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U.S. derivatives professionals are concerned the National Association of Insurance Commissioners' recent ruling that weather derivatives should be classified and regulated as insurance, rather than a capital markets product, could shut broker/dealers out of the market. If the conclusion is accepted by U.S. state regulators, as NAIC rulings typically are, weather derivatives could become the exclusive preserve of insurers, according to lawyers. Roger Hoadley, spokesman at the NAIC in Kansas City, Mo., did not return calls.

The International Swaps and Derivatives Association's 2003 credit derivatives definitions went live in June, but within hours the market was already talking about supplements and amendments.

The revelation that distressed Italian dairy producer Parmalat Finanziaria had purchased self-referenced credit-default swaps has provoked debate on the ethics behind corporates selling protection on their own name. By purchasing self-referenced default swaps corporates dive into a sticky ethical and legal situation, said derivatives pros. Parmalat, which has come under the microscope for having purchased self-referenced default swaps in 1999, became distressed after it failed to pay back principal on a bond and had its rating slashed to CC.

"Most people here, accountants, lawyers and bankers, are trying to work out how they can make money out of the problem rather than what the solutions is."--Jonathon Laredo, founder of Solent Capital Management and former head of structured finance for Europe and Asia at JPMorgan, commenting on derivative professionals' reaction to the introduction of International Accounting Standards at the European Derivatives Accounting Summit (DW, 12/1).

State Street Global Advisors, Australia, part of the world's largest institutional asset management house, is considering trading credit derivatives for its domestic portfolios, which total some AUD40 billion (USD29.6 billion). "We're studying quant-style concepts and trading strategies," said Lawrence Dryden, head of asset allocation and currencies in Sydney. It is likely that the asset manager will incorporate credit derivatives as an additional investment tool next year, but has to do more research before making the decision. SSgA is in the early stages and is planning to gather more research from investment banks before deciding whether the instruments will gel with the remainder of its portfolio, according to Dryden.

A large slice of the synthetic collateralized debt obligation market migrated to the single-tranche arena this year as a result of innovations in CDO structuring and spread tightening. In single-tranche offerings, CDO houses issue just one slice of a deal, typically a piece rated around the single A level, and then delta hedge the remainder of the portfolio, according to Robert Reoch, founder of Reoch Consulting.

UBS is considering re-establishing an onshore interest rate derivatives operation for Brazil, potentially before the end of next year. "We've been cautiously looking at this," said Joonkee Hong, global head of emerging market derivatives in New York. It will likely wait until the economic outlook improves, which Hong is expects next year.

After two years in the doldrums the Japanese equity derivatives market started to perform again in the second half of the year and the major houses reacted by reorganizing desks, hiring staffers and offering new products.

Bunge, a diversified oil seed processor and supplier of soybean products, is considering entering an interest rate swap to turn a recent USD500 million five-year fixed-rate debt issue into a synthetic floater. Morris Kalef, treasurer in White Plains, N.Y., said the corporate typically enters swaps as a means of managing its fixed-to-floating asset and liability mix. The firm is not waiting on a specific event to determine whether it will pull the trigger, although Kalef noted that the decision would depend on whether Bunge spies an interest rate hike on the horizon.

2003 YEAR IN REVIEW ASIA

The credit derivatives markets lost a little of their shine in 2003 after several years of hogging the limelight as their older and less glamorous sibling, equity derivatives, made a comeback on the back of confidence returning to the underlying stock markets. Nevertheless, developments in credit derivatives indices and single-tranche CDOs ensured that credit derivatives continued to be highly profitable.

Jerome Jurschak, ceo of ACE Guaranty Corp. and ACE Capital Re, has resigned. Calls to Jurschak's office were referred to Anna Lowry, spokeswoman at ACE Ltd in Bermuda, who declined comment. The resignation comes amid a re-jig of the firm's insurance operations and ahead of a planned initial public offering of ACE Financial Services, which includes the two units Jurschak headed up.