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Part - III

Although some dealers are widely recognized to have particular strengths-for example, JP Morgan is known for default swaps and credit-linked notes while Bankers Trust is known for its work in total return swaps-most will characterize themselves as Renaissance players. "CIBC Wood Gundy has consciously adopted a generalist strategy. We want to be active participants in the credit markets as a whole, not specialists in a single type of structure," says Shaun Rai, acting head of credit derivatives at CIBC Wood Gundy. Similarly, the larger dealers are working hard to develop and maintain a presence in the global credit markets. Bankers Trust, which has one of the most experienced credit derivatives groups on the Street, has just recently expanded its credit derivatives operations to include representatives in London and Tokyo in an effort to enhance servicing for Asian and European accounts. According to one New York-based headhunter, "Dealers and brokers are still staffing up their credit derivatives desks. Two of my biggest projects involve dealers putting together credit trading offices in East Asia."

Spread problems

Ironically, the growing interest in credit derivatives markets comes as credit spreads approach all-time lows. Credit markets, however, are fast becoming an appealing alternative to the increasingly commoditized currency and interest rate markets. "Spreads are tight in the credit markets, but they are even tighter in, say, interest rates or currencies," says Blythe Masters, who heads up JP Morgan's credit derivatives business.

Masters explains that the tight spreads are a result of a relatively buoyant global economy and a global credit market that has suffered relatively few major credit events. The market is pricing this perceived low level of credit risk into the premium investors receive for holding credit risk. Still, these historically tight credit spreads are at a relative premium to current spreads associated with market risk, and Masters notes that leveraged credit investments are becoming increasingly popular with hedge funds and other proprietary investors with an appetite for big bets.

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