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The credit derivatives market is torn over the issue of restructuring as a credit event, but is urgently trying to reach a resolution before liquidity drops, according to International Swaps & Derivatives Association credit derivatives documentation task force meeting minutes obtained by DW. Players continue to be at odds regarding whether restructuring should be a credit event under standard quoted prices for credit default swap contracts, and if so, whether the language of the definition should be modified. Roughly 20 market participants, including Merrill Lynch, Morgan Stanley Dean Witter, and Abbey National Bank, aired their views at the December meeting in London and New York. A general discussion followed.

One of the difficulties in managing equity and foreign exchange barrier option books is handling potentially unstable gamma positions when the spot is near the barrier and/or the option near expiry. The figures below illustrate such an example using a down-and-out put. The option matures in one month, is struck at-the-money, and has a barrier at 80% of the strike. The top figure plots the option price versus spot and the large curvature near the barrier indicates a large gamma. This is clearly seen in the lower figure, which illustrates the corresponding gamma. The gamma profile near the barrier is quite unstable and the delta hedge will be inefficient and often costly. This is one of the main barrier risks. One technique to manage such risks is to use exponential soft barriers.

A new regulation in South Africa likely to come into effect at the end of March is expected triple the volume of securitizations and synthetic securitizations, which will in turn boost the over-the-counter derivatives market. Gill Raine, head of financial engineering at Rand Merchant Bank in Johannesburg, expects the number of securitizations to rise to 30-40 a year from about 10. "This could open a whole new world for over-the-counter derivatives," according to Bruce Stewart, chief derivatives dealer at South African bank Nedcor Bank in Johannesburg. Structuring securitizations requires fixed income derivatives, and the market should be boosted as a result. He said there is no doubt that volumes will increase but thinks that the demand for synthetic securitizations might not take off as quickly because investors will have to get comfortable with the products.

Traders bought one- and two-month 25-delta out-of-the-money Aussie dollar puts against the U.S. dollar last week, betting that the currency would weaken. One-month implied volatility stood at 14.3%/14.6% at the close of trading on Thursday. Risk reversals favored puts over calls by 0.4%. The Aussie dollar was expected to weaken against the U.S. dollar because of weaker-than-expected Australia Bureau of Statistics unemployment data published on Thursday. Although employment figures improved, full-time employment had actually fallen, representing an actual weakening in the labor market, said a trader. Traders also expect one-month implied volatility to rise if the Aussie dollar falls further, making buying puts more attractive still, the trader said. On Thursday the spot stood at AUD0.5552 compared with AUD0.5565 the previous Thursday, he said. Most trades were interbank and speculative, he said. Typical notional sizes were AUD50 million.

Traders sold at-the-money Thai baht straddles against the U.S. dollar last week in a bid to offload falling implied volatility. One-month implied volatility had dropped by Tuesday to 9.5%/10.5%, from about 10.5%/11.5% the previous Friday, said a trader in Singapore. Vol fell after Thai general elections over the week-end proved to be peaceful. The spot market was similarly assuaged. Traders, led by a few large U.S. banks, were mainly selling one-month volatility on Monday. By Tuesday the selling was frenzied in maturities out to a year. Similar trading patterns were evident in the Taiwan dollar and Korean won against the U.S. dollar, as these currencies tend to move together, he said. The spot stood at THB43.10 on Tuesday, compared to THB42.15 just before the Thai elections, said the trader. Most plays were likely speculative, he said. Notionals averaged USD5-20 million, he said.

Abbey National Asset Managers is considering making its debut in the hedge fund market with the launch of three funds that will user over-the-counter derivatives. The funds would likely each launch with some GBP100-150 million (USD149-223 million) in assets. It would launch the funds only if they each could be expected to grow to USD750 million within three years. "We're not doing this to playact," said Scott Jamieson, head of strategy in Glasgow. The board of directors must still grant approval, and the decision will include factors such as whether hedge funds fit the risk levels Abbey National is comfortable with. The timing of this decision is not certain, but will likely be in the next several months. If approved, the fund strategies will include a leveraged currency fund, a global macro fund—"That's a euphemism for, ‘we can invest in anything we want,'" Jamieson quipped—and an unleveraged European long-short market neutral equity fund.

Taiwan's Securities and Futures Commission is gearing up to allow local securities houses to market interest-rate swaps for the first time within a couple of months. The move is welcomed by Taiwan's two largest securities houses, Yuan Ta Securities Co. and Grand Cathay Securities Co., which are keen to become market makers in the product, leveraging off their corporate business. Currently only foreign and local banks are allowed to offer interest-rate swaps. An official at the SFC in Taipei said it wanted to help develop and deepen the local bond market and to help local securities houses compete better with foreign banks, which dominate the interest-rate swap market. The SFC is also responding to lobbying by securities houses which have repeatedly pressed it to give them approval. He declined to comment further on the timing of the move. Senior SFC officials are now on the verge of signing proposals on how the market could be regulated, he said, declining to elaborate. They were drawn up by the SFC's over-the-counter derivatives department.

MONY Life Insurance will be adding selectively in the near term to its energy sector, specifically natural gas, on the view this sector could tighten another 10 to 15 basis points versus the overall corporate market. Only now is the Street beginning to see increases in free cash flow from companies that in the past de-leveraged themselves, so quarter over quarter there have been some dramatic earnings increases in this sector, says New York-based Mike Dineen, who manages $575 million in a total return corporate portfolio. Dineen, who has added to his Alberta Energy (Baa1/BBB+) exposure, also purchased Gulf Canada's 71/8% notes of '11 (Baa3/BB-). He bought into the 30-year tranche of last week's $1.5 billion Viacom offering (A3/BBB+), and also bought the high single A-rated Unilever's 71/8% notes of '10. "We are using our cash build-up to be more proactive" in the primary market because it remains difficult to do swaps in the secondary market, says Dineen. There are many cash buyers for the new issue market leaving little incentive for dealers to do swaps and also, as dealers minimize risk by holding inventory, they have little reason to bid paper. The portfolio, which is neutral to the benchmark Lehman Brothers Corporate Intermediate Index with a duration of 3.65 years, is 66% investment grade corporates, 20% asset-backed securities and mortgage-backed securities and 14% cash.

Source: Thomson Financial/Securities Data. For more information, call Rich Peterson at (973) 645-9701. BP SPRD. - basis point spread over Treasuries; FLT. SPRD. - basis point spread over floating index; Comb. - fee is combined; NR - not rated; Na - not available; n 144A // Manager responsible for running the books; Contains offerings of $2 million or more and includes only the portion of global deals distributed in the U.S.; * More managers, but not listed; JB - joint books; Ý estimated price.

James Investment Research is moving out of Treasuries and into MBS, as well as some non-callable agencies, on the view that the former have priced in too much good news and the latter could see spread-tightening as investors seek quality. Barry James, a senior portfolio manager for some $200 million in taxable fixed income, says MBS and agencies could tighten this year 50-100 basis points and 25-75 basis points, respectively. Treasuries may have over-rallied, now that it appears the budget surplus may not be as large as once anticipated. He says he may boost his MBS allocation from 10% of the total portfolio to 15-20% and the agency allocation by perhaps only a few percentage points by selling five- to 10-year Treasuries and buying MBS with maturities of 10 years or more, such as 30-year Ginnie Mae 61/2%s. Keeping to lower coupons such as this will also help protect him from the expected boom in refinancing. James says if he sees a pullback in rates of 25-30 basis points he would look to extend duration out to about six years from its current 5.5 years via the Treasuries-MBS swap. The duration of the portfolio's benchmark, the Lehman Brothers Government/Credit Index, is 5.54 years. The Alpha, Ohio-based firm's portfolio is allocated 46% to Treasuries, 36% to agencies, 10% to MBS and 8% to corporates.

This chart, provided by Citibank/Salomon Smith Barney Inc., tracks bid-ask prices for par credit facilities that trade in the secondary market. It also tracks facility amounts, ratings, pricing and maturities. This information is based on sources which we believe to be reliable but has not been independently verified. Accordingly, Citibank/Salomon Smith Barney and its affiliates do not assume responsibility for, and do not make representations or warranties (express or implied) as to the accuracy of the information. This information sheet does not constitute an offer to sell or a solicitation of an offer to purchase any securities or other instruments described herein.

Some European industrial junk credits are now trading above par while others remain in the high 80s and 90s, a disparity that has high-yield pros disagreeing about whether credit issues or technical factors are driving the prices. "It is all technical," argues David Newman, high-yield research analyst for Salomon Smith Barney in London. He points to the fact mutual bond fund inflows into the U.K. market hit $644 million for last week. With few new issues, those flows tend to head toward recognized names. "There are the largest inflows since June, 2000," he adds. Credits such as Alfa Laval, Grohe Holding, Ineos Acrylic and William Hill are trading around 106, while BSN Financing and Isco .are in the low-90s. Frank Ferrantelli, head trader for CIBC World Markets in London, sees the trading opportunities, as does Newman, who believes the reason for the trading disparity is because investors are flocking to familiar names in reaction to the volatile fourth quarter of last year. He points out that the similarly rated Premier Foods' 12 1/4% notes of '09 (B3/B-) is yielding 13.9% while William Hill's 10 5/8% notes of '08 is yielding 9.75%. "Why not sell William Hill and buy Premier, taking out 12 points of money and a downward yield of 430 basis points?"