Morgan unveils managed bespoke credit investment product

JP Morgan Chase has completed what it claims is the first of a new generation of credit derivatives investment deals.

The US dealer created its first manager-enhanced return-increasing tailor-made (Merit) structure in September. Merit products are independently managed credit derivatives baskets that allow investors to tailor their credit exposure to a high degree.

Merits are similar to the bespoke credit products dealers create off their exotic trading books that are offered to investors on a private, bilateral, basis. But the new product’s independent active management and highly tailored credit risk profile should attract new investors, Christian Spieler, London-based managing director in the financial institutions derivatives marketing group at JP Morgan Chase, told RiskNews.

JP Morgan Chase’s first transaction using Merit technology was more akin to a collateralised debt obligation (CDO) tranche restructuring rather than an outright creation of a new exposure from scratch. An investor client asked JP Morgan Chase to capital-protect a 14-year tenor European CDO equity note that it owned.

Spieler said that initially, JP Morgan Chase was not sure that it could structure a solution that met the client’s complex requirements. For example, the investor wanted euro-denominated capital protection via US names, to avoid credit risk correlation. The investor also demanded independent third-party management of the credit portfolio.

But JP Morgan Chase was able to structure a deal acceptable to the client using its proprietary derivatives hedging technology that underpins Merit, although it declined to elaborate further. Deutsche Asset Management was selected as the independent manager.

According to JP Morgan Chase, there have been several subsequent transactions linked to the basket of US investment grade names managed by Deutsche. The US bank is also in negotiation with two other investment managers about participation in future Merit deals.