Deutsche Bank and Dresdner Kleinwort Wasserstein are looking at securitizing the counterparty risk in their derivatives books for the first time. Although neither firm has made a commitment to the transaction, Deutsche Bank is further down the road and expects to structure a deal within six months. Peter Haagensen, director and global risk officer for over-the-counter derivatives at Deutsche Bank in London, said any deal it brings to market likely will have a notional size of at least USD1 billion with a maturity of five to 10 years. The only other firm known to execute this type of transaction is UBS Warburg, which did two transactions, Alpine I and II, in which it securitized counterparty credit risk from its interest-rate swaps, options and currency swaps books (DW, 10/17/00, DW, 9/2/02).
David Murphy, head of counterparty portfolio management at DrKW in London, said the firm recently merged its loans and counterparty risk portfolio management. "We are actively investigating similar structures to Alpine," he said, adding that the decision will be based on comparing securitizing loans through a traditional collateralized loan obligation with securitizing counterparty risk to determine which is better for economic capital and regulatory capital relief.
"We're going through a phase where every large bank is looking at [its counterparty credit risk]," said Deutsche Bank's Haagensen. He explained that this risk can be distributed from banks to investors, eventually driving down the cost of transactions to corporates and other counterparties. "This should give banks the appetite to do more swaps and be one more step toward allocating risk," he added.
In the Deutsche Bank deal, the credit-linked notes would be tied to the mark-to-market value of the swap, giving investors a variable notional value. He noted that most of the swaps included in such a transaction would be in-the-money. In the Alpine transaction, losses in the underlying portfolio are financed through a bite out of the coupon and the principal.
Mark Ritter, global head of credit exposure management at UBS in Greenwich, Conn., said the firm will continue to structure similar transactions in the future. "We hope other banks will consider doing transactions of a similar nature in this growing asset class," said Ritter, adding that it adds validity to the instrument.