Warren Buffett famously called them financial weapons of mass destruction. In the world of derivatives, there has probably never been so much devastation as was evident in the aftermath of the collapses of Fannie Mae, Freddie Mac and Lehman Brothers. The disappearance of one of the most significant players in the derivatives market – Lehman – was never going to be painless. Yet the implications for corporates who had Lehman as a counterparty in their hedges, alongside the chaos in the CDS market

Europe and the US have grown accustomed to the benign macro economic environment that has prevailed for much of the early part of this century. Double digit inflation and interest rates are a distant memory for many, while many in the West have never even experienced it. At the same time, the market for inflation products is relatively young and illiquid. Participants in the market are vulnerable to structural basis risk because their exposures have typically been hedged with inflation-linked bo

The past 12 months have inevitably changed the demands investors make of equity derivatives teams. Some business lines have gained substantially from this, particularly equity financing. The lending of cash against pledged equity stakes has taken place for decades, but in the past 12 months there are few banks that have not been active in that area, including those that do not have established equity businesses. Volumes of such transactions have been at record levels, but the falling markets of

The volume of outstanding credit derivatives contracts declined for the first time in the market’s history over the first half of this year. It fell to US$54.6trn at the end of June, down 12% from US$62.3bn at the end of 2007, and a 20% annual drop, according to International Swaps and Derivatives Association (Isda). This decrease primarily reflects the industry's efforts to reduce risk by tearing up economically offsetting transactions, and demonstrates the industry’s ongoing commitment to redu

UBS, which built up its commodities trading division in the wake of Enron’s collapse, earlier this month announced its exit from commodities businesses other than precious metals. The move is aimed at bringing the bank’s cost base down to a more sustainable level. “The ongoing crisis in the financial markets and dramatically changed industry dynamics require us to recalibrate our business,” explained Jerker Johansson, chairman and CEO of UBS Investment Bank. UBS was not among the banks that comp

At a leverage finance conference in Barcelona just days before Fannie Mae and Freddie Mac were taken into conservatorship by the US government, attendees commented that Lehman Brothers was noticeable by its absence. Alongside Morgan Stanley and Goldman Sachs, it was a major player in the LCDS market in both the US and Europe. Earlier this year, Lehman hired Dresdner Kleinwort’s Tom Johannessen, head of secondary loan sales and trading in London, to develop its LCDS business. Morgan Stanley and J

The dislocation in the credit markets may have sounded the death knell for structured credit, but any slowdown in business on that side was more than made up for in other asset classes. As early as March 2008, interest rate and foreign exchange traders in Asia were boasting that they had made their budgets for the year. Volatility in the US dollar interest rate yield curve and in the US dollar itself had completely reversed. It soared from the very low base that had been set over the previous co