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The generation of large, positive semi-definite covariance matrices that properly reflect market conditions has been a challenge for finance practitioners for several years. Since the 1996 amendment to the 1988 Basel accord, where the principals of internal models for the calculation of market-risk capital were outlined, it has been a major problem to generate the covariance matrices that are necessary to calculate firm-wide Value at Risk estimates. In very large portfolios a risk factor model may be employed, but it is still necessary to have a covariance matrix for all the risk factors of the portfolio.

HSBC plans to expand its interest-rate product range in Taiwan next year to include caps, floors and options as uncertainty grows on the direction of interest-rate moves, according to a senior official in Taipei. "This year the interest-rate trend was obvious, next year it won't be a one-way market," he added. The derivatives will be offered in both Taiwan and U.S. dollars and available within three months.

The Financial Supervisory Service in Korea will permit local securities houses to trade over-the-counter equity derivatives next July; a move that players said will bolster the market. "[The regulations] will strengthen the competitiveness of the securities companies and offer investors a greater range of choices in the financial market," said Lee Young Gi, associate in the securities supervision department of the FSS in Seoul.

Crédit Agricole Indosuez has hired Duan Yang, interest-rate trader at Credit Lyonnais in Hong Kong, in a similar post, according to an official familiar with the move. Yang will report to Eddie Lee, head of fixed income in Hong Kong, when he starts in the coming weeks.

KBC Financial Products is planning to increase its presence in the credit derivatives market by year-end as part of a joint venture between the securities market subsidiary and its parent, Belgium's KBC Bank. The company has recently decided to move its credit derivatives operations from the bank side to the securities subsidiary, in a move that will transform KBC from an end user to an active market maker, according to Carlo Georg, head of international trading in London. The move follows Georg's move from Hong Kong to London to take up the new role (DW, 9/2).

Schroder Investment Management is canvassing opinion among clients about setting up its first fund to use credit derivatives to take positions rather than to hedge exposure. John McLaughlin, head of the structured investment team in London, said the fund manager, with USD172 billion under management, is pitching the idea as an alternative to buying yield-enhancing structures. Instead, Schroder wants to create its own structures since liquidity in the synthetic market has improved to a point where Schroder can actively manage a portfolio of single-name default swaps. "We need to know that we're not bound to go back to the original trader to unwind a trade," he noted, adding the market has also become more standardized.

Prudential M&G, the biggest fund manager in the U.K., in January plans to set up a convertible bond hedge fund that will likely use over-the-counter derivatives. The GBP500 million (USD710 million) fund will invest in European investment-grade convertible bonds, according to an official. Hedge fund officials said this would make it the largest convertible bond fund in the U.K. Asmita Kapadia, a spokeswoman in London, confirmed the plans, declining further comment.

Schaumburg, Ill.-based Motorola is planning to enter an interest-rate swap to convert the fixed-interest rate on a USD600 million senior note offering it brought to market late last month into a synthetic floating-rate liability, according to a company official. The swap is likely to be a plain-vanilla deal with a 10-year maturity to match the maturity on the offering. The notes carry an 8% coupon. "We're thinking that it's a good opportunity to possibly lock in favorable rates because of the recent interest-rate cuts by the Federal Reserve. It's just a great way to keep our balance sheet in line," the official said. The company would look to enter an interest-rate swap in which it pays a floating rate and receives a fixed rate to hedge the interest-rate risk on the notes.

Spreads on European single-name default swaps have narrowed substantially this month, as synthetic collateralized debt obligations structurers bought protection to take advantage of wide spreads and the usual year-end rush to finish deals was larger than expected, according to several traders.

Credit-default protection tightened more than 30 basis points on AT&T following buyside demand for a USD10.9 billion global note offering it issued Nov. 15. New York-based credit derivatives traders reported that the U.S. long-distance telephone and cable giant was among the most heavily traded last week. Spreads on AT&T tightened to about 161bps last Tuesday from 210bps a week earlier as interbank market players looked to sell protection. "Essentially what happened was the bond deal was priced very cheap and it caused a buying rally, which brought spreads in," one trader said. The multi-part global bond offering was the fourth-largest corporate bond issue ever. Some USD7 billion was in dollar-denominated notes and bonds while the remaining portion was split into two euro-denominated tranches. The U.S. offering was sold in three portions, a USD1.5 billion 2.58% five-year tranche, a USD2.75 billion 2.78% 10-year tranche and a USD2.75 billion 2.95% 30-year tranche. Press officers at AT&T did not return calls.

Siam Commercial Bank, with over THB700 billion (USD15 billion) in assets, is planning to extend its investments in credit derivatives to include credit-default swaps next year. SCB is looking to sell credit-default swaps to take on exposure to businesses it does not have lending relationships with, such as non-Thai organizations. The move comes on the back of the bank wanting to diversify its portfolio because of the deteriorating credit quality of local corporates, said an official.

TD Securities is looking to add three credit derivatives structures to its New York division over the next several months. Phil Chiaramonte, managing director of U.S. credit derivatives structuring in New York, said the hiring plan is part of a move to expand the credit derivatives group in the U.S.