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Derivative houses in Malaysia, including ABN AMRO and HSBC, expect interest rate swap volumes to rocket with the impending launch of three and 10-year bond futures. "This will definitely help," said Aik Sai Hong, treasurer at HSBC in Kuala Lumpur. Hong estimated that average monthly interest rate derivatives trading volumes range from MYR700 million to MYR1 billion (USD185-264 million) and that once the contracts are introduced volumes could swell by 20-35%.

Simon Glossop, former head of credit trading at RBC Capital Markets in New York, has joined the European Bank for Reconstruction and Development as a portfolio manager. The EBRD is also planning to hire a head of the desk. Alex van Nederveen, deputy treasurer in London, said Glossop will work on the investment credit desk, which trades products ranging from collateralized debt obligations to repos. Glossop referred calls to van Nederveen.

Edward Rich, managing director in interest rate swaps trading at Bear Stearns in New York, has left the firm. It could not be determined whether Rich, who could not be reached, had joined a competitor. Michael Fedak, senior managing director, to whom Rich reported and Michele Agostinho, spokeswoman in New York, did not return calls.

AMP Henderson Global Investors (NZ), with over NZD11 billion (USD6.3 billion) in assets, is preparing to enter the credit derivatives market for the first time in the coming months. Peter Scobie, senior portfolio manager of fixed interest in Wellington, said the manager has been reviewing counterparty arrangements and studying products but noted that the lack of standardized documents has delayed its debut, which it began considering last year (DW, 2/24/02). He noted, however, that the asset manager is looking at credit-linked notes and credit-default swaps for its over NZD3 billion fixed income portfolio, as well as CDOs. It will likely take the plunge in the coming months.

Government-owned Korea Development Bank, with KRW79.8 trillion (USD66.7 billion) in assets, was in the final stages of converting a five-year JPY65 billion (USD551.9 million) bond as DW went to press. "We're now just deciding on a counterparty," said S.W. Kim, head of swap trading in Seoul.

JPMorgan is calling for its derivatives counterparties to be more transparent about ring fencing of international branches. The move comes hot on the heels of the firm resolving a disagreement with a European trading partner over a derivatives trade it executed with the European firm's Argentinian branch. The disagreement arose in spite of the trade being covered by an International Swaps and Derivatives Association Master Agreement with the European firm's head office, illustrating that in spite of documentation designed to close such loopholes, there is significant room for interpretation on the ring fencing issue, said Christina Leijonhufvud, head of country risk management in New York, declining to reveal specifics of the contract. It is important that any ring fencing of subsidiaries be made clear at the beginning of an agreement in order to allow firms to correctly price the risk of a trade, she argued.

JPMorgan has won its court case against a U.S. hedge fund and therefore does not have to pay out on a credit-default swap contract referenced to Argentina. Eternity Global Master Fund was claiming JPMorgan had committed fraud, negligent misrepresentation and breach of contract, according to court papers obtained by DW. The ruling means JPMorgan does not have to pay out on a USD3 million (notional) default swap which matured on Dec. 17, 2001, before the generally recognized credit event at the end of December. In addition, JPMorgan was facing fraud charges on two other default swaps, which matured after that date.

San Francisco-based Raven Investment Group will adopt predominately convertible arbitrage strategies in its debut Raven Investment Fund, which will both buy and sell over-the-counter derivatives. Ed Yao, partner, said the fund will be multi-strategy, however, more than 85% will be traded in convertible arbitrage. Yao worked as an equity derivatives trader at Morgan Stanley in Hong Kong before leaving the firm in 2001 (DW, 5/13/01).

Royal Bank of Scotland plans to structure public synthetic collateralized debt obligations referenced to asset-backed securities for the first time later this year. The firm has already structured private deals, but in order to increase its distribution it is looking to the public arena, according to David Littlewood, global head of structured credit products in London.

The nascent onshore credit derivatives market is gaining momentum with Standard Chartered Bank and HSBC recently stepping into the ring, alongside local institutions. The domestic market kicked off at the start of the year with Deutsche Bank, BNP Paribas and Credit Lyonnais obtaining licenses for credit derivatives (DW, 1/26). JPMorgan is in the application process and Citigroup completed its first transaction in Taiwan in recent months (DW, 5/25).

Santander Central Hispano has hired Rodrigo Espirito-Santo, former senior salesman for marketing equity derivatives to hedge funds at Commerzbank Securities in New York, as a salesman in its emerging markets team, which includes derivatives.

On May 3, the U.S. Tax Court issued its decision in Bank One Corp. v. Commissioner, the first case to address the question of how an over-the-counter derivatives dealer must value open positions at year-end under the U.S. mark-to-market tax regime, which became mandatory in 1993. As discussed below, the decision is likely to create more issues for both taxpayers and the Internal Revenue Service than it resolves. The much-awaited decision was issued against a backdrop of considerable controversy--including over such basic issues as the appropriateness of an adjusted mid-market method in valuing derivatives, and the degree of deference, if any, properly afforded to an OTC derivative dealer's specific valuation model or financial accounting methodologies. The disagreements appear to have been exacerbated over the years by a considerable gap between the OTC derivatives dealers, on the one hand, which have spent substantial resources developing their valuation models and consider those models to be proprietary technology, and the IRS, on the other hand, which is imperfectly positioned to second-guess the various technical and theoretical underpinnings of a valuation model, but nonetheless has an interest in ensuring that dealer models do not systematically undervalue positions and, consequently, taxable income. One of the more striking examples of the IRS's attempts to address this gap occurred in 1995, when the IRS commissioned the Los Alamos National Laboratory to develop software for the valuation of derivatives with the intention that the software would then be used in tax audits. The project survived long enough for the Los Alamos scientists to produce a software prototype in 1997 that was unveiled to a select group of industry participants for comments, but the project was abandoned later that year, after an intense round of industry criticism, and IRS management concerns over the project's costs.