Awards for Excellence 2002
JPMorgan
JP Morgan has played a pioneering role in the credit derivatives market from the start – through its landmark BISTRO synthetic securitization, single-name credit default swap (CDS) products and the first widely syndicated credit-linked notes.
Through RiskMetrics, the risk management modelling system that was originally part of JP Morgan and later floated as a separate company, it was also at the forefront of the development of a common risk management methodology for bank risk managers.
Along with Deutsche and Goldman Sachs, JP Morgan was also instrumental in the recent launch of Creditgrades, a new credit modelling system based on equity and credit analysis that was recently unveiled by RiskMetrics.
And Blythe Masters, a managing director in Morgan’s New York office, chairs the ISDA Credit Derivatives Market Practices Committee – dubbed the G6 – which has done much to standardize the market through documentation, settlement and end-user guidelines.
“We are keen to improve the transparency, liquidity