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Italian banks are looking at ways of structuring a covered bond without a change in the regulatory framework. Banks, including Monte Paschi Dei Siena, are studying ways of issuing covered bonds in the absence of a specific law because the cost-savings versus residential mortgage-backed securitizations is so significant, explained Anna di Paolo, head of structuring at MPS Finance, Monte Paschi Dei Siena's investment banking unit.

The Depository Trust & Clearing Corp. is pilot-testing a system that performs cash flow matching for credit derivatives. The DTCC is offering a central point to which a firm can send cash flows to be run through an automated reconciliation process and returned to the firms. "Using the system, we are matching pretty well with our counterparties, which has been a big issue at the moment because of the compound growth of volumes," saidStefano Toffolo, European co-chair of the operations committee at the International Swaps and Derivatives Association and global head of over-the-counter derivatives operations atCredit Suisse First Boston. ISDA released a strategy paper for automating derivatives settlements last week.

GFI, a cash and derivatives brokerage house, has hired two teams to consolidate its move into the second generation of credit-default swaps. The first team will be dedicated to correlation and the second to options. Both teams start in January.

Asian securities house KGI Securities has started trading equity derivatives in Hong Kong, according to Jerry Wu, regional head of equity derivatives trading in Hong Kong. Wu recently joined from Morgan Stanley and works alongside Howard Tong, head of equity derivatives marketing, and previously a director in global equity markets at Merrill Lynch (DW, 10/12).

Merrill Lynch is gearing up to offer what is thought to be Asia's first warrants with embedded over-the-counter call options linked to the volatility of the Standard & Poor's 500. "It's a nice non-correlated bet," said John Robson, managing director and head of structured products in the global equity markets group in Hong Kong. He said Merrill is looking to close its first deal before year end and is considering introducing the product next year in Europe and the U.S.

Merrill Lynch plans to launch an onshore interest rate trading operation in Seoul early next year. "We should get our license in the first quarter," said H.H. Choi, head of debt in Seoul. Choi transferred from Merrill's Hong Kong hub late last year to build up the firm's debt and investment banking businesses (DW, 10/28/02).

Long-term buyers of credit protection are expected to suffer more pain next year as spreads on default swaps and bonds stay tight. Michael Cloherty, market strategist at Credit Suisse First Boston in New York, said that while buyers of long-term protection suffered from the rally this year credit volatility worked to reduce some of the pain.

Macquarie Bank has teamed up with Royal Bank of Scotland to offer global commodity risk management services to the latter's client base. The agreement covers oil and oil products, natural gas, precious and base metals and agricultural products, according to a Macquarie spokeswoman in London. The partnership is in its early stages, she added, declining further comment. Simon Grenfell, head of the energy markets group at Macquarie in London, declined comment. Calls to RBS bankers were not returned.

San Francisco-based Tricera Capital is considering purchasing equity derivatives to hedge the firm's recently launched Tricera Asia Fund, which is expected to hit assets of USD5-10 million in the coming months. Raymond Lin, founder, said the firm is looking at buying out-of the-money puts on Asian indices for the long/short fund, which would offer diversified protection on stock volatility.

The credit-default swap market was starting to prepare for a Parmalat credit event last week. Traders made the switch from quoting prices in basis points to charging a cents-in-the-dollar figure as DW went to press on Thursday. The move was triggered by Standard & Poor's downgrading the Italian dairy producer six notches to CC/C.

Credit-default swap spreads on U.S.-based supermarket chains including Safeway, Albertson's and Kroger were pushed out further last week after a West Coast protection buyer snapped up around USD100 million of default swaps on the grocers. The names were already reeling from drastic cuts in earnings because of ongoing labor strikes.