Derivs - Credit

Fast money investors have been positioning for a post-quantitative easing squeeze on European credit default swap indices, according to strategists at Citigroup in London, who have noted large net long positioning in iTraxx Main and a small net short non-dealer position in Crossover.

Hedge funds have been trading the relative value between credit default swaps on Italian banks UniCredit and Intesa Sanpaolo as UniCredit’s spreads gap wider because of exposure to Russia and Ukraine. On Monday, five year subordinated CDS on UniCredit were trading at 296bp while Intesa Sanpaolo sub CDS traded at 195bp.

Real and fast money investors were seen buying payers spreads with February and March expiries in iTraxx Main, as flows in credit options this week suggested market participants have ruled out a substantial widening of credit default swap index spreads.

What began as a curious geopolitical squall has become a major storm, affecting not just the markets on which it falls but the weather in other asset classes as well. Risk premiums that remained low until the end of 2014 have finally responded to the pressure.

Derivatives end users in the US and Asia are likely to face the biggest hurdles complying with the clearing mandate under the European Market Infrastructure Regulation when it kicks in towards the end of this year, according to lawyers.

The precipitous decline in the oil price has taken some of the attention away from Greece, albeit until the elections next week. Less than four months ago the price of West Texas Intermediate crude was more than $100 a barrel; now it is languishing below $50.

2014 continued to be an active year for financial regulation in the EU, with a push to finalise much of the outstanding primary legislation on the regulatory reform agenda and to move towards implementation of regulation already in place. The derivatives market will be particularly affected by the new regulatory landscape and the market will face many new challenges into 2015 and beyond, which we consider further below.

Asset managers are concerned about peripheral names in European credit given the potential for a Greek exit of the Eurozone, which could have unpredictable effects on the direction of markets.

Overall interest rate trading that was reported to swap data repositories last week increased by 420% from the previous week, according to data from the International Swaps and Derivatives Association. Overall credit default swap notional that was reported, also increased by 400% from the previous week.

The process of minimising line items in a portfolio has been a driving force behind trade compression and termination tools, but whether or not it is the ideal solution has been questioned by some market participants. Gabriel Suprise investigates.

LCH-CME basis swaps have been growing in frequency as dealers seek to balance exposure between one or more central counterparties, reports Beth Shah.

Tools that enable firms, whether buyside or sellside, to reduce the number of line items in a portfolio, while keeping the same risk profile, are changing the way market participants trade derivatives.