Credit derivatives volumes soar
The notional amount of credit derivatives outstanding hit $12.43 trillion at the end of June, according to the International Swaps and Derivatives Association.
The over-the-counter derivatives industry trade association said the credit derivatives market grew by 48% in the first six months of 2005. In mid-2004, the size of the market was $5.44 trillion. For the purposes of its survey, Isda took the market to comprise credit default swaps, baskets and portfolio transactions indexed to single names, indexes, baskets, and portfolios.
The credit derivatives market's 128% year-on-year growth rate eclipsed growth in other asset classes. Notional outstanding volume for equity derivatives grew to $4.83 trillion – equivalent to year-on-year growth of 28%. The notional outstanding volume for interest rate derivatives, including swaps, swaptions and cross-currency swaps, grew by nearly 10% in the first half of 2005 to reach $201.4 trillion.
Isda surveyed 101 firms on a confidential basis. It adjusted notional principal outstanding amounts for double counting of interdealer transactions.
TriOptima tears up Delphi-related CDS
Stockholm-based TriOptima has executed a further credit default swap (CDS) termination cycle, tearing up more than $720 billion worth of contracts involving the troubled Michigan-based auto-parts maker Delphi.
In the wake of Delphi's filing for Chapter 11 bankruptcy protection on October 8, 21 dealers used the firm's multilateral tear-up technology on October 12 and 19 to terminate some 5,300 single-name Delphi CDS contracts with a notional value of $23 billion – approximately 70% of all outstanding Delphi single-name contracts. Before bankruptcy, only about 500 Delphi CDS contracts had been terminated in the tear-up cycles.
The Swedish firm also scheduled a special index termination cycle for October 20, after having completed a regular index termination cycle on October 7. A total of 17,344 Delphi-affected index swaps with a notional value of almost $700 billion were torn up.
TriOptima's tear-up technology allows swaps counterparties to multilaterally eliminate unnecessary trades from their books, while allowing them to maintain the same net position in regular termination cycles. But targeting those names that have suffered a credit event also allows participants to eliminate many of the legal and administrative burdens involved in the settlement of a defaulted name.
Since the beginning of the year, TriOptima has terminated more than 100,000 CDS contracts with a notional value of $2.3 trillion.
JP Morgan goes live with T-Zero
JP Morgan went live on T-Zero's post-trade processing platform for credit derivatives in October. It is the first dealer to join the platform since Goldman Sachs initially used the technology after its trade with KBC Alternative Investment Management on September 30.
With pressure on credit derivatives dealers from the Federal Reserve Bank of New York and the UK's Financial Services Authority to tackle the build-up of credit derivatives confirmations, T-Zero's so-called 'agnostic' processing technology allows users to ease this backlog.
"T-Zero allows users to affirm trades as and when they do them. It deals with the details that could delay things further down the chain, such as reference obligations or splits between the number of funds," says Guy America, JP Morgan's head of European credit trading. "It facilitates the confirmation of novation trades as it provides a central platform for three parties to agree terms with ease."
Mark Beeston, president of T-Zero, says the firm had a "healthy pipeline" of dealers due to sign up to the service in the next month. He expects at least four more dealers to join shortly, but he refused to name them.
European Islamic Investment Bank names management team
The European Islamic Investment Bank (EIIB), planned to be the UK's first Islamic bank, has named its senior management team as it prepares for launch next year.
Tony Ellingham, formerly chief financial officer of Gulf International Bank, has joined EIIB as finance director. He was previously group head of internal audit at Schroders, and also chief financial officer at Schroder Private Bank.
Grant Lowe will head risk management. He has moved from the South African Reserve Bank, where he worked in risk management. Meanwhile, Adrian Donlan has joined EIIB as head of IT. He was previously with fund-of-funds manager Pantheon Ventures Group.
EIIB managing director John Weguelin says: "This means we're on track for Financial Services Authority approval, and for opening for business in the first half of next year. Over the next few months we expect to bring on board several senior trading and banking staff, while building our finance and operations staff."
EIIB was incorporated in January and applied for FSA approval in August. Its backers are European and Gulf-based private and institutional investors, including several Islamic banks.
Barclays and Protego in property deal
Barclays Capital and UK property investment management company Protego have arranged a property index certificate sale worth £8 million, the first significant secondary market deal in the nascent property derivatives sector.
Protego and Barclays Capital placed £380 million in property investment certificates (PICs) with UK investors earlier this year after one investor wanted to cash in. Protego was able to identify five new investors to take on the PICs within three working days.
Charles Weeks, head of new business development at Protego, says the resale is a good sign for the property derivatives market. "It illustrates the ease, speed and price transparency by which PIC trades can be executed in the secondary market," he says.
Since its inception, questions have surrounded the potential for liquidity in the property derivatives market. But some parties, including Weeks, believe sub-sector trades could be a possible solution, with one banker adding that more trades "would completely change the dynamics of the market".
Hurricane Katrina costs estimated at $40 billion–55 billion
Damage caused by Hurricane Katrina will cost the insurance industry between $40 billion and $55 billion, breaking the record payout made by the business following the September 11 attacks, according to new research from Towers Perrin, a US insurance service provider.
Towers Perrin's white paper predicts that around 50% of the losses will be absorbed by the reinsurance market, with most of the rest taken by direct insurers – only 1–2% will be borne by the bond and derivatives markets.
