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Implementation of the 2002 International Swaps and Derivatives Association equity derivatives definitions will expose derivative users to legal and basis risk and could result in temporary lapses in trading. The new definitions will likely benefit the market by increasing standardization, which then reduces legal basis risk, but in-house lawyers said they are bracing for a period of chaos while the definitions are implemented.

Merrill Lynch has slashed the number of traders on its equity derivatives proprietary trading desk to three people, from around 10, and has stopped statistical arbitrage prop trading. The firm is keeping a scaled down presence in volatility and convertible arbitrage. Officials familiar with the firm's activities said the cuts reflect a change in management philosophy following a recent reorganization that saw the desk come under the responsibilities of Barry Wittlin, co-head of the global rates group.

Salomon Smith Barney has established a global rates and currencies group, which combines several interest rate and foreign exchange groups. The new group sits within the firm's global fixed income division and the reorganization became effective Jan. 1., according to an internal memo sent by Tom Maheras, head of global fixed income, on Dec. 18.

Spintab, a Swedish mortgage bank, has entered a foreign exchange swap on the back of a floating-rate EUR750 million (USD782.96 million) bond to convert it into a synthetic Swedish krona-denominated bond. Martin Rydin, dealer in Stockholm, said the bank uses currency swaps on all of its non-Swedish krona offerings because it needs to fund its mortgage portfolio, which is denominated in that currency. Rydin would not disclose the exchange rate on the deal. CDC IXIS is the counterparty on the swap and was chosen because it has a AAA rating and provided good pricing, according to Rydin.

Cathay Life Insurance, Taiwan's largest insurer with over USD35.4 billion in assets, is considering trading credit derivatives for the first time for its over USD3 billion international fixed income portfolio. "We've been studying lots of articles and reading info from counterparties," said Alex Chang, fixed income analyst in the international investment department in Taipei.

"It's fair to say that virtually every senior equity marketer covering Korea has moved in the last 12 months."--Mike Brennan, managing director at financial recruiter Alexander Mann in Hong Kong, on the high demand for equity derivatives professionals covering Korea on the back of market deregulation and growth. For complete story, click here.

New York-based hedge fund manager La Jolla Value Partners is considering selling covered calls in a bid to ramp up returns for its recently launched long/short equity hedge fund. Brian Pursley, fund manager in New York, explained that while the first focus of the fund is to up its assets under management, it currently has USD3 million, other over-the-counter instruments including calls will be considered where they present investment opportunities. Bear Stearns is the prime broker for the fund, but La Jolla will shop around to ensure best execution.

The Restructuring Debate Rumbles On The restructuring credit event is currently the most controversial issue in credit derivatives documentation as it can be much softer than failure to pay or bankruptcy. Soft credit events can expose the protection buyer to Cheapest-to-Deliver risk. In hard restructurings it is likely that same seniority debt will trade at a similar cash price irrespective of maturity or currency. However, in a soft scenario debt may still trade on a yield basis and cash prices may not converge. The protection buyer's Cheapest-to-Deliver (CTD) option is therefore of greater value in soft restructuring scenarios where the protection seller could be delivered an obligation trading substantially lower than the restructured obligation. The Conseco case led the U.S. market to adopt modified restructuring (mod-R) although this has not gained traction in Europe.

The price of Aussie dollar/U.S. dollar options spiked last week as traders snapped up positions on the Aussie currency. One-month implied volatility stood at 9% Wednesday, up from 8% where it had traded the previous week, according to one New York-based trader. The currency pair traded at USD0.5765 last Wednesday, up from USD0.5611 on Jan. 2.

This chart, provided by Citibank/Salomon Smith Barney Inc., tracks bid-ask prices for par credit facilities that trade in the secondary market. It also tracks facility amounts, ratings, pricing and maturities.

Brandywine Asset Management will rotate $500 million, or 20% of the firm's global sovereign portfolio, out of 10-year European sovereign debt into one- to two-year sovereign bonds, in a strategy designed to shorten duration, says Stephen Smith, portfolio manager. The move, he adds, is likely to take place next month after the European Central Bank cuts interest rates, with Smith anticipating a 50 basis point cut. If his prediction is correct, sovereign bonds in Europe will appreciate, offering a good selling opportunity. Smith has not decided yet which sovereign credits he will purchase, as this choice will depend on currency rates at the time of the rotation.