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Singapore-based OUB Asset Management, which recently became the first portfolio manager in Asia to actively manage a synthetic collateralized debt obligation, is looking to manage additional structures this year. "We're still in the preliminary stages," noted an official at the firm, adding that several investment banks have approached OUB. He said it will chose which CDOs it manages and when based on its prediction for credit derivatives spreads widening and the robustness of the structure.

J.P. Morgan and Salomon Smith Barney are separately structuring synthetic collateralized debt obligations. The deals are unusual because they are referenced to high-yield debt whereas most synthetic CDOs are based on investment-grade assets. The CDOs, which were being pitch to end users last week, have yet to be finalized but range in size from USD300-500 million with maturities of five to seven years and are expected to hit the market in the next couple of months. Officials at J.P. Morgan and Salomon Smith Barney declined to comment.

Hanwha Chemical Corp., a global chemical manufacturer in Seoul with over KRW3.631 trillion (USD2.8 billion) in assets, entered a currency swap last month, converting a U.S. dollar loan into Korean won. The loan, a USD100 million six-month LIBOR facility, will be used toward the purchase of petrochemicals, said Y.K. Kang, manager of foreign exchange in Seoul. In the swap, Hanwha pays dollars and receives won at an exchange rate of KRW1,308.30. The maturity mirrors the life of the loan. Kang added that the firm is leaving the remaining 50% of its USD200 million loan portfolio unhedged to participate in potential won upside against the dollar.

As elsewhere, in the Asian fx derivatives market the previous 12 months could be summarized by two words: "low vol," and a concomitant increase in the use of plain-vanilla instruments, according to Louis Cucciniello, head of options at J.P. Morgan in Singapore. With vol lower across the board, vanilla options offered a strategy with a lower-than-usual cost to express directional views, he explained. And unlike structured derivatives, users of vanilla options did not cap their upside participation.

Buyside and sellside firms spent the beginning of the year arguing over what constitutes restructuring and whether it counts as a credit event (DW, 2/5, 3/19). But in May the International Swaps and Derivatives Association published a supplement to its 1999 definitions of credit derivatives that introduced modified restructuring. However, while U.S.-based institutions accepted it quickly and Asian firms followed soon after, European institutions have not adopted the new language. One market maker estimated only 40% of new contracts in Europe included modified restructuring.

The use of sophisticated risk management tools is being rapidly adopted in the investment management industry. We view this trend as natural given that asset managers are in the business of taking risk. In other words, whether their mandate is to fund contingent liabilities, such as pension funds, produce excess returns over a benchmark, such as traditional asset managers, or generate exceptional absolute returns, such as hedge funds, asset managers need to assume risk in order to meet their objectives.

Norwegian state-owned utility Statkraft is considering making its first major use of over-the-counter derivatives to hedge weather-related risks. An official in Oslo said the state owned utility has significant exposure to fluctuations in rainfall because it is the country's leading hydroelectric producer. "We have a mean production of 33 TW/h per year of hydro production, which can be affected by both precipitation and temperature and can vary a lot," the official explained. Statkraft is considering using weather derivatives now because the market is becoming more liquid. "Our approach is that we have weather risk and so a part of risk management is to consider whether that can be hedged and what is the cost," he said. "Our experience so far is that it has been too expensive."

An increase in the volume of plain-vanilla and structured credit products in 2001 has moved the Asian credit derivatives market another step closer to the depth and sophistication of the European and U.S. markets. One major innovation last year was the structuring of the first synthetic CDOs referenced solely to Japanese names, by firms such as BNP Paribas, J.P. Morgan and Deutsche Bank (DW, 11/19).

The foreign exchange market in 2001 remained largely indifferent to the kind of sweeping macroeconomic movements and exogenous shocks that in different times would have sent spot and implied volatility on a roller coaster ride. As a result, the fx markets were "a really boring place to be this year," according to one options trader.

"The clock is ticking the wrong way."--Thor Lien, managing director of Enron Nordic Energy in Oslo, commenting on the amount of time the company has to find a buyer (DW, 12/3).

Grand Cathay Securities Corp. and Yuanta Core Pacific Securities Co. recently separately received licenses from the Securities and Futures Commission to act as market makers in Taiwan dollar interest-rate swaps, a move that officials believe will bolster the market. Grand Cathay and Yuanta are the first domestic securities houses to receive such licenses. "This should boost volumes by 20-30% within six months", said Samuel Wang, manager of the derivatives department at Yuanta in Taipei.

Capital-protected products structured with derivatives dominated the Asian equity market last year as investors looked for a silver lining amid slumping cash equity and interest rate markets. "The major trend for the year was capital-guaranteed notes and funds," said Alan Loh, managing director and Asia Pacific (ex-Japan) co-head of equity derivatives at Deutsche Bank in Hong Kong. Harold Kim, managing director of Asia Pacific equity derivatives at Salomon Smith Barney in Hong Kong, agreed, noting that "Markets were generally weak, nervous and volatile. These conditions hurt demand for bull-market products, however, these same conditions are good for capital-guaranteed products." James Rodríguez de Castro, managing director of global equity-linked products at Merrill Lynch in Hong Kong, attributed part of the increase in demand to local banks pitching these structures to retail clients. Merrill offered the first exchange-listed equity-linked notes in Singapore dollars earlier this year (DW, 7/29). Warrants structured on baskets of Chinese B shares were also popular in Asia last year. Credit Lyonnais in Hong Kong revived these instruments after pioneering the product four years ago (DW, 6/11).