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This article discusses the construction of notes derived from iBoxx indices, the basis between cash and credit-default swaps and what types of clients these instruments are aimed at. The first notes were introduced this summer by ABN AMRO and Deutsche Bank.

ABN AMRO is planning to launch a euro-denominated iBoxx 40 credit-linked note within the next few months and is looking at issuing additional iBoxx 50 CLNs in currencies other than the euro in January. The euro-denominated iBoxx 40 is planned on the back of the introduction last week of its first iBoxx 40 note, which was denominated in Swiss francs, said Andrew Feachem, credit derivatives marketer in London. The iBoxx is a European fixed-income index jointly compiled by seven market makers to provide transparent pricing of investment-grade corporate bonds.

Auto manufacturers worldwide got hit by consumer credit concerns on manufacturers led by Ford Motor Credit last week, with DaimlerChrysler also suffering a 50 basis point spread blow out. Five-year protection for Ford blew out to around 700bps, up from 475bps the previous week and Daimler's spreads increased to 230-240bps last Thursday from around 180bps the week before. "A lot of the widening has been stateside, being led from the cash investors. Dealer desks are scrambling to hedge their positions on automakers like Ford and are moving to get euro protection," he noted.

Barclays Capital Asia plans to close its Hong Kong equity derivatives trading desk and centralize all Asian trading in Tokyo, according to Dustin Kuo, head of index arbitrage trading in Hong Kong. "Hong Kong used to be a great hub but as turnover is down so much it really doesn't make sense when you're making more money outside of Hong Kong," he said. The operation will be moved to Tokyo to reduce costs, Kuo said, adding he will relocate to Japan next month.

Domestic banks in Japan are looking at structuring synthetic collateralized debt obligations to free up capital with a greater sense of urgency as their loan books worsen in tandem with the country's stock market, according to market officials. The success of Mizuho Bank's securitization earlier this year is also causing other banks to look at the structures, according to one credit structurer (DW, 3/31). In addition, Mizuho itself is planning to securitize more of its loan book to free up capital, according to an official at the firm.

Buried in a 120 page document is the latest sign that the Basel Committee on Banking Supervision is still insisting on including restructuring as a credit event for regulatory capital relief. In a document published this month, named Quantitative Impact Study 3, Technical Guidance, it states that, "restructuring of the underlying obligation involving forgiveness or postponement of principal, interest or fees that results in a credit loss event (i.e. charge-off, specific provision or other similar debit to the profit and loss account)," must be included.

Pythar Capital began fundraising in Europe last week for its telecom, media and technology long/short equity hedge fund and is also in the process of fundraising in the U.S. The fund will initially look to raise USD25-40 million (DW, 7/8) and expects to start trading on Nov. 1 or Dec. 1, said Doug Ashton, one of the joint managers of Pythar.

Etolian Capital, a fixed income hedge fund founded by derivatives honcho George Handjinicolaou, is gearing up to start pre-launch trading next month with an eye to going live in January. Handjinicolaou, former managing director and head of global fixed income emerging markets at Merrill Lynch in New York, said the fund will pursue a quantitative options model to invest in relative-value credit plays, such as capital structure arbitrage.

Collateralized fund obligations (CFOs) represent the latest application of securitization technology to a new asset class--hedge funds--and offer investors debt and equity classes backed by a diversified portfolio of funds managed by a fund-of-hedge-funds manager. Financing investments in hedge funds is nothing new. Banks have financed hedge funds for many years. But financing the investment using securitization technology and tapping institutional investors is new, with the first two publicly rated deals having closed this past summer, and a growing pipeline at dealers and rating agencies. Relative to the collateral backing conventional CDOs, a CFO's underlying hedge fund collateral is much more diversified, having high risk-adjusted returns and very low correlation to traditional equity and fixed income asset classes. These features, together with low historic return volatility and relatively low absolute losses, even in distressed markets, make hedge funds both an attractive addition to an investment portfolio and an attractive asset class to securitize. Investment in a CFO provides equity investors with efficient, non-recourse leverage, and offers debt investors with an opportunity to lend against an asset class less correlated with credit markets. The universe of hedge funds includes as many as 5,000 hedge funds managing in excess of USD550 billion in assets. Hedge fund investment strategies may be grouped broadly into 12 to 15 different styles, such as merger arbitrage and distressed situations. Fund of funds managers strive to assemble a portfolio of hedge funds that is resistant to event risk by employing multiple managers having diverse investment strategies, with the goal of achieving "equity-like returns with bond-like volatility." CFOs offer portfolio managers with another way to increase assets under management and diversify funding sources, as well as provide longer term financing than bank lines.

New York-based multi-strategy hedge fund D.E. Shaw, with USD4.3 billion in capital under management, has hired Kevin Fox, former senior v.p. and general manager of commodity services at Aquila, to launch an energy trading operation. D.E. Shaw expects to trade both physically and financially settled energy contracts and has hired additional trading personnel, according to an official familiar with the fund's strategy. Fox, who is due to join the secretive hedge fund today, could not be reached for comment. Officials at D.E. Shaw in New York declined all comment.

The Council of Europe Development Bank has entered a cross-currency interest rate swap to convert a AUD100 million (USD55 million) fixed rate bond into a euro-denominated synthetic floater. Arturo Seco, deputy treasury manager at the Council in Paris, said the bank pays three-month Euribor and receives the 5.25% coupon on the bond. The swap mirrors the five-year maturity of the bond.

Nederlandse Waterschapsbank, a public sector finance agency, has entered a foreign exchange swap to convert the proceeds of a recent Australian dollar-denominated bond into euros. Tom Meuwissen, head of treasury, said the bank always exchanges foreign currency issues into euros, to alleviate currency exposure.