Firms Push Hybrid Credit Hedging
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Firms Push Hybrid Credit Hedging

Bank of America, CIBC and Commerzbank are joining a growing number of firms looking to structure hybrid products to hedge credit or bankruptcy exposure via equity and credit derivatives. The recent bankruptcies of once mighty companies, such as Enron and WorldCom, and the deteriorating corporate credit environment makes a compelling case for using both equity and credit derivatives to manage exposure, according to bankers. "In [bear] markets there is a high correlation between equity and credit," said Rajeev Misra, global head of credit derivatives at Deutsche Bank in London.

CIBC is planning to create a joint venture between its credit and equity derivatives desks to capture such hybrid business, according to Chris Roads, credit flow trader in London. Similarly, BofA has set aside staff to work out strategies for hedging its own credit derivatives positions with equity, said Alex Bernand, director in structured credit trading in London. The firm expects to eventually roll out the effort to end-users.

Commerzbank Securities has taken the approach of putting credit and equity derivatives within the same trading group, explained Riccardo Pascoe, head of corporate risk and capital structure in London. The firm has appointed Michael Stavely, who had global responsibility for credit trading and structuring, as global head of corporate trading with responsibility for running a group that comprises all derivatives, convertible bond and cash credit trading, according to Neil Brazil, spokesman.

The moves follow earlier efforts by JPMorgan, Société Générale and Deutsche Bank. Guy America, head of European credit derivatives at JPMorgan in London, said the firm's equity and credit derivatives desks began working together over two years ago by marketing derivatives to convertible arbitrage funds. An official at Société Générale, which already has staff that trades both credit and equity, said the firm is considering hiring additional credit traders and it has been training traders internally to deal with both types of derivatives.

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