The derivatives markets continue their sharp growth trajectory, led by a credit derivatives sector that has brushed off the dual threats of rock bottom spreads and processing strains. As trading margins erode in the bond-based credit derivatives market, dealers are increasingly looking to asset-backed credit default swaps and loan-based default swaps for future profit growth. Both markets have seen an increase in liquidity this year, but there is still debate between different constituencies ove

ALM trades from insurers have been around for a long time. As early as the mid-1990s, UK insurance companies were regularly seen in the swap and swaption markets attempting to hedge guaranteed annuity options. Other countries’ insurers have followed suit, all with the problem that similar guarantees on insurance contracts make them effectively short volatility and short duration. The hedging of defined benefit pension schemes has captured the market’s interest in recent years, however. Legislati

With automation bedded in and now with shareholders to satisfy, exchanges are having to consider where future growth is going to come from. The obvious route is consolidation. The planned US$8bn merger of the two Chicago markets will increase pressure on other exchanges to forge closer links – if only to cut costs. As one consultant said: “M&A is simply about the fact that the expense of running an exchange is largely an IT expense. So, if you combine two exchanges, often you can run them on may

The China Foreign Exchange Trade System and National Interbank Funding Centre (CFETS) in July published an improved renminbi/foreign exchange forwards and swaps principal master agreement for trades on the domestic interbank market. Deals are now governed by Chinese law, though Chinese courts have not been tested by derivative disputes. The latest master agreement covers renminbi forwards and swaps trading between banks but not yet renminbi deals with domestic corporates or cross-border dealing.

Demand for Islamic risk management products is set to snowball over the next few years and bankers are rushing to develop effective Islamic derivatives to sate this appetite. As interest in Islamic finance starts to reach fever pitch, investors and issuers of Shariah-compliant instruments such as Sukuk bonds are increasingly looking for a wide range of tools to help them hedge their positions without breaking Islamic rules. “Islamic markets need derivative equivalents to be on a par with convent

The changing pattern in commodity term structures has become dramatic, particularly in terms of commodity index performance. Heating oil has a negative roll return of 20%, according to Deutsche Bank projections. Heating oil and crude oil both saw a 22% negative roll return in 2005. Given this, and the energy bias of many commodity indices, rolling futures contracts on a pre-defined schedule has become a poor strategy for passive, long-only commodity index investing. “If an index investor does no

The late May jump in equity volatility caught out many hedge funds and some dealers that were running short volatility positions. This reduced fund appetite to take risk significantly, resulting in a quiet summer. A reduced risk appetite was also seen among real money accounts in the wake of the spring spike. Since mid-June business in selling calls has shrunk because clients are too scared, dealers said, noting that for much of the summer these accounts were simply buying put spreads and collar

Progress towards launching the iTraxx LevX Senior and the iTraxx LevX Subordinated indices in Europe has outpaced similar efforts to launch the CDX Index Company’s LCDX index in the US. Barclays Capital, Credit Suisse, Deutsche Bank, Dresdner Kleinwort, Lehman Brothers and Morgan Stanley - the dealers active in the single name loan CDS market in Europe - are expected to act as market makers in the new European leveraged loan credit default swap indices at launch later this month. One of the two

The European CDS on ABS market is seeing some trading, but it is still not a mass market. “[European CDS on ABS] spreads are pretty stable, so it is hard to take a clear view on spreads. Also, there is not a lot of difference in opinion on what will happen in the market,” said Krishna Prasad, head of European structured finance research at Lehman Brothers. One of the key factors that has helped propel the US single name CDS on ABS market and uptake of the ABX since its launch in January is the w