Derivs - Credit

Complex package transactions may be difficult to price electronically now that the package transaction requirement to trade such products on swap execution facilities is live, according to Nathan Jenner, coo of fixed income, currency and commodity trading at Bloomberg.

Asset managers and banks have been adding outright payers and payer spreads with strikes around 80-85 basis points and expiries to June and September. The flow has increased following a 5bp increase in the iTraxx Main last Thursday.

Uncertainty over the definition of a derivative in proposed UK bail-in regulation could increase risk in the market as it allows counterparties to interpret the term in different ways, according to lawyers.

It’s been a while since the eurozone’s periphery had any meaningful impact on broader market sentiment. Mario Draghi’s “whatever it takes” pronouncement in 2012 put paid to the regular bouts of volatility emanating from Europe’s beleaguered sovereigns. But on May 15, just over four years since the first Greek bailout, we received a reminder that peripheral CDS spreads still have the capacity to widen. And the movements weren’t insignificant—about a month’s worth of gains was wiped out in an afternoon.

US Institutional Investors are increasingly turning to exchange-traded funds to gain exposure to a rapidly expanding range of asset classes, with a recent push from issuers into fixed income underlyings driving the trend.

Dorian Raimond, ex-head of index and options trading at BNP Paribas in London, is set to join Barclays in a similar role.

Hedge funds and real money investors are increasingly buying out-of-the-money payer options on the iTraxx Main across May, June and July expiries, with strikes up to 150% OTM. Payer spreads in the iTraxx Main are also being actively traded by investors, while some hedge funds are looking at taking similar exposures through bearish risk reversals.

Clearable mortgage swaps would primarily be used to speculate on the mortgage securitisation market, with hedging of positions being a secondary use of the instruments, according to traders.

Counterparties to derivatives contracts with UK credit institutions could suffer under plans from Her Majesty's Treasury to implement bail-in as part of the 2013 Banking Reform Act, ahead of the European Bank Recovery and Resolution Directive, according to the International Swaps and Derivatives Association.

Strategists at BNP Paribas are recommending buying credit default swaps on Lloyds bank, expecting negative headlines connected to the Scottish vote for independence to impact the British bank's credit spreads.

Hedge funds are buying payers in iTraxx Main with expiries in May or June and strikes around 90-and-95 basis points. The trade is designed to hedge against a potential widening of spreads in June.

ING Investment Management's use of index credit default swaps in its Renta Fund Global High Yield fund saw assets under management rise to €6 billion from €5 billion since February.