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Many of the building blocks are in place for the expansion of the private equity market in Japan: low asset prices, a real need among corporates to restructure; workable bankruptcy laws and an established and liquid local banking industry. Critically, though, appetite among the big Japanese banks for the provision of leveraged debt remains low. Think about the perfect environment, theoretically, in which private equity should thrive.

JPMorgan, Goldman Sachs and UBS Warburg have started aggressively marketing equity variance swaps--instruments that allow investors to gain exposure to changes in volatility--and some are pushing new versions as demand rockets on the back of high volatility. European equity volatility has spiked as high as 50% in recent weeks, which is higher than levels seen after Sept. 11, traders said. JPMorgan has seen a six-fold increase in demand for variance swaps in recent months and is now selling about 30 transactions a month, according to a firm official.

Traders are examining their counterparty risk to JPMorgan in light of a recent downgrade and a statement that the bulge bracket will post weaker than expected earnings. Although the firm is still rated AA minus traders said they are reviewing their collateral agreements with an eye to reducing risk, either by shrinking credit lines or buying credit protection. Eileen Darko, spokeswoman in London, declined comment.

KEB Commerz Investment Trust Management, a Seoul-based asset manager with USD2.1 billion under management, is examining using over-the-counter equity options for an upcoming fund. Jae Hyun Lee, head of equities in Seoul, said that once the fund is up-and-running it will look at the possibility of using OTC puts and calls in addition to exchange-traded options and futures. He expects the fund to launch in the coming weeks, but declined further comment.

Nomura International and Credit Suisse First Boston have agreed to a provisional court date early next year for their dispute over whether exchangeable bonds are deliverable in a USD10 million Railtrack credit-default swap. For the complete claim form in PDF format, click here.

Merrill Lynch has hired Helen Oldfield, v.p. in the legal department at Credit Suisse First Boston in London, in a similar role. Sid Kurth, head of European debt markets council for Merrill in London, said Oldfield will be a replacement for Robert Webster, director, who recently joined Bank of America (DW, 7/7).

Merrill Lynch reportedly viewed the sale of its Global Energy Markets (GEM) commodity trading group to Allegheny Energy for USD490 million last year (DW, 9/23) as a convenient and lucrative way to exit a business that it did not fully understand, according to an official familiar with the workings of GEM. Moreover, Dan Gordon, head of trading, either on his own or because he knew the firm was looking to get out, reportedly had been shopping the business to potential buyers without Merrill's knowledge.

The Bangko Sentral ng Pilipinas, the Philippines central bank and regulator, is expected to issue blanket credit derivatives licenses to foreign banks and domestic institutions in the coming months. "This is a very positive step," said Bryan Yap, co-head of emerging markets-Asia; fixed-income and derivatives trading at Deutsche Bank in Singapore. The regulator allows some derivatives products, such as credit-linked notes, but each trade must be approved by the central bank. "We're still studying [blanket licenses] but it's one of our priorities," said Deodora San Pedro, an official in the supervisory reports and studies office at the BSP. She added that the study should be published in the coming months, declining further comment.

Lawyers are warning that traders will have to be educated in the intricacies of the proposed equity derivatives definitions as depending on which clauses they choose the price could differ and the firm could be left unhedged. The proposed International Swaps and Derivatives Association's 2002 definitions are expected to replace the 1996 definitions later this year and are far more precise than their predecessor, meaning that there is less room for confusion but more room for trader error.

Interest rate swappers were left guessing last week whether Fannie Mae had already entered the swaps market to rebalance its portfolio or if it would still need to receive approximately USD10 billion in swaps. The agency recently announced its assets have a 14-month shorter maturity than its liabilities. Some traders claimed swap spreads had widened last week as dealers unwound 10-year swaps, in which they received fixed and paid floating, because they think Fannie Mae had already executed its swaps plan. However, other traders said the agency still has to enter swaps and the widening is due to corporate credit weakening and the fear of war with Iraq.