Change font size:   

 
Liquid Real Estate Awards

Liquid Real Estate Awards

2008 results released

Bank deleveraging has barely started

Bank deleveraging has barely started

Banks lending money to governments to help fund bank bailouts looks horribly circular

weeklyFiXLiquid real estate
Skip Navigation LinksHome :: Back Issues :: Credit derivatives

May 2000

Credit derivatives





Still think that you've got time to get ready for the internet? Still sure that you've got a few quarters of easy revenues to make?
If you're an investment banker, you'd be wrong. And for the proof look to the credit derivatives market. This is one of the youngest, least commoditized markets in the business. It's not like US treasuries which has been a loss-leader for most firms for years and where systems such as TradeWeb cut back on costs.
Most credit derivatives trades are unique: with differing needs, maturities, credits and terms. And yet it is in this market that one of the fiercest on-line battles outside of retail share trading is taking place. It's a transatlantic battle, where trading costs are being cut dramatically.
In one corner we have CreditTrade, a UK-based company set up last June by Paul Ellis, formerly a credit derivatives trader with BZW before leaving in 1996 to set up Mutant Technologies, the developer of the idea and software for CreditTrade.
In the other is Creditex. Located in the area around New York's Union Square called Silicon Alley, its creators are two former credit derivatives traders from Deutsche Bank, Sunil Hirani and John McEvoy.
CreditTrade went live last summer, at first offering just a central electronic place to list trades and negotiate terms (for regulatory reasons neither site can yet finalize the trade on-line). It expanded this more recently when it acquired the 13-strong credit derivatives team from Prebon Yamane. Ellis says the trade listings can come in over the net, or the old-fashioned way over the telephone "and be inputted within 60 seconds".Its detractors claim most of the deal flow comes over the phone to the former Prebon people.
Creditex, on the other hand, which launched in March, is purely electronic, although some claim it is little more than glorified e-mail. This has become the derogatory comment of the internet age, a way to attack a business for claiming to be more advanced than it is. In reality, in this instance, it's somewhat irrelevant. Both systems are relatively simple in their approach - each provides a central platform for posting and conducting trades in a previously opaque market.
There are two big differences between them. "CreditTrade seeks to create price transparency for all liquid credits," says one credit derivatives trader at a major investment bank. "Creditex is more focused, concentrating initially on creating a market for default swaps."
The other, perhaps more significant difference is in the way the two are structured: CreditTrade is independent, whereas Creditex has investments from several of the major street players, notably JP Morgan and Deutsche Bank, but also from several other banks and insurers. The latter certainly makes Creditex appear attractive, but Ellis states that a lack of street backers has not hindered his business: "We've had no one turn us away yet, and everyone we see likes our strategy. There isn't a significant player who hasn't posted a trade with us."
There are those who doubt that CreditTrade can be a long-term player without some industry backing. "We do maybe 100 trades or more using, say, JP Morgan as our broker," says one trader. "But we'd much prefer to use a system in which we have an equity stake." CreditTrade has not rejected industry backing, though. "We've completed two rounds of financing, and the third will be completed in the next few weeks and will include market participants," says Ellis. "We wanted the freedom and flexibility to build and launch an independent platform, and not be in a position where we might owe any one player a favour."
High-yield bond trading site LimiTrader and distressed debt trading web venture ereorg have taken a similar approach.
Creditex reports a rapid growth in business since it launched in early March. "We're posting 100 or more potential trades a day," says Hirani. And that means a notional value of between $1 billion and $1.25 billion, he continues, which is more than a lot of the internet bond trading platforms. They told an audience at the International Swaps&Derivatives Association meeting in Amsterdam in March that they're happy to conclude two trades a week. CreditTrade, a few months older, is looking at six a day. A trader at one of the major banks who knows both systems says that thus far Creditex has posted about 10 deals in six weeks, and that it is rising steadily.
The next step is into related territory, such as the loan trading market. Creditex has seen interest in pricing and trading secondary loans off credit derivatives on its site. But CreditTrade has actually done loan trades. The first one was done last November, and now the site sees up to five such trades a week.
The potential for growth is huge, even to the extent, says McEvoy, of credit derivatives becoming the benchmark for debt trading as a whole. And that could well put both systems - glorified e-mail or not - in need of an upgrade or two. And possibly even cooperation?
CreditTrade is more focused on Europe, Creditex on North America, and traders wonder whether there is room long-term for two such sites.
Yet it is early days. There may well be thousands of potential customers for credit derivatives, but it is still a small market. It's a relatively new product and heavily regulated, and that has held back many financial institutions from getting involved, meaning that there are relatively few major players. "We had one of the largest European banks in here earlier today," says a credit derivatives investment banker in London. "And they don't yet use credit derivatives. They don't have the systems, the right controls in place, or enough knowledge about the product."
But in the meantime, all you traditional investment bankers, beware. These two firms expect to see costs drop from 300 basis points to 25bp, or even lower, as a result of their efforts. If it can happen in such an opaque, deal-specific business as credit derivatives, it can happen anywhere.






If someone calls up at 4pm on a Friday and says they have to sell and need a price, is it really fair to say to the rest of the market that this is what that risk is worth?

An ABS banker chews over the shortcomings of marking to market...

  1. Top 10 financial definitions that are funnier since the credit crunch

  2. Top 10 reasons to tell your boss you deserve a bonus this year

  3. SEC Opens Door For ETFs Of ETFs

  4. Private banking and wealth management survey 2008: The benchmark annual survey of the wealth management industry

  5. Gulf states: Less noise from leveraged wealth funds

Latest Issue

November 2008
Ruromoney Jobs Post a job

Home | Mobile site | Contact Us | Debt markets | Equities | Foreign exchange | Banking | Alternative Investments | Regions and Emerging markets | Polls & Awards | Structured credit | Back issues | Euromoney store | Useful links and Related events | Site Map

The material on this site is for financial institutions, professional investors and their professional advisers. It is for information only. Please read our Terms and Conditions, Privacy Policy before using the site.

All material subject to strictly enforced copyright laws. © 2008 Euromoney Institutional Investor PLC.