ABN Amro launches CDO programme

ABN Amro has launched an innovative collateralised debt obligation (CDO) programme, which aims to provide credit enhancement for its arbitrage conduit, North Sea Funding. This is the first time a bank-sponsored arbitrage conduit has used CDO evaluation techniques to determine its credit enhancement.

"What we've done is tranched out the credit enhancement in the conduit into a rated synthetic CDO, which gives an implicit rating to our liquidity line," says Gerwin Scharmann, head of ABN's arbitrage conduit business in London.

Greater transparency on the credit quality of the conduit's credit enhancement should permit ABN to get better regulatory capital treatment on the vehicle under Basel II. Scharmann says this is a more sophisticated approach than the classic risk matrix used to determine the credit enhancement for arbitrage conduits. CDO evaluation techniques assume there will be unexpected credit migration, and instead of having to inject credit enhancement into a conduit in the event of a downward credit migration, the enhancement is built into the structure.

Calyon launches callable CDO platform

Calyon has teamed up with the French asset manager Ofivalmo to launch Eiffel, a callable synthetic collateralised debt obligation platform. The first series of notes were issued from the platform last month.

The Eiffel platform allows for multiple issues on notes with fixed-, floating- or hybrid-spread coupons. The notes are linked to a portfolio of 123 credit default swaps with a weighted average rating of BBB+. The portfolio was selected and will be managed by Ofivalmo.

The first series of notes are due on June 30, 2013, unless Ofivalmo calls the transaction on one of the yearly call dates from June 30, 2009, onwards. The notes would be called at the initial principal amount plus a premium. If the notes are not called on June 30, 2009, the coupons will benefit from a step-up feature.

More sign up to novations protocol

A total of 1,953 trading entities had signed up to the International Swaps and Derivatives Association's novation protocol by the time the adherence period closed on November 30. As the deadline approached, a late surge in adherents saw 380 entities added in the last two days.

Isda's novations protocol, announced on September 13, was launched for interest rate and credit derivatives transactions in response to the increased regulatory concern over the growing backlog of unsigned novation trades in which an exiting party of a trade assigns position to a third party.

The problem was particularly acute with credit default swaps, where the procedure to assign trades was regarded as cumbersome. According to dealers, the exiting parties – typically hedge funds – often took several weeks to notify the original party of the assignment.

The protocol attempts to deal with procedural and timing issues for such assignment trades by requiring deals to be confirmed by the parties involved on the same day.

Bob Pickel, Isda's chief executive, said getting so many adherents was a "major achievement" for Isda and the derivatives industry.

UK backs agricultural derivatives

The UK government has thrown its weight behind a Home Grown Cereals Authority (HGCA) initiative to encourage UK farmers and the banking community alike to make better use of financial risk management techniques, if the industry is not to be hit hard by increasing price volatility.

In early December, the Department for Environment, Food and Rural Affairs granted the HGCA £500,000 for a three-year programme to educate farmers about the importance of using derivatives to hedge against fluctuations in market prices. The authority said grain prices were known to vary between £60 and £120 a tonne, putting farmers' incomes at risk at times of market instability.

But the HGCA criticised banking institutions for not doing enough to open up hedging products to farmers. The organisation said European banks ought to look to Australia and the US, where price hedging is common thanks to banks having taken the initiative to entice farmers into the markets.

"Overall, the Europeans have a very poor use of the futures markets," says Julian Bell, the HGCA's senior economist. "Farmers haven't really changed their attitudes very much and are looking for people out there to do it for them. A better understanding of price risk management can help remove the emotion from selling grain and allow more balanced decision-making."

Although the European Commission estimates that agricultural income across its 25 member states would grow by 11.7% by 2012, they said such fluctuations could seriously hurt the market. According to the HGCA, farmers could be interested in a whole range of products from interest rates swaps to currency options. In the UK, a third of farmers' annual income is dependent upon the level of the euro on the one day that grants are issued, making them susceptible to tiny market changes.

Tullett Prebon launches Chinese brokerage

Tullett Prebon has opened an interdealer broking operation in Shanghai through a joint venture with Chinese investment company Sitico.

The joint venture, Tullett Prebon Sitico, is the first interdealer broker to receive approval from the China Banking Regulatory Commission. Sitico, an arm of the state-owned investment company Shanghai International Group, owns 67% of the joint venture, with Tullett Prebon, the interdealer broking arm of the UK-based financial services firm Collins Stewart Tullett, owning the other 33%.

The joint venture was originally unveiled in November. It will be staffed by 20 brokers plus support personnel. Tullett Prebon Sitico plans to expand to Beijing and subsequently to other cities in China.

BGC to launch repo platform

US interdealer broker BGC plans to go live with a combined voice and electronic US dollar repurchase agreement (repo) trading platform early this year.

BGC plans to offer execution and processing of trades in overnight and 'term specials' for Treasury bills and off-the-run treasury repo trades. This should happen early in the first quarter of 2006, the broker says.

Later in the year, BGC will extend the service to cover trades in other repo asset classes, such as general collateral and mortgage-backed securities. The technology behind the platform, which the broker says will be the first of its kind, will be provided by trading software specialist eSpeed.

Markit moves into inflation

Markit has launched a valuations service for inflation derivatives that will cover European, US, UK and French zero-coupon swaps going out to 30 years.

