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The declaration of a war on terrorism and subsequent attacks on Afghanistan by the U.S. has prompted Lehman Brothers to recommend clients sell volatility on a basket of stocks it dubs "war" securities versus a basket of "peace" stocks. Implied volatilities for the stocks in the war basket have increased despite a decline in realized volatilities because there has been a perceived increase in systematic risk, said Paul Lieberman, v.p. of equity derivatives and quantitative research in New York.

Merrill Lynch and J.P. Morgan are leading an initiative to net credit-default swap contracts for the first time to reduce the amount of time traders have to spend settling contracts in the event that the reference asset defaults. "Net settling will be a great thing if we can do it because anything that will increase liquidity is good," according to Anjan Malik, a credit derivatives trader at Lehman Brothers in London. He added that an obstacle could be firms' reluctance to share information on positions with their competitors.

J.P. Morgan and Deutsche Bank separately plan to start offering derivatives based on economic statistics, such as inflation and productivity, published by the U.S., European and Japanese governments. The conracts will be based on a model, dubbed the parimutuel digital call auction model, which prices risk based on a commitment of capital and the cost of hedging the position. The products will allow investors to trade and get pricing on economic indicators, according to officials at both firms. They will start offering digital options and digital spread trades by year-end.

Royal Bank of Scotland has entered an interest-rate swap with Morgan Stanley on the back of a EUR500 million (USD452 million) bond as part of its regular funding process in the European market. Sanjay Sofat, treasury manager in London, said the company entered the 12-year swap to convert the fixed-rate bond into a floating-rate liability. In the swap, RBS will pay a spread over six-month Euribor and receive 6%, matching the coupon of the bond offering. A Morgan Stanley interest-rate official confirmed it entered the swap but declined further comment.

Liz Parminter, a power trader at RWE Trading in London, will join Aquila Energy on Jan. 2. Parminter has been hired as head of commodity and direct trading. In the role she will focus on structuring bilateral trades for clients and other power trading companies, rather than trading standardized contracts through the broker market, explained Parminter. She decided to join Aquila because of its "can-do attitude and willingness to commit to the market," she explained. Parminter will report to Rusty Smith, director of trading in London.

Morgan Stanley has hired David O'Malley, a buyside portfolio manager handling all derivatives use at Penn Mutual Life Insurance in Philadelphia, as v.p. of credit derivatives product management and marketing to U.S. clients in New York, according to an official familiar with the move. O'Malley joined the firm at the beginning of the month, filling a spot left vacant following the departure of Steven Olentine, who was hired by Swiss Re Financial Products last month as a structured credit derivatives salesman in New York (DW, 9/2).

Traditionally collateralized debt obligations (CDOs) involve a transfer of collateral assets. The CDO liabilities then reference the cash flows (principal and interest) of the collateral assets. But CDOs are increasingly issued in synthetic form, where there is no physical transfer of collateral. In these structures the CDO references default losses, rather than the cash flows of the referenced collateral.

Manila-based San Miguel Corp., a food and beverage company that distributes products such as San Miguel Beer and Coca-Cola, is considering using its first cross-currency interest-rate swap in the Philippines market on a USD80 million dollar portion of a floating-rate loan facility it arranged via J.P. Morgan two weeks ago.

UBS Warburg has repackaged a U.S. dollar bond into a Singapore dollar-denominated bond through a special purpose vehicle for the first time. The firm executed the transaction to give Singapore-based investors, who could not use derivatives or did not want to tie up derivatives lines, access to the OCBC Bank bond. "This is the first deal of this type we've done in Singapore," said Michael Pieri, director of local currency fixed income trading in Singapore. While UBS has executed similar transactions in U.S. dollar instruments, it has not entered this type of deal in Singapore before because the market is relatively new. He added that it has had the capability to pull the trigger on similar transactions for several months but investors could not agree on which bond to swap. Other candidates included Ford Motor Credit's global offerings, but some investors did not want exposure to the auto sector.

Westdeutsche Landesbank is beefing up its precious metals trading team in London. Michael Bushman, formerly at first-e, an Internet bank which has closed its U.K. portal and previously a market maker in gold options at UBS Warburg, starts next month in the new position of head of precious metals options trading. Bushman was on gardening leave and could not be reached.

Conning Asset Management is buying mortgage-backed bonds, both pass-throughs and collateralized mortgage obligations, on the view that credit deterioration and a historically steep yield curve will continue to help the sector outperform. Karen Kelleher, portfolio manager who oversees $1 billion in the firms $30 billion fixed-income portfolio, says the firm has moved away from investment-grade corporates (the firm's traditional asset of choice) and purchased Fannie Mae and Freddie Mac pass-throughs in the 6-6.5% sector of the coupon stack. She has also been buying 10-year original life PAC CMOs, backed by conventional 6-6.5% collateral, believing that the negatively convex structure will protect from extension risk. The moves have been financed with cash from MBS that prepays, as well as from the sales of shorter average life CMOs. Kelleher says she might purchase an additional $40 million or so of MBS, should the curve stay in this range, bringing the firm roughly in line with the MBS weighting of the Lehman Brothers aggregate index.