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"This is still open for debate."--Norah Barger, chairman of the credit risk mitigation subgroup of the Basel committee in Washington, commenting on the committee's stance on dropping restructuring as a requirement for regulatory capital relief. For complete story click here.

Credit-default swap spreads on Aon Corp., a Fortune 500 insurance broker, skyrocketed last week after the company announced the Securities and Exchange Commission was looking into its accounting practices and said it may have to restate earnings for the past three years. Midmarket five-year default swap spreads jumped from 130 basis points Tuesday to as high as 475bps before retracing to 450bps by late Wednesday in New York. "It opened up 200 bid/no offer, an offer came in at 300 and got lifted and it kept going up," said one credit derivatives trader in New York. "The market will punish any company that has a story with guys in badges involved," added the trader, referring to the SEC investigation. The company also announced it was shelving plans to spin off its underwriting unit. Aon shares fell to USD14.77 Wednesday from USD21.38 Monday, with a 52 week high of USD44.80.

Commerzbank and BNP Paribas are recommending bullish euro foreign exchange options trades to investors, taking the view that downward pressure on sterling and the yen will continue. Ian Stannard, foreign exchange analyst at BNP Paribas in London, said assets in Europe generally look favorable compared with other regions. "Inbalances in the U.K. economy continue to grow and there are signs that export manufacturing is starting to falter," he said, adding that Japan will be affected by the slow recovery in the global economy. The firm is taking a medium- to long-term view on the trend and suggesting three- to six-month euro calls against both currencies. For example, the firm is recommending a six-month euro call at JPY120.50, with an approximate price of 0.96%. Euro/yen was trading at JPY117 on Friday. This trade takes advantage of low implied volatility at 8.8-8.9%, which is close to implied vol lows seen in May of 8.6-8.7%, after reaching a high of 10.1% in June.

Credit-default swap spreads tightened across the telecom, auto and industrial sectors late last week as proprietary trading desks started to take profits on default swaps they had bought in the last weeks. Five-year protection on DaimlerChrysler tightened 20 basis points to 160bps last week. Traders said investors were selling positions they had put on at the start of the month when the car manufacturer was trading around 145bps. Five-year protection on Ahold also tightened 20 basis points to 145-165bps by Thursday morning from midday on Wednesday, while Cable & Wireless tightened 60bps to 320-350bps.

The cost of U.S. dollar/Canadian dollar options rose and risk reversals flipped last week amid strong buying interest in greenback puts/Canadian dollar calls. Foreign exchange options traders said vol rocketed because a firm, whom they declined to name, bought nearly a yard of one-month U.S. dollar puts struck at CAD1.57, likely for a client. Spot was at CAD1.5780 late Wednesday in New York, down from as high as CAD1.59 earlier in the week. One-month implied volatility rose to 9.6% after the buying action Wednesday from 8.8% Monday. Traders expected spot to move even lower, as 25-delta risk reversals flipped to 0.2 vol in favor of dollar puts/Canadian dollar calls, from 0.1 vol in favor of dollar calls/Canadian dollar puts on Tuesday.

SNS Bank, the banking arm of banking and insurance company SNS Reaal Group, plans to enter interest-rate swaps and possibly foreign exchange swaps on approximately EUR1 billion (USD966 million) of medium-term notes by year-end. SNS issues approximately EUR6 billion of debt per year, 35-50% of which is issued through MTNs, said Bart Toering, head of capital markets in Amsterdam.

Credit Suisse First Boston and JPMorgan are looking at ways to reduce the foreign exchange risk in synthetic collateralized debt obligations to improve the efficiency of the structure. At the moment CDO structurers get a conservative rating where deliverable obligations can be in several currencies, because a shift in the exchange rate could alter the real recovery rate, said Irene Ho-Moore, managing director at Standard & Poor's in London.

Credit derivatives professionals' paychecks were flat or down on last year, according to a survey by headhunting firm Sheffield Haworth. Credit has been one of the hottest areas in derivatives for the last few years and salaries have been rising steadily, but salaries were capped to subsidize less profitable areas of firms, said one senior credit derivatives pro.

Bank of America, CIBC and Commerzbank are joining a growing number of firms looking to structure hybrid products to hedge credit or bankruptcy exposure via equity and credit derivatives. The recent bankruptcies of once mighty companies, such as Enron and WorldCom, and the deteriorating corporate credit environment makes a compelling case for using both equity and credit derivatives to manage exposure, according to bankers. "In [bear] markets there is a high correlation between equity and credit," said Rajeev Misra, global head of credit derivatives at Deutsche Bank in London.

Anthem Inc., the fifth-largest publicly traded health benefits provider in the U.S. and the newest member of the Standard & Poor's 500 Index, is considering entering its first interest-rate swap in more than a decade, according to George Martin, treasurer in Indianapolis. He said the company, which issued USD950 million in fixed-rate debt last month, may seek to convert at least a portion of that deal into a synthetic floating-rate obligation. Anthem has a total of USD1.8 billion in outstanding debt.

Greif Bros. Corp., a maker of industrial packaging with annual revenue of roughly USD1.5 billion, is planning to enter interest-rate swaps to partially convert the fixed-rate liability from a recent bond offering into a synthetic floating-rate obligation. Rob Zimmerman, assistant treasurer in Delaware, Ohio, said the company did not enter any swaps as part of the USD250 million deal, which was priced late last month, or immediately after it because it hopes to get a more attractive rate by waiting. "We will be swapping it out on a scheduled basis, because the market is so [bad] right now we would be paying a high spread over LIBOR," he said.

The International Swaps and Derivatives Association is working on a revised version of the 1992 Master Agreement. Parties should carefully consider the proposed changes because these agreements have become the market standard for documenting over-the-counter derivatives.