Swiss Re New Markets is expected to bring additional liquidity to the bankruptcy swaps market following its recent decision to start offering bankruptcy swaps to U.S. corporates. A spokeswoman at Enron, previously the only player in the bankruptcy swaps, said the company welcomes the move.
Sylvain Bouteillé, associate director in the credit solutions unit at SRNM in New York, explained it started offering the products because of requests from corporate customers. It already offers single name credit default swaps and portfolio swaps, but Bouteillé said it decided to offer bankruptcy swaps because corporates are primarily sensitive to bankruptcy. Since many of the triggers on a standard credit default swap, such as restructuring debt, are not relevant to a corporate, this is a better hedge, he continued.
Most corporates' risk is short term and the contracts are designed to cover that risk. It is also pitching the contracts as a risk management tool rather than a trading tool so does not see the need in providing two-way markets.
All of the contracts will be sold via the Internet in typical notional sizes of between USD10-15 million for maturities up to 12 months. SRNM will sell protection on approximately 350 corporates spread equally over the U.S., Europe and Asia. The site is only available to U.S.-based corporates, but Bouteillé said it will review opening it to other jurisdictions after it has been running in the U.S. for a few months. SRNM started in the U.S. because that is where most of the requests for the product came from and it has preferable legislation regarding electronic signatures to some of the other regions. The Web site went live last Monday but Bouteillé predicts it will take a few more days until trading starts.