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Collateralized debt obligation and commercial paper conduit structurers and accountants are working on ways to transfer the downside risk of portfolios to avoid having to put the whole structure on asset managers' and banks' balance sheets. The answer is to make hedge funds consolidate the deal. This is done by transferring a majority of the downside risk to hedge funds, through instruments dubbed expected loss notes, according to accountants. These are similar to the equity tranche of a CDO in which the hedge fund's principal is reduced each time an asset defaults.

John Cieslowski, a credit derivatives trader at Goldman Sachs in New York, is jumping to Bank One, where he will take on a similar role, according to officials familiar with the move. Tom Kelly, spokesman, could not comment by press time.

Merrill Lynch, Lehman Brothers and Citigroup Private Bank are suffering delays in filling what are in some instances long vacant slots for equity derivatives marketers, in spite of market conditions that many professionals think should be ideal for snapping up candidates. Cutbacks made by most Wall Street players have flooded the market with equity staffers hopeful of work while many other derivatives specialists have left their posts in response to what they perceived to be disappointing bonus pay outs, noted several industry officials.

Goldman Sachs recently brought aboard Ada Lam, fixed-income saleswoman at Lehman Brothers in Hong Kong, for a similar role covering Hong Kong and Taiwan. She reports to Wassim Younan, managing director and head of fixed income, currencies and commodities at Goldman in Hong Kong. Younan and Lam declined comment.

PNM Resources has entered an interest-rate swap to switch a USD182 million floating-rate debt issue into a synthetic fixed-rate liability. Lisa Rister, director of financial risk management in Albuquerque, N.M., said it entered the swap to hedge the firm's exposure to fixed rates.

Derivatives houses in Korea including Citibank, Crédit Agricole Indosuez and Kookmin Bank are in talks to set up a floating rate benchmark similar to LIBOR. "Swap dealers are concerned that the C.D. rate does not fully reflect market conditions," said Sang Ook Lee, swap trader at Kookmin Bank in Seoul. Dealers explained that the current floating rate benchmark, the three-month C.D. rate, is relatively illiquid due to the lack of an active money market. Banks tend to borrow and lend at overnight rates rather than through the money market.

Rutherglen Capital, a hedge fund manager with USD5 million under management, is considering using over-the-counter equity options for its debut fund dubbed the Rutherglen Capital Global Media Fund. "We might be using them in the near future," said Neil Carter, director in Sydney, noting that OTC options could be used as a hedging tool for its market-neutral media sector fund. Carter noted that options will only make up a small portion of its portfolio as it primarily trades cash equities, exchange-traded funds and listed index products.

Prudential Securities has added two foreign exchange staffers, whose responsibilities include over-the counter derivatives sales and trading. Peter Graham will join in New York from a similar role at Bank Julius Baer, while Mark Davison has joined in London from Société Générale, according to John Fallon, senior v.p. and head of foreign exchange and precious metals global derivatives in New York. Davison declined comment and Graham could not be reached.

Pacific Asset Management, with over USD120 million under management, is gearing up to start purchasing and selling credit-default swaps on Asian underlyings by year end. "These will allow us to obtain some degree of leverage," said Desmond Soon, investment manager. He added that the fund manager has studied the instruments since last year (DW, 9/8) but had not pulled the trigger on any deals because of administrative problems, about which Soon declined to elaborate.

"These will allow us to obtain some degree of leverage."-- Desmond Soon, investment manager at Pacific Asset Management in Singapore, commenting on why it is gearing up to purchase and sell credit-default swaps. For complete story, click here.

Five-year credit protection on Altria Group, the parent of Philip Morris USA, blew out 110 basis points last Wednesday following a court decision which reevaluates the company's tobacco bond liability. Credit-default swaps on the name traded as wide as 350bps last Wednesday, compared with 240bps the week before, according to a New York-based trader. The leap occurred in spite of a slow down in trades as the market moves in to the summer slowdown, he added.