JP Morgan has created a global credit index group within its credit trading department, as the US bank seeks to tap into growing demand from real money for alternative ways of making bets amid decreased liquidity in fixed income, commodity and currency cash markets.
The new group will be headed by Samik Chandarana, previously head of credit trading for the Europe, Middle East and Africa region, according to an internal memo seen by IFR. Chandarana will retain his reporting line to Guy America and Matt Cherwin, co-heads of credit and securitised products.
The new group will combine the bank’s market making abilities for index credit default swaps, credit options and bond indices, with the idea that the move will help clients benefit from improved liquidity in derivatives products that reference credit indices.
Many clients are struggling with thin cash liquidity in large parts of the corporate bond market, in part caused by higher capital requirements. Dealer corporate bond holdings have collapsed from more than US$200bn pre-crisis to less than US$20bn, according to the New York Federal Reserve.
At the same time, buyside firms have amassed more than US$1trn in fixed income assets as they diversified away from the equity markets into the relative safe-haven of bonds, and corporate bond issuance runs at record levels.
With banks no longer able to warehouse large positions, buyside firms are turning to derivatives-based alternatives for chunkier trades and assets that are most constrained by illiquidity, such as high-yield credit.
CDS indices, options and total-return swaps on bond indices are all witnessing increased interest from real money accounts, having reaped liquidity benefits associated with improved standardisation. Gross notional outstanding on CDX North America IG index currently stands at US$462bn, while credit index options notional stands at US$495bn according to data from the DTCC.
During the high yield sell off in August 2014, activity on CDX HY jumped by 80% over a matter of weeks as investors rushed to the contracts for hedging cash bond positions and taking exposure as lower prices created an attractive entry point.
The new JP Morgan group will also form a partnership with the bank’s global equities division to enhance its exchange traded funds offering – a growing industry. According to BlackRock data, US$78.6bn of assets flooded into the growing range of fixed income ETF products in 2014, taking assets under management in those funds to over US$400bn – more than double 2010 levels.
Chandarana will also lead the bank’s e-trading effort across global credit, working closely with Frank Troise, global head of execution services, and Scott Wacker, global head of e-Commerce sales and marketing.
As a result of the new structure, Sanjay Jhamna will take over as head of EMEA credit trading, moving from his forma role leading the global credit exotics and hybrids business for the last four years.
Aymeric Paillat will lead exotics trading and report to Jhamna, while the repack and solutions group led by Alistair Bloch will be moved under the global syndicate function.
Fajr Bouguettaya will continue to manage the credit correlation business and report directly America and Cherwin.