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Five-year credit protection on U.S. consumer finance firm Household International fought back to stand between 500-540 basis points last Wednesday, down 125bps on the previous week and recovering from a high of 900bps on Oct. 24. Equity and corporate bond rallies, combined with the effects of several collateralized debt obligations being issued, have tightened spreads, noted one trader. Anticipation of another interest rate cut in the U.S. has also peaked expectation of a continuing equity rally, which in turn has influenced spreads inward.

Rhicon Currency Management with over USD100 million under management, has launched its second foreign exchange fund and it will use over-the-counter derivatives. "This is for U.S. investors that can't invest in our offshore fund," said Christopher Brandon, managing director in London.

JPMorgan has laid off Philip Smith and Scott Adams, v.p.s and interest rate derivatives marketers, in its New York-based derivatives marketing team. Michael Dorfsman, spokesman in New York, said the cutbacks were part of the firm's plans to cut 2,000 staffers. Smith and Adams could not be reached for comment.

Derivatives professionals are expecting many junior staffers to take the brunt of lower bonus payouts this year, with many such workers anticipated to receive marginal sums, if anything at all. One credit derivatives head expects this year to be the first since 1998, in which derivative staffers walk away empty pocketed.

MEFF, the Spanish futures and options exchange, plans to start clearing large over-the-counter trades that mirror exchange-traded instruments. Fernando Centelles, deputy ceo in Madrid, said it is making the move because of derivatives traders increasing concerns about counterparty risk in OTC transactions. Firms are more cautious about counterparty risk because of deteriorating credit quality and an increase in the size of trades, according to Centelles. Trades are increasing in size because more traders are putting on relative-value strategies where the notional size of the trade has to be huge to profit from the arbitrage.

Eksportfinans, the Norwegian export credit agency, has entered an interest rate swap to convert a USD750 million bond offering into a floating-rate liability. Soren Elbech, head of funding and investor relations in Oslo, said the agency converts all of its fixed-rate debt to floating in order to maintain its AAA rating. "It is a hedging exercise," he explained. Elbech would not disclose what the agency is paying and receiving in the swap. The bond has a coupon of 3.875%.

Merrill Lynch has merged its global Strategic Solutions Group (SSG), a specialized group responsible for structuring and marketing derivatives-based transactions, into its derivatives sales division. Doug DeMartin, head of global credit products in New York and to whom the sales side reported, will head the new group.

Scotia Capital has issued the first exchange-listed collateralized debt obligation and has a couple more in the pipeline for the coming months. Frank Ackermann, managing director in the credit derivatives and credit investments group in London, said, "This is the first public offering of its kind and we have more in the pipeline." The firm structured--and listed on the Frankfurt Stock Exchange--a EUR1 billion (USD997 million) CDO for DZ Bank, which closed last week.

The use of credit-default swaps as a hedge for all or a portion of the credit risk embedded in a convertible bond has increased dramatically over the past few years. One reason is that convertible arbitrage funds attempt to profit by buying embedded equity options cheaper through a convertible bond than is possible by purchasing the option separately in the equity derivatives market. Thus, although arbitrage funds are typically focused on isolating the equity option's value, the repackaging of the equity option in the convertible bond gives rise to other risks inherent in bonds--such as interest rate and credit risk--that are frequently hedged.

Rabobank International is planning to set up an equity derivatives operation in Asia next year. A firm official said the desk will be in Singapore, but declined further comment. Rabo has previously traded equity derivatives out of Japan, but closed its securities operation in Tokyo two years ago.

The Federal Farm Credit Banks Funding Corporation (FFCB) has entered an interest rate swap to convert part of a recent USD1 billion fixed-rate bond into a synthetic floater. An FFCB official in Jersey City, N.J., said the swap was executed to hedge interest rate risk as well as to match the resetting nature of a significant portion of the agency's assets. He declined to specify what portion of the bond issue has been included in the swap.