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Economists and analysts looking for succor from tumbling equity markets and the specter of war with Iraq should beware the false optimism suggested by tightening credit default swap (CDS) spreads, warn derivatives market officials. While CDS spreads are an important indicator of the overall robustness of the economy, the CDS market may not always accurately reflect credit conditions more generally, explained Alex Reyfman, v.p. in credit derivatives strategies at Goldman Sachs in New York. The CDS spread is the annualized basis point premium demanded by the market in exchange for providing default protection.

Lehman Brothers has reportedly promoted John Wickham, co-head of global equity derivatives in New York, as sole head of the division. Wickham's former co-head, Mark Sanborn, will now head up global program trading, said officials familiar with the reorganization. Wickham and Sanborn did not return calls. Meanwhile Dave Gittings, co-head of U.S. equity derivatives sales, has left the firm. Bill Levy, who joined Lehman last year to co-head the group with Gittings, has assumed sole responsibility for the role. Gittings declined comment and Levy did not return calls.

Richard Cohen, head of Pacific Rim credit derivatives atMerrill Lynch in Tokyo and an industry veteran, has left the firm. He reported toPeter Walshe, head of credit products for the Pacific Rim in Tokyo. Market officials speculated that Cohen was let go as part of a global drive to reduce costs. Both Walshe and Takayuki Inoue, spokesman, declined all comment. Cohen could not be reached.

Merrill Lynch has begun to structure guaranteed products with single hedge funds as the underlying risk. Although Deutsche Bank has structured similar products, most firms do not offer these types of capital guaranteed structures because it is necessary to actively hedge the underlying exposure on a frequent basis. This is because single funds do not have the same diversity as fund of hedge funds.

Singapore-based APS Asset Management, with over USD850 million under management, is preparing to use equity derivatives in the coming months for a USD10 million hedge fund it launched last year. "This is an effective way to leverage our positions," said Wong Kok Hoi, cio and founder. It has considered since its inception last year using products such as equity options in Taiwan and Korea to create synthetic short positions because offshore borrowing is restricted (DW, 4/14). It is preparing to pull the trigger after being advised by its prime broker Goldman Sachs Global Securities Services to look at the instruments. The long/short fund primarily invests in cash equities in Asian markets including Japan, Hong Kong and Singapore. Wong noted that the notional size of OTC derivatives positions could total 10% of the portfolio this year.

By accessing foreign credit markets, credit investors can add diversity to their portfolios and take advantage of relative value opportunities. While investors can do this using the cross currency asset swap, investors concerned about the associated default contingent risk can use the perfect asset swap structure.

"There's no need to have three of four dealing rooms in Asia Pacific--you don't see this in Europe or the U.S."--Matthew Miller, head of fixed income and derivatives recruitment at Global Sage in Tokyo, commenting on ING Financial Markets moving its Tokyo credit derivatives trading operation to Hong Kong. For complete story, click here.

Guidelines regarding stock borrowing and lending which Taiwan's regulator--the Securities and Futures Commission--plans to publish in April, are expected to open the door to the development of a local equity derivatives market, according to traders. After the initial outline, the SFC will look to draft detailed regulations on securities lending in the coming months, said Wang Hung Rui, an official at the regulator in Taipei.

Five-year credit protection on Heidelberger Zement, the German cement producer, widened about 100 basis points over the last week, blowing out to 510 basis points/530bps last Wednesday from 375bps/450bps a week before. On Monday, the company announced it had cancelled plans to sell its building materials division, HBE, and on the same day Standard & Poor's downgraded the parent to BBB minus from BBB. After these negative credit events, spreads began widening to 450bps/480bps, traders said. They added that volume was low, however, since the name is so illiquid, and a few trades caused spreads to widen substantially.

Hedge fund manager Maystone Partners plans to buy credit default swaps once its Maystone Continuum Fund, a convertible-bond arbitrage fund launched last month, doubles its assets under management to USD100 million. Henry Pizzutello, managing partner in Greenwich, Conn., explained that because the typical notional size of over-the-counter credit default swaps is USD5 million, the fund wants to increase its assets under management for diversification purposes before plunging into this market.

Launching and selling a loan this past month is leading to all kinds of ailments. One loan salesman confessed to taking up smoking again during a recent syndication, whilst another has had headaches caused by a particularly troublesome credit. "We were a lot happier back then," said another banker, talking about the days when they left the office before midnight.