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Barclays Considers Credit Hedging Debut

Barclays Global Investors Australia, with AUD17 billion (USD9.15 billion) under management, is examining using credit-default swaps for the first time for its AUD2 billion fixed-income portfolio. "We're building up our knowledge of the product," said Mark Nordio, head of fixed-income in Sydney. The firm is in the initial phases of studying credit-default swaps and will not make a decision whether to use the product until it has more information. However, if it does decide to pull the trigger it will likely take 12-months before it enters its first trade, said Nordio.

Credit derivatives would help the asset manager to alter its credit exposure. "They seem to offer an efficient way of hedging credit exposure," he added. BGIA would primarily look at purchasing credit-default protection on domestic bonds it holds and take advantage of the basis differential rather than selling protection as default-swaps typically trade tighter than the underlying bonds. Nordio declined to elaborate on the potential size of its credit derivatives portfolio.

Nordio said he is currently reading up on developments in the credit derivatives market in Australia: "you need to keep abreast of the products...there's a lot of research out there--each house has their own experts." But, Nordio declined to reveal factors on which it will select counterparties. The asset manager will need to gain a further understanding of the products before it is ready to seek approval as well as establish systems and procedures.

"This can only help the market," said a credit derivatives trader, noting that end-users becoming involved will boost liquidity. "With people like Alan Greenspan commenting that credit derivatives can mitigate financial risk and with the International Swaps and Derivatives Association's proactive stance on addressing uncertainties in documentation, more investors in Australia are viewing credit derivatives as a credible product," added the trader.

A number of Australian asset managers have been looking at credit derivatives in recent months including Tyndall Australia (DW, 6/9) and Portfolio Partners (DW, 7/7).

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