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Dresdner Bank is suing Bankgesellschaft Berlin because of the latter's refusal to pay out on a credit default swap referenced to Marconi, the troubled telecom company whose restructuring last fall triggered millions of dollars of payouts on credit derivatives protection. Marconi's restructuring highlighted loopholes in credit derivatives documentation, leading to disagreements about what qualifies as a trigger for protection and what can be delivered against a contract. Most of the outstanding contracts on Marconi have been settled, according to dealers and end users, but BGB appears to be one of the last hold outs.

Domestic securities houses in Korea have recently executed the first equity-linked notes onshore after receiving licenses to trade the products. "The first weeks have been very encouraging," said Hong Shik Kim, head of proprietary trading and derivatives at Good Morning Shinhan Securities in Seoul. He added that notes encompassing knock-out call options on the KOSPI 200 index are proving popular with retail investors and that over USD200 million has been sold in the past few weeks. Kim said that for the more exotic notes, domestic houses are hedging the over-the-counter options with international players. Typical notes range from USD10-50 million.

Morgan Stanley has hired Richard Cohen, head of Pacific Rim credit derivatives at Merrill Lynch in Tokyo, in a new role as v.p. in credit derivatives trading in Hong Kong. Cohen is a well-known veteran in the region's credit mart, according to rival traders (DW, 2/2). Simon Locke, spokesman at Morgan Stanley, said Cohen has joined in Tokyo but is moving to Hong Kong in the coming weeks to handle trading for credit derivatives and structured credit products for non-Japan Asia.

One of the least-understood aspects of option pricing is how to account for holidays and weekends when looking at short-dated option prices. Intuitively options have low premiums if there is a smaller window of opportunity to extract value from the gamma. The question is: how do traders calculate this exactly?

Five-year credit-default protection referenced to R.J. Reynolds Tobacco Holdings widened to 400 basis points Wednesday, out from 350bps the previous week. The blow out followed an announcement on April 25, that it had slashed its earnings forecast for the year as a result of tough conditions in the tobacco industry, said a trader in New York. Immediately following the announcement, credit default swaps on the name traded as wide as 475bps.

Fubon Securities, one of Taiwan's largest securities houses and a subsidiary of Fubon Financial with assets of over NTD116.1 billion (USD3.31 billion), recently became the first Taiwan-based organization to invest in a synthetic collateralized debt obligation. "This is the first deal in Taiwan for a CDO," said Roger Huang, manager of the fixed income and derivatives department in Taipei. The securities firm last month purchased a USD10 million managed mezzanine synthetic CDO tranche which it believes is the first CDO sold in Taiwan from Citigroup. The managed mezzanine tranche, rated Single A, is structured on a portfolio of global credits. In the structure Fubon has control over the credits selected in the portfolio as the equity and senior tranches are hedged by the arranger.

Pensionskasse Post, the pension fund of Swiss Post in Bern, is considering using interest rate derivatives for the first time as an alternative to cash bonds. Andres Haueter, head of asset management at the CHF10 billion (USD7.39 billion) fund, said since most of its fixed income investments are in Swiss bonds, which are illiquid, the fund is looking at the potential of investing in synthetic bonds structured using interest rate swaps, especially as its Swiss franc assets are growing.

Becton, Dickinson & Co., a syringe manufacturer, has entered two interest-rate swaps on the back of recent bond issues. Richard Berman, v.p. and treasurer in Franklin Lakes, N.J., said the corporate executed a plain-vanilla fixed to floating rate swap, tied to the issues for accounting purposes. It also entered into a second swap, exchanging the last 13-years of the 15-year bond, back into fixed rate. Berman declined to give further details, or clarify the total notional amount of the swaps. He added, however, that the second interest-rate swap was made as a hedge against future debt issuance.

Three of the biggest names in credit derivatives, who are also Merrill Lynch alumni, are clubbing together to start a structured credit products boutique. The structured credit 'dream team' of T.J. Lim, ex-global debt capital markets coo, Glenn Barnes, former European head of structured credit, and Kevin Krespi, ex-head of debt for the Pacific Rim (DW, 7/7), are setting up an advisory firm called New Smith Financial Solutions. Lim, Barnes and Krespi declined comment.

UBS Warburg is on the prowl for a head of derivatives and government sales after several senior departures. David Shulman, global head of fixed-income distribution in Stanford, Conn., said the firm is in the process of reviewing its derivatives government agency businesses and has started its search for a head, but declined to give further comment, including saying whether the role is newly created.

"If Commerzbank don't very rapidly replace the recent CDS flow departures, they will find it increasingly difficult to price and structure their structured credit products."--Simon Barker, recruiter specializing in structured credit products at Michael Page City in London, on recent departures from Commerzbank. For complete story, click here.

U.S. and European credit derivatives dealers have reached a compromise over what forms of guarantees will be accepted in standard credit derivatives and pitched the draft supplement to buyers and sellers of protection Wednesday, according to credit bankers.