Derivs - Credit

As legislators from the House and Senate head into conference Thursday morning to nail down the details of financial reform, experts say this final step before the bill becomes law could bring some surprises like a strengthened Volcker Rule and tiny tweaks of language that would have a significant impact on the industry.

The recently-formed Swaps and Derivatives Markets Association believes that Nomura’s acceptance as an Intercontinental Exchange Trust U.S. credit default swap clearing member is a positive step towards the group’s goal of more access to clearing for boutique and mid-market banks.

Interdealer broker Tullett Prebon is preparing to launch a hybrid voice and electronic credit default swap platform in the U.S. The firm already offers this service in Europe and plans to expand across the pond where some competitors already have a foothold.

The Ambac Assurance Corp. credit auction landed at 20 this afternoon, meaning investors will receive USD0.80 for every dollar of protection purchased against the company. The auction was run jointly by Markit Partners and Creditex.

Fixed income asset manager Highland Capital Management is plotting the launch of a long/short credit hedge fund, possibly for later this year. The Dallas-headquartered firm, which has USD24.1 billion under management, intends the market neutral fund to invest in distressed debt and collateralized loan obligation securities.

The first round of bidding on the Ambac Assurance Corp. auction landed at 27.5 this morning, according to a Web site jointly run by Markit Partners and Creditex. This means protection sellers will likely have to pay out around USD0.725 on the dollar for credit default swaps sold on the holding company that triggered the CDS in March.

If the U.S. financial reform legislation successfully pushes many over-the-counter derivatives onto exchanges, banks and dealers could see a tax break on those deals of up to 12%, lawyers say.

Sharon Bowles, chair of the European Parliament’s influential Economic and Monetary Affairs Committee, told Derivatives Week that E.U. politicians will propose a 25% cap on bank ownership stakes in clearing houses, rather than a complete ban.

Correlation across asset classes has rocketed as disparate markets react to sovereign debt problems. The move has some arguing derivative book hedges are going to need to be radically re-hedged somehow. But there is also a camp that sees the spike as short-term background noise that can be ignored.

Over-the-counter equity derivatives are the least suitable for standardization and exchange trading, and OTC fx swaps are the least likely to be cleared, according to a survey of market participants done by BNY Mellon and analyzed by the TABB Group. This discrepancy highlights the fact that standardization does not necessarily imply clearing and vice versa.

Over-the-counter credit derivatives traders have been moving to listed equity derivatives in the past week in an attempt to find the liquidity lacking in their market, according to David Silber, managing director of equity derivatives at Jefferies in New York, a firm focusing primarily on listed trades.

Hopes that the EUR750 billion bailout announced on May 7 would alleviate the pain of the eurozone were quashed this week as uncertainty returned to the sovereign CDS market.