JP Morgan wins Derivatives House of the Year award

While other investment banks wrestled with large writedowns in the third quarter – a result of hefty leveraged loan warehouses and exposures to US subprime mortgage securities – JP Morgan reported writedowns of $1.3 billion net of fees on leveraged lending funded and unfunded commitments, and just $339 million on collateralised debt obligation (CDO) warehouses and unsold positions.

“About a year ago, we began to see the deterioration in the underlying housing market, and we began to lock things down,” commented Bill Winters, London-based co-chief executive of JP Morgan’s investment bank. “We didn’t have a lot of subprime senior exposure, which burned a lot of banks, but we began hedging or selling the whole loan exposure we did have.”

Over the past 18 months, JP Morgan has built up the scale of its distribution effort, with a particular focus on Asia, has leveraged its balance sheet to provide innovative solutions for clients in difficult market conditions, and has pushed through massive investment in electronic infrastructure.

“We realised we had under-invested in electronic trading, so 18 months ago we started to rebuild all our execution capabilities around flow products,” says Winters. “We have done that, which means we were well prepared to weather the huge spikes in volumes in August and September.”

Meanwhile, London-based hedge fund Cairn Capital won Risk’s Deal of the Year award, due to the restructuring of its Cairn High Grade Funding SIV-lite in August. Structured investment vehicles (SIVs) have come under severe pressure over the past six months as asset-backed commercial investors have deserted the market in droves. Unable to roll over short-term funding, some vehicles were left facing the prospect of a forced liquidation of portfolios to meet liabilities.

While some banks have opted to consolidate vehicles onto their balance sheets, Cairn has carried out the only successful restructuring of an SIV so far. Senior bankers applauded the manager for its foresight and open-mindedness in reworking the structure at such an early stage, which meant investors got a far better deal than they would have received otherwise.

Risk. Called Pricing with a smile, the paper demonstrated how the Black-Scholes model can be extended to make it compatible with observed market volatility smiles, allowing consistent pricing and hedging of exotic options.

The Risk awards are designed to recognise best practice and innovation in the derivatives and risk management industries globally. The winning institutions are those that have weathered the subprime storm, and continued to provide liquidity and structuring know-how to clients. Click here for a full list of the 2008 awards winners.

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