The UK-based pricing firm has worked with 12 inflation derivatives dealers to create an independent valuation service for mark-to-market pricing of euro harmonised consumer price inflation (CPI) ex-tobacco, French CPI ex-tobacco, UK retail price index and US CPI zero-coupon swaps.

Swaps of up to five years' duration will have monthly granularity, with the firm saying it expects to add year-on-year swaps and floors in 2006. The new inflation functionality forms part of Markit's Totem service, aimed at risk managers and product controllers in sell-side institutions, which provides monthly independent valuations on over-the-counter derivatives, including interest rates, credit, equity, currency and energy.

Tim Barker, head of valuations at Markit in London, says that the new inflation service was developed in response to "a surge of client interest in highly structured interest rate derivatives and inflation-linked trades".

Meanwhile, Bradford Levy, a managing director of Goldman Sachs' e-business group in New York and a participant in the project, says Markit's new inflation service now allows dealers to mark their month-end revaluations with more certainty. "Given the wide spreads in the broker market, it will also provide us with very useful information on monthly seasonality out to five years, something that has been unavailable until now," he adds.

BarCap launches new South African inflation index

Barclays Capital and the Bond Exchange of South Africa (Besa) have launched an index of South African government inflation-linked bonds.

The index succeeds an earlier benchmark, produced by Barclays Capital since 2002. Besa said its involvement will make the index an independent and reliable benchmark for investors in the nascent market.

BarCap and Besa will calculate the index from Besa's daily price-fixing data, which provides information on all local fixed-interest securities. Oversight will come from a committee with members from Besa, the Actuarial Society of South Africa and various bond market participants.

Besa chief executive Garth Greubel says the oversight arrangements will add transparency to the market. Barclays Capital's head of index products, John Williams, adds: "The launch of the index should help boost liquidity in South Africa's inflation-linked bond market and help draw in international investors."

The market capitalisation of the South African government inflation-linked market totalled R57.8 billion ($8.9 billion) in August last year, representing more than 11% of total central government debt. The government is committed to the issuance of inflation-linked debt it issues via auction on a twice-monthly basis.

BIS launches home-host guidelines

The Basel Committee on Banking Supervision has issued a consultative document on the thorny home-host issue, with the aim of encouraging banking supervisors to set up a framework for the effective cross-border implementation of the Basel II capital Accord.

The paper, published at the end of November, sets out the general principles and gives some practical examples for banking supervisors as they develop their Basel II implementation strategies. The committee said the need for supervisory validation and approval of banks' Basel II approaches across jurisdictions makes it necessary for regulators to improve information sharing, both to reduce the regulatory burden on banks and to conserve scarce supervisory resources.

The paper stresses the importance of flexibility and pragmatism in sharing information, but acknowledges local confidentiality laws should be taken into account to facilitate the smooth implementation of Basel II. It also notes that approaches among regulators may differ with regard to Pillar II and that an in-depth discussion may be required between home and host supervisors on Pillar II and its impact.

"As supervisors implement Basel II on a bank-by-bank basis, this paper will assist them in developing effective information-sharing processes," says Jaime Caruana, chairman of the Basel Committee and governor of the Bank of Spain. "We need to foster more effective supervisory cooperation, which is key to the success of implementing Basel II."

The consultation paper was developed in association with the Core Principles Liaison Group, a committee working group that includes banking supervisors from 16 non-Committee member countries, and invites comments to be submitted by February 28, 2006.

BIS report shows growth

The exchange-traded futures and options market has continued its rapid expansion, growing by 23% year-on-year in the third quarter to a turnover of $357 trillion, according to the latest figures released by the Bank for International Settlements (BIS).

Despite lower volatility in interest rates dampening demand for interest rate products, rising prices on most of the world's stock exchanges during the period boosted activity in equity derivatives, which now account for 22% of the regulated market.

Demand from Asia saw the biggest increase, with South Korea overtaking the US to become the world's biggest exchange-traded derivatives market, with demand rising by 71%. Individual investors made up most of the increase, drawn by the ability to hedge small amounts on the product for quick returns, the BIS says.

"It's an Asian thing," comments Christian Upper, one of the report's authors. "The growth in Korea was dramatic. In the past, the Korea figure was particularly small, but now that it has grown it has a much bigger effect on the overall growth. The individual investors seem to have a preference for the equity products."

Third-quarter turnover, however, was 4% down on the second quarter of this year. The lower volatility in interest rates was a major factor behind this, but jitters following Hurricane Katrina in August had helped boost demand for derivatives, says Upper.

He predicts the regulated futures and options market will continue to grow as companies diversify their risks further. "This is structural growth in the market, as market participants divide their portfolios into smaller segments," he says. "It's about putting more and smaller eggs into the same basket."


On page 55 of the October 2005 issue, a quote was attributed to William Brodsky, chief executive of the Chicago Board Options Exchange. However, it was actually William Easley who was quoted. Easley is a managing director at the Boston Options Exchange, which is partly owned by the Boston Stock Exchange.

On pages 54–55 of the October 2005 issue, the titles of figures 1 and 2 were switched.

On page 27 of the December 2005 issue, we said Fitch Risk acquired Algorithmics earlier that year. Actually, it was Fitch Ratings.

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