According to the paper, commercial losses represent the biggest category, worth between $19.7 billion and $25.3 billion; personal lines represent $15.2 billion to $19.3 billion; and the remainder is made up of marine and energy losses ($4 billion–6 billion), liability ($1 billion–3 billion) and various others.
The total damage is greater than September 11, which cost around $35 billion, and 1992's Hurricane Andrew, the most financially damaging hurricane in recent history, which cost $20 billion.
The report added that, after 40 years of relatively quiet hurricane seasons, the US southeast may be moving into a period of greater activity – and now there are far more people and property at risk. "Based on current exposures and climate conditions, we should expect a $20 billion hurricane loss roughly every 15 years," the study concluded.
EU adopts capital requirements directive
The European parliament has voted to adopt the new rules governing the capital requirements directive, which will allow for implementation of the Basel II framework in the EU.
"A recent study estimated that banks would have reduced capital requirements of about €80 billion–120 billion as a result of the proposed directive," said Charlie McGreevy, the commissioner for internal market and services, in an address to members of the European parliament in late September.
The approval clears the way for member states to formally adopt the proposals at the end of the year, which must be ratified by the European Council of finance ministers. It should take effect from January 2007, in time for the implementation of the standardised approaches for Basel II, and the advanced approaches 12 months later.
Tullett Prebon launches freight derivatives desk
Tullett Prebon has teamed up with three international ship-brokers to operate in the growing freight derivatives market in London, the US and Singapore.
The London-based interdealer broker has partnered Capital Shipbrokers in London, Island Shipbrokers in Singapore and MJLF in Stamford, Connecticut. Part of its London ship-broking desk will move to Capital's London office. Tullett will also set up a new ship-broking team in Singapore next month. The team will be based in Island Shipbrokers' offices and headed by Tim Spragg, formerly with Arcadia Petroleum.
Both teams will report to Henry Ann, Tullett Prebon's head of new business.
The new partnership represents a greater commitment to the business, Tullett said in a statement. "Our newly formed partnership will allow Tullett Prebon brokers to benefit from Capital, Island and MJLF's knowledge of the physical shipping business," says Ann. "At the same time, it will provide the customers of the three ship-brokers with valuable hedging opportunities through the use of forward freight agreements and the growing use of options."
PBOC approves first renminbi interest rate swaps
The People's Bank of China (PBOC) has started giving out approvals on a deal-by-deal basis for renminbi-denominated interest rate swaps, with the Bank of China the first to arrange a transaction for a client, while another transaction between China Everbright Bank (CEB) and China Development Bank (CDB) is awaiting government approval.
In late September, the Bank of China reportedly entered into the country's first renminbi interest swap with the Ministry of Railways. Then, on October 12, local newspaper Shenzhen Daily reported that CEB and CDB entered into the first interbank renminbi interest rate swap, based on a notional principal of 5 billion renminbi ($617 million). The swap, which was pending government approval as of October 12, involves CEB paying a fixed rate of 2.95% for 10 years to CDB. The latter will pay a floating rate referenced to the one-year deposit rate set by the PBOC. The one-year deposit rate is currently 2.25%.
Bankers also expect the PBOC to start awarding licences soon for other banks to conduct interest rate swaps in renminbi. "We're still waiting for the approval, and we're very close to being able to do something. But we haven't actually got the licence yet," says an interest rate derivatives specialist at a foreign investment bank in Hong Kong. "Currently it's on a deal-by-deal basis. So if we have a deal, we can try to get it approved by the central bank."
Ralph Liu, chief investment officer at CEB, was quoted by the Shenzhen Daily as saying: "This afternoon, we have agreed with the China Development Bank to enter into a renminbi-denominated interest rate swap for 5 billion renminbi. We are the fixed payer, they are the receiver, we are counterparties to each other."
The report did not specify reasons for entering into the swap, but it is believed that CEB requires the swap to hedge the risk from a pilot fixed-rate five-year housing loan that the bank is preparing to launch in Shanghai and Beijing later this year.
US requests public comment on capital adequacy
Several US banking oversight and regulatory agencies, including the Federal Reserve Board, have requested public comment within 90 days on proposed changes to current US capital adequacy standards. The revised standards would, in the future, apply to banks that will not fall under the scope of Basel II.
The Fed's call for feedback reflects widespread concern about disparities in the regulatory treatment of US banks and the competitive inequalities this may prompt. Many smaller banks will continue to operate under less sophisticated local regulation, while larger internationally active firms will begin their compliance with Basel II in 2009. "We will endeavour to reduce gaps between the two frameworks as much as possible," says John Dugan, the US comptroller of the currency.
Dugan says the primary goal of the request is to increase the risk sensitivity of domestic risk-based capital rules, without unduly increasing regulatory burden. Changes to capital adequacy are being considered jointly by the Fed, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation and the Office of Thrift Supervision.
Comments on a number of issues related to non-Basel II capital adequacy have been requested, including changes around the number and magnitude of risk weights, the use of external credit ratings and treatment of securitisation – all of which have been flashpoints in previous discussions about more closely aligning capital requirements with risk.
In September, US regulators announced that the compliance date for Basel II has been pushed back by three years because of mixed results from the fourth quantitative impact study, which was completed in January 2005. The exercise raised concerns over a potentially sharp decrease in capital requirements for some banks, possibly leaving then vulnerable to idiosyncratic shocks. Under the revised implementation schedule announced on September 30, Basel II requirements will be phased in between 2009 and 2011.
The week in Risk.net, May 19-25 2017Receive this by email