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"We don't want to be in the business of swapping earthquake risk for credit risk."--Wayne Cramer, v.p. of global risk management and insurance at Vivendi Universal in New York, explaining why it opted to issue a catastrophe bond rather than take out reinsurance. For complete story, click here.

Five-year credit-default swap spreads on Fiat widened last week to 1,200 basis points from 1,100bps, in a delayed reaction to Moody's Investors Service's downgrade of the credit to junk. Traders said that in a quiet holiday-shortened week, Fiat was the only credit that saw a movement.

The International Swaps and Derivatives Association published a new Master Agreement in December to replace the 1992 agreement. The new agreement represents the work of ISDA's Documentation Committee, with over 100 different members reviewing earlier drafts and providing comments. The trade association has already arranged for netting opinions on the new agreement in 36 different jurisdictions.

Falling interest rates will push firms to be more creative in structuring capital guaranteed products this year because the premium typically used to purchase options has shrunk substantially. Firms started working on innovative structures last year, but are expecting demand to pick up. "I don't think there's a day that goes by that we don't think about how to make options cheaper," said Stéphane Liot, global head of fund derivatives at BNP Paribas in Paris.

Asset managers are expected to step into the synthetic collateralized debt obligation market to manage deals this year as a way to increase assets under management and fees. This trend took off last year when several asset management giants including Pacific Investment Management Co. (PIMCO) (DW, 6/29), Barclays Global Investors (DW, 5/19) and the Trust Company of the West (DW, 2/10) managed their first synthetic offerings. Many others, including State Street Global Advisors (DW, 5/13), started considering the move.

San Diego-based hedge fund manager Context Capital Management plans to enter its first equity options as part of the investment strategy for its USD30 million Context Convertible Arbitrage Fund. Jim Abbott, fund manager, said the fund, which was launched in August, will employ equity derivatives to hedge credit risk on convertible bonds. It may also enter trades where it arbitrages the price of a company's debt versus its equity.

GKN Plc, a manufacturer of automotive engines and components, is considering entering an interest rate swap to convert a recent GBP125 million (USD201.50 million) offering into a synthetic floating-rate liability. The company will make a decision shortly, said Derek Butler, head of treasury in Redditch, U.K. But, he declined to detail what will influence its decision. If GKN goes ahead with the plans it would enter a swap in which it receives the 7% fixed coupon on the bond and pays a floating rate.

Investors Turn To Exotics In Times Of Trouble

Hybrids Expected To Top New Year Shopping Lists

INVESCO, BlackRock, Barclays Global Investors and Blackstone, which were separately planning to bring their first managed synthetic collateralized debt obligations to market last year, have reportedly postponed the deals because of adverse market conditions. BGI has shelved plans to manage its first CDO in the U.S. because of a lack of investor appetite and tight credit spreads, according to Tom Taggart, spokesman in San Francisco. The deal was scheduled to be priced in the summer (DW, 5/19) was postponed and then cancelled. An official from Blackrock in New York said the firm has structured its first synthetic CDO but is waiting for better arbitrage opportunities between the asset and liabilities side of the deal. One official said those opportunities are likely to resurface when insurance companies clarify their long-term commitment to the CDO market. He expects this to happen in the coming weeks. Bill Hensel, spokesman at AMVESCAP, INVESCO's parent firm in Atlanta, Ga., declined comment and Christine Hadlow, spokeswoman at Blackstone in New York, didn't return calls by press time.

The 2002 definitions are based on the 1996 International Swaps and Derivatives Association's equity derivatives definitions and, like the 1996 definitions, are primarily intended to be incorporated into confirmations documenting equity derivatives transactions. Trades executed under the 1996 definitions will not, without further action by the parties, be affected by the adoption of the new definitions. This article will discuss the key areas in which the 2002 definitions modify the 1996 version, including the expansion of product coverage, separation of settlement mechanics from product type, expansion of the consequences of merger and other events impacting the underlying shares and refinement of the consequences of market disruptions. Like the 1996 definitions, the 2002 definitions are intended to reflect a global standard of current market practice and are not necessarily meant to deal with issues that only relate to certain specific jurisdictions.

The Asian structured credit derivatives market is expected to break more of its ties with its European and U.S. equivalents, a trend which, although started last year, has a long way to go. The first synthetic collateralized debt obligations referenced entirely to Asian credits was launched by Société Générale Asia last year and totaled USD100 million. BNP Paribas was hot on its French rivals heels and started working on its first Asian dominated CDO in February (DW, 2/25). Gilbert Tse, managing director and head of structured credit derivatives at SG in Hong Kong, said, "I think we'll see a lot more CDOs with some or more Asian contents this year." Guillaume Dieu, director and head of Asia Pacific synthetic securitization at BNP in Hong Kong, said the products are popular because of the diversification they offer CDO investors who already have CDOs referenced to European or U.S. credits.