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The imminent expiry of massive foreign exchange barrier option positions could cause the dollar to weaken against the euro to levels over USD1.07. The State Administration of Foreign Exchange (SAFE), which oversees foreign exchange reserves for the People's Bank Of China, was rumored to be long at least USD5 billion in range trades that it was hedging as they neared expiry, which was keeping the euro below USD1.06, said traders and salesmen. One trader, however, speculated that trades were more likely to be euro calls with reverse knock outs because about a month ago when the trades would have been put on, a barrier trade would have cost more than a call with a reverse knock out. SAFE is a major player in the fx options market and uses the products to hedge its cash reserves, traders explained. One trader said, because SAFE has entered barrier trades in the past, it is often the subject of rumors about such trades. Officials at SAFE declined comment.

CADES, a French public agency, plans to use interest rate and foreign exchange swaps on a portion of its EUR3 billion (USD3.1267 billion) funding requirement for this year. CADES Chairman Patrice Ract Madoux in Paris said it is too early to tell how much of the issuance the agency would convert, but said CADES uses interest rate swaps to convert fixed-rate offerings into floating rate liabilities and fx swaps to convert any non-euro EMTNs into its home currency.

A group of banks led by Morgan Stanley is pushing for the European credit-default swap market to follow the lead of the U.S. and adopt a standardized quarterly termination date for all CDS deals. But so far their arguments have failed to convince a trio of industry heavyweights--JPMorgan, Deutsche Bank and Goldman Sachs. These three believe CDS players in Europe should have the flexibility to trade swaps with a monthly termination date, even though their New York offices have already signed up to the quarterly standard.

Dresdner Kleinwort Wasserstein has hired Loren Remetta, associate, credit derivatives trading for its New York desk, from WestLB. Paul Lewitt, head of credit derivatives trading in London, to whom Remetta reports, said Remetta was hired into the newly created position in response to the growth in Dresdner's business and the importance of New York within the business. Remetta will work alongside Pawel Mosakowski, v.p. credit derivatives trading, to execute proprietary strategies and provide greater North American pricing expertise to the firm, he added. Remetta declined comment. Mosakowski did not return calls.

Lehman Brothers has transferred Charles Woo, senior v.p. equity derivatives marketing in Hong Kong, to its Seoul branch. While the newly-launched onshore equity derivatives market is currently restricted to domestic houses, Woo still handles offshore equity derivative transactions for Korean clients, according to officials familiar with the move. Lehman began preparations to establish an equity presence in Korea early last year (DW, 2/17) along with other bulge bracket rivals including JPMorgan (DW, 6/23).

Hedge funds have been off loading massive tender option bond (TOBs) positions, a leveraged long bond position that is hedged by swaps, since the beginning of the year as fund managers have looked to reap the gains from a fall in U.S. Treasury prices. Ying Chen Li, v.p. in the fixed income strategy division at Merrill Lynch in New York, said since Jan. 2, when the U.S. 10-year Treasury note yield sat as low as 3.80%, hedge fund managers have been unwinding positions and making big profits. The 10-year Treasury note yield reached 4.09% last Wednesday, having gone as high as 4.18% on Jan. 9.

Kuala-Lumpur based MBf Unit Trust Management, with over MYR400 million (USD105.2 million) under management, is looking at using over-the-counter derivatives within 12 months. "It could be a mixture of products," said Philip Tan, senior fund manager, noting that it is looking at both equity and fixed income derivatives for hedging its investment portfolio as well as purchasing structured notes. The fund manager has been looking at reentering the domestic OTC market since capital controls were introduced in 1998, but is waiting for liquidity to return. "It's still a young market--we need much more participation from players," said Tan, noting that it could take over a year. "Liquidity is still the main stumbling block," he continued.

Household Finance Corp., a subsidiary of U.S. consumer finance giant Household International, has entered into a foreign exchange swap to convert a EUR750 million (USD791.4 million) bond offering into dollars. An official in Prospect Heights, Ill., said bringing the issue back into U.S. dollars aided the loan house in complying with Financial Accounting Statement 133 guidelines, which favors domestic currency debt. Household is maintaining the issue's fixed rate status in order to match funds in the firm's asset liability mix, he added.

KBC Financial Products is setting up a fund derivatives group and has appointed Sajeev Sirpal, managing director and head of Asia in Hong Kong, to spearhead the effort in London. "If you believe hedge funds are here to stay as an asset class then you can see the potential in this new field," said Sirpal, who will transfer to London in the coming weeks as global head of the newly formed structured fund products group.

Merrill Lynch is setting up a global equity structured products group to be based in New York and is sending Brent Clapacs, managing director and head of equity trading for the Pacific Rim in Hong Kong, to the Big Apple to head the venture. Michael DuVally, spokesman in New York, said the group is being formed to expand Merrill's share of the global structured equity derivatives market. DuVally declined to specify the firm's current share. By dedicating a specific group to the development of structured equity products Merrill envisages expanding both its origination and distribution capabilities for its global client base, he added.

Fabien Pictet & Partners, a London-based hedge fund boutique with USD200 million under management, is introducing a long/short fund dedicated to emerging market debt and will have the capacity to use any type of over-the-counter derivatives. The fund, called GEMs Bond Fund, will start trading next month and although it will not use derivatives extensively, will be likely to use instruments such as fx options, emerging market bond options, credit-default swaps and listed options, said Julian Jacobson, portfolio manager. GEMs is the firm's fourth fund, but the first dedicated to emerging market debt.

"This means no fussing and mussing over CDOs."--John Mullen, global head of structured credit markets at ABN AMRO in London, on making credit trading and asset-backed securities a joint venture. For complete story, click here.