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Currency options professionals last week pinned the blame for the USD750 million in fx losses rung up by a rogue trader at Allied Irish Bank subsidiary Allfirst to weak risk controls. "I think the bank's systems of controls are atrocious," one trader said. "At most major money banks, if you don't get confirmation for a trade in two days their pit bulls are all over you." If the firm had used a random confirmation technique it should have realized something was amiss much earlier. "The amount of trades put on to lose that much had to be phenomenal. I don't know how they could have missed it," he added. Officials at Allfirst did not return calls.

Salomon Smith Barney is preparing to market a synthetic collaterlized debt obligation referenced to a USD1 billion pool of investment-grade bonds that is expected to come to market by March. Los Angeles-based Trust Company of the West (TCW) will actively manage the CDO, which has been named Craigey Street. "They've managed a couple of our cash deals in the past. TCW has a very strong investment-grade team," said a Salomon official. He declined to provide further details on past deals. Officials at TCW did not return calls before press time.

Five-year credit protection on Rolls-Royce blew out by roughly 70 basis points last week amid concerns over the U.K. company's amount of off-balance sheet debt as so-called Enronitis--skepticism over companies' accounting standards--swept the financial markets. Spreads on Rolls-Royce widened from around 135-155 basis points at the start of the week to 200-220 bps by Thursday. "There's a lot of nervousness everywhere and now you are starting to have real issues with the fundamentals and there's not a lot of confidence in some of the accounting out there," said one trader. An equity research report Goldman Sachs published Wednesday, which questioned the size of Rolls-Royce' on and off balance sheet debts, caused investors to hit the panic button and buy protection in droves. Goldman officials responsible for the report did not return calls.

Those who trade equity derivatives for a living are familiar with the complexities of trading volatility. In general, traders seek to exploit option mispricings through delta-neutral strategies in which a hedge position in the underlying stock is dynamically adjusted through the life of the option. While the Black-Scholes framework provides a straight forward formula with regard to initiating (delta) and adjusting (gamma) the stock hedge, the process of realizing profits from volatility trading is far from exact. Profit uncertainty arises from the path dependent nature of an option's gamma and vega. These Greeks are a complex function of the relationship of the spot price to the strike price, time, and volatility.

John Kapustiak, head of U.S. interest rate options trading and U.S. rates proprietary trading at Bank of America in Chicago, has been promoted to global head of rates derivatives trading in Chicago.

Traders in Asia believe that a domestic treasury bond futures market to be launched in Thailand within nine to 12 months will result in a dramatic increase in the use of OTC interest-rate derivatives.

Royal Bank of Scotland Financial Markets is planning to hire five derivatives salesman for its London office to focus on selling derivative-linked products to end users on the Continent. Chris Webster, head of derivatives sales in London, said he plans to expand the 27-strong team to 32 sales professionals. The mainly interest-rate derivatives sales force will cover the U.K. and Europe. Webster said the expansion is in line with the bank's goal to do more business on the Continent. Although he acknowledged the interest-rate derivatives market is saturated, he said RBOS is still hoping to make inroads. "The market is developed, but our coverage of it isn't."

UBS Warburg has created a capital guaranteed note on the DAX and Euro Stoxx 50 that offers more upside potential than traditional structured products and is being aimed at investors who are turning bullish on equity markets. The one-year certificates will offer higher participation than most guaranteed notes, but in turn also have the potential for a 100% wipeout, said Martin Boldt-Christmas, equity derivatives analyst in London.

Taylor Woodrow, a FTSE 250 housing and construction developer, is considering entering its first interest-rate swap to convert part of a GBP250 million (USD356 million) 6.78% 10-year bond into a synthetic floater. Adrian Auer, group finance director in London, said the company is reviewing some interest-rate structures to determine whether it makes sense to hedge the rate risk on the offering. The deal was priced last month. "We will probably use interest-rate derivatives to get the balance right," he said. The company may enter a swap now because this bond offering was its first in more than a decade.

One-month implied volatility for Japanese yen/dollar options rose only slightly to 10.5% Wednesday, up from about 9.8% a week earlier, as demand for at-the-money yen calls/dollar puts, saw a slight increase. The one-month 25-delta risk reversal inched further in favor of yen calls/dollar puts. Traders reported that activity in the options markets was slow last week because investors were wary of the volatile spot market. "Spot has been whipping around all week. It's very choppy. Most investors are staying out," said one trader. Spot was trading at JPY133.65 last Wednesday.

Taplin, Canida & Habacht will swap out of short-term Treasuries into corporates on the view that the Enron-related worries have caused corporate spreads to widen more than justified, and that Treasury prices are going to decline with the improved economy. Bill Canida, portfolio manager with the Miami-based shop, says he will wait for 30-year auto sector corporate bonds, such as Ford Motor Corp., to reach a 300 basis points spread over Treasuries before moving. As of last Monday, those spreads ranged between 270 and 280 basis points. He declined to specify exactly how much he would move.