Part - I

After the hype comes the hard work of building a new market from the ground up.

Credit derivatives dealers have a lot in common with U.S. manufacturers in China-perhaps a little too much in common. Both groups have hopes for the development of an enormous market that, with the right product and marketing strategy, could generate undreamed-of profits. Both have had unanticipated logistical, regulatory and strategic difficulties. Both have only modest returns to show for their expenditures of time and capital. And though they haven't figured out how to make a lot of money, both have no plans to abandon their efforts.

That in a nutshell is the credit derivatives market today. Globally, tight credit spreads are hurting the market. Senior managers are more skeptical about the accelerating salaries being paid, and nagging problems with documentation regulation and pricing remain. But volume and liquidity are growing at a healthy pace.

The initial, giddy optimism about the product is clearly giving way to a more sober assessment of the work that must be done to create truly liquid-and profitable-credit markets. "Now that all the hype is dying down, there's a lot of pressure on trading firms to produce results," says David Crammond, president of Intercapital USA, a New York-based brokerage. "If 1997 doesn't produce meaningful trading profits, institutions will have to ask themselves: How many more resources should we commit to this business?"

Recent turmoil in a number of credit derivatives desks may indicate a certain amount of management skepticism in the markets' long-term potential as a highly liquid profit center. Citibank, for example, reportedly ejected nearly its entire credit derivatives staff because-according to various rumors-they were not generating profits in line with their compensation. "Management is breathing down our necks to write tickets," says one New York-based credit derivatives trader. "Credit derivatives cannot be a cost center any longer."

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* Contributed by -
Prashant Jadhav,
2nd Year PGeMBA (Finance),
Mumbai Educational Trust (MET) Schools of Management, Mumbai.