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Replication Indices Being Used for Fund Hedging Aca dw080607 3/8/07 16:31 Page 1 AUGUST 6, 2007 REPLICATION INDICES BEING VOL. XVI, NO. 31 USED FOR FUND HEDGING UBS Hires CDO Marketer Dealers that have structured portfolios to replicate UBS has hired Sean Rice, managing director in global structured products hedge fund returns are looking at using them as a at Bank of America in New York, for proxy hedge for derivatives they write on managed a similar role. funds. Goldman Sachs, Merrill Lynch, and JPMorgan See story, page 2 are among firms that have launched so-called hedge fund replication indices, based on algorithm-driven At Press Time investment portfolios that seek to mimic hedge fund CDO Hedging Drives Vol 2 strategies. The indices were originally set up as a cheap way LCDS Spreads Draw In Managers 2 for investors to get hedge fund-like returns, but according to some fund of funds officials, In The News dealers are looking to use the indices to hedge structured investments. Calyon, Manager Close (continued on page 12) Short Strat 3 INVESCO Shops CLO 3 ACA ADOPTS FULL-SPREAD ACCOUNTING METHOD Muni Swap Play Sold To Retail 3 Credit insurer and asset manager ACA Capital has overhauled its accounting methods and, Relative-Value Play in a vote of no-confidence in the rating agencies, it is now valuing its credit portfolio by Shutters Sowood 3 credit-default swap spread levels, rather than ratings. ACA officials said although this One-Year CDS Gain Favor 4 means its accounts are more volatile, they now more accurately reflect market valuations. I-Grade CDOs Pick Up 4 Vol Spices Up Retail Terms 4 While Financial Accounting Standard 157 requires all financial institutions to mark instruments as close as possible to their sale price by January, ACA is among the first to opt Asia Pacific for a method based entirely on spreads. Other firms such as FGIC use a method that Investors Eye Ball Credit 5 combines a variety of factors including ratings, spreads and contractual terms, but FGIC has CPDOs Surprise By Absence 5 not yet adapted this method to FAS 157. Other firms have held off adopting the full-spread approach because revaluing books this way is likely to inject volatility into balance sheets and User Strategies ACA’s results, coming during the recent market turbulence, show this. Under the new Manager Buys Into Levered Note 5 (continued on page 11) BNP, IXIS Mull Credit DPI Return 5 INVESTORS SEE POSITIVES IN LCDS DOCS, Departments Markets 7 BUT LIQUIDITY IS A CONCERN Learning Curve 8 European credit derivatives investors are approaching Monday’s launch of a new market- Data 11 standard loan-credit-default swap contract with caution. While largely pleased with the COPYRIGHT NOTICE: No part of this publication may terms, most said they plan to wait and see before piling into trades. The main reason is be copied, photocopied or duplicated in any form or by concern about lack of liquidity—a problem in the current European LCDS market— any means without Institutional Investor’s prior written consent. Copying of this publication is in violation of the being perpetuated under the new contract by its launch into a volatile credit Federal Copyright Law (17 USC 101 et seq.). Violators may be subject to criminal penalties as well as liability environment. for substantial monetary damages, including statutory “There has been a ton of pent up interest for the last two-and-a-half months,” said damages up to $100,000 per infringement, costs and attorney’s fees. Copyright 2007 Institutional Investor, one trader member of the International Swaps and Derivatives Association inter-dealer Inc. All rights reserved. ISSN# 713-16410 group that created the template. “We definitely expect more volume on Monday,” he said For information regarding subscription rates and electronic licenses, please contact Dan Lalor at Friday. “But I don’t expect to see a huge number of new players right away.” (212) 224-3045. (continued on page 12) Check out www.derivativesweek.com for breaking news and updates—free to subscribers. dw080607 3/8/07 16:21 Page 2 Derivatives Week www.derivativesweek.com August 6, 2007 At Press Time UBS Hires BofA CDO Marketing Head EDITORIAL PUBLISHING Sean Rice, head of U.S. structured credit marketing at Bank of America in New TOM LAMONT ELAYNE GLICK Editor Publisher [New York] York, has joined UBS in Stamford, Conn., as managing director and head of (212) 224-3069 STEVE MURRAY structured credit product management. Reached at UBS, Rice said he is starting Deputy Editor MIKE FERGUS Marketing Director a product management group for synthetics. He reports to Steve Dugdale, head PETER THOMPSON (212) 224-3266 Executive Editor [Chicago] VINCENT YESENOSKY of structured credit trading, and Chris Ryan, head of credit and fixed income. (773) 439-1090 Senior Operations Manager At BofA, he reported to Michael McLaughlin, global head of structured ELINOR COMLAY (212) 224-3057 Managing Editor [New York] DAVID SILVA securities in New York. It could not immediately be determined if he has (212) 224-3208 Senior Fulfillment Manager been replaced. ABIGAIL MOSES (212) 224-3573 Reporter [London] (44-20) 7303 1753 SUBSCRIPTIONS/ ELECTRONIC LICENSES NICOLETTA KOTSIANAS Reporter [New York] One year - $2,725 (in Canada add $30 Structured Correlation Market Drives Volatility (212) 224-3274 postage, others outside U.S. add $75). DAN LALOR HARRY THOMPSON Credit officials believe volatility in the credit markets will not die down until Director of Sales [New York] Associate Reporter and (212) 224-3045 the bid returns for bespoke single-tranche collateralized debt obligations. Hong Kong Bureau Chief (852) 2912-8097 EMILY-JANE STAPLETON Several buy-side traders said trading has been driven by dealers rebalancing Account Executive VENILIA BATISTA AMORIM (44-20) 7779-8704 correlation books rather than preparing to issue new structures. London Bureau Chief (44-20) 7303-1718 KEN LERNER Dealers delta-hedge CDOs by selling single-name credit-default swaps to Account Executive [New York] STANLEY WILSON (212) 224-3043 balance out the protection they hold through single-tranche CDOs. The Washington Bureau Chief (202) 393-0728 amount of CDS they need to sell increases as spreads widen, which usually REPRINTS KIERON BLACK DEWEY PALMIERI helps stabilize spread widening. Sketch Artist Reprint & Permission Manager [New York] (212) 224-3675 But last week when the seven-year CDX IG index jumped 10 basis points to 82 PRODUCTION [email protected] bps, the delta on the popular seven-year 7% to 10% tranche actually decreased, DANY PEÑA CORPORATE Director GARY MUELLER meaning dealers had to switch to buying protection, explained one trader. LYNETTE STOCK, DEBORAH ZAKEN Chairman & CEO Managers Correlation desks that had been sellers of protection throughout the year, had to CHRISTOPHER BROWN MICHELLE TOM, MELISSA Predident now get short risk in CDS, said Jeffrey Rosenberg, strategist at Bank of America. ENSMINGER, BRIAN STONE, JAMES BAMBARA STEVE KURTZ Chief Operating Officer Associates ROBERT TONCHUK JENNY LO Director/Central Operations & Fulfillment Tightened CLO Warehouses Lure Web Production & Design Director Customer Service: PO Box 5016, MARIA JODICE Brentwood, TN 37024-5016. Managers To LCDS Advertising Production Manager Tel: 1-800-715-9195. Fax: 1-615-377-0525 [New York] (212) 224-3267 UK: 44 20 7779 8704 Collateralized loan obligation managers are starting to ask dealers to ramp up deals Hong Kong: 852 2842 6910 ADVERTISING AND E-mail: [email protected] for them using loan-only credit-default swaps because warehouse lines for cash BUSINESS PUBLISHING Editorial Offices: 225 Park Avenue deals have been reduced in the past month. Dealers have been unable to move JONATHAN WRIGHT South, New York, NY 10003 Publisher (212) 224 3566 Tel: (212) 224 3208 Email: [email protected] large chunks of syndicated loans from their books and cannot sit on any more loan JESSICA SOMMAR Derivatives Week is a general exposure, according to secondary loan market traders. At the same time, the basis Editor, Business Publishing circulation newsweekly. No statement in (212) 224-3272 this issue is to be construed as a between LCDS and loans continues to increase, and structurers expect that some CHRIS DEANGELIS recommendation to buy or sell securities or to provide investment advice. Online Sales Director (212) 224-3618 managers should soon return to the market with hybrid offerings to take advantage Derivatives Week ©2007 PAT BERTUCCI, MAGGIE DIAZ, Institutional Investor, Inc. ISSN# 713-16410 of that spread. One rating agency official said he has been fielding questions about LANCE KISLING, Associate Publishers Copying prohibited without the deals that would include between 25-50% LCDS. SAMUEL HARRIS WILLIAMS permission of the Publisher. LCDS spreads were averaging 100 basis points in April but moved to Head of Legal Sales (212) 224-3894 LESLIE NG around 225 bps by the end of June. In comparison, cash loan spreads have Advertising Coordinator (212) 224-3212 moved from about 200 bps to 250 bps in that same time period, according to one LCDS trader’s estimate. For some names such as Univision and Tribune Co. LCDS is trading above their cash loans (DW, 7/6). The basis between LCDS and cash loans is increasing because of the falling value of the prepayment option embedded in the cash loan. The prepayment risk is far lower with LCDS because the entire loan facility must be called for 30 days before the LCDS contract is canceled. 2 ©Institutional Investor News 2007. Reproduction requires publisher’s prior permission. dw080607 2/8/07 18:44 Page 3 August 6, 2007 www.derivativesweek.com Derivatives Week Calyon, CAAM Close Short Strategy RBC Takes Muni Swap Play To Retail Calyon and Credit Agricole Asset Management have closed a RBC Capital Markets is offering U.S.
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