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Deutsche Bank has set up a global credit arbitrage investment arm that will scour the market for fixed-income securities and then either repackage or keep them on its balance sheet. The firm, dubbed Winchester Capital Principal Finance after its address at Great Winchester Street, London, could have a balance sheet topping hundreds of millions of dollars, according to market officials. Deutsche Bank decided to set this up now because the CDO market has reached a size where it makes sense to have an independent entity investing in different CDOs, according to market officials. Another official speculated that Deutsche Bank had not turned its attention to this before because it was making so much money from its structuring desk, however, now that CDOs are becoming harder to shift and margins are decreasing, it is looking for new opportunities.

The U.S. Internal Revenue Service has filed its answer to a petition made by two taxpayers regarding the taxation on proceeds of a so-called Structured Yield Product Exchangeable for Stock (STRYPES), according to court papers. In the impending case, to be heard at the United States Tax Court, the Internal Revenue is seeking that Bobby and Delaine Stevenson pay nearly USD25 million of tax on gains made from the transaction.

Five-year credit-default swap spreads on the world's third-largest food retailer, Ahold, yo-yoed last week after the company announced worse than expected results. Traders said protection jumped out to 270-280 basis points after the announcement but had come back to their original levels of around 225bps by Thursday.

Sumitomo Mitsui Asset Management, expected to be Japan's largest asset manager with around USD100 billion under management when a merger of several Japanese investment firms comes into effect next month, will consider using credit derivatives for the first time. "We're closely monitoring this market," said Makoto Takahashi, head of the fixed income group at Sumitomo Life Investment Co., Japan's largest investment advisory firm with over JPY8 trillion in assets and one of the companies that will form the new entity.

Volumes in euro/Hungarian forint options rocketed by three to six times as investors jumped into convergence trades in the last two weeks. Traders said approximately EUR250 million (USD250 million) of these trades were executed every day in comparison to EUR50-100 million on average. The trades were sparked off when JPMorgan reportedly bought about USD500 million (notional) in 10-delta euro put/forint calls.

A lawsuit alleging breach of contract brought by a U.S. hedge fund against JPMorgan regarding a credit derivative contract on Argentine sovereign debt will be heard in the U.S. District Court for the southern district of New York after a judge threw out the bank's attempt to dismiss the case. In a memorandum and order District Judge Lawrence McKenna dismissed all Eternity Global Master Fund's other claims expect breach of contract. The notional size of the credit derivatives position and the damages Eternity is seeking could not be determined by press time. Officials at JPMorgan did not respond to messages and officials at Eternity in New York could not be reached for comment.

Domestic Korean securities houses, including Dongwon Securities, Good Morning Shinhan Securities, Hana Securities, Woori Securities Co., are readying to start offering over-the-counter equity derivatives in the Korean market. The move will likely bring increased business to international houses as the domestic firms will hedge their positions. "Lots of things are changing--this is a great time in the Korean market," said Hong Shik Kim, senior executive managing director and head of trading and derivatives at Good Morning Shinhan in Seoul, noting that deregulation is allowing local houses to set up an onshore equity derivatives market in Korea. "This market will get bigger and bigger," said J.K. Kim, head of derivatives at Hana Securities. Market officials expect the firms to receive their OTC equity derivatives brokering licenses, which will permit them to sell won-denominated OTC equity products, next month.

Ferox Capital Management has hired Anthony Medina, equity derivatives trader at Lehman Brothers, as a senior trader at the convertible bond arbitrage fund in London. Jeremy Herrmann, head of the fund in London, referred calls to Nick Curtis, a firm official, who confirmed the hire, but declined all further comment.

Singapore-based Maestro Capital Management is preparing to launch its first fund and will consider using over-the-counter equity options. "We'll use the futures market as our medium of trading but as we follow trends we could choose different mediums such as OTC options," explained Nick Delf, managing director in the Lion City. Maestro is looking to start its Global Maestro Fund in early January and will focus on program trading. "We're systematic trend followers," he explained.

Pacific Investment Management Co. is looking at developing more hybrid synthetic managed collateralized debt obligations, following the introduction of its first two such products last month. An official at the firm in Newport Beach, Calif., said the U.S. manager launched the first CDOs in order to exploit favorable opportunities in pricing and the money manager is now considering making further launches for the same reasons. Potential products will be evaluated in view of their arbitrage gains. The official said the details as to when the firm may launch new products or what type of CDOs it is eyeing have not yet been decided.

Moody's Investors Service is in talks with U.S.-based derivatives-savvy professionals, aiming to appoint the first person to its newly conceived derivatives team by year end. David Fanger, senior v.p. in New York, explained the hire is being made as part of a recent decision by the rating agency to create specialist accounting, derivatives and corporate governance teams. The specialist teams will serve as a resource for Moody's analysts, who are responsible for tracking a portfolio of firms. While Moody's analysts are already knowledgeable about derivatives, the fact they follow a group of companies full time gives them little time to focus on derivatives, thus the attention of the specialists will aid in making the information more robust, he added. The new hire will report to Christopher Mahoney, senior managing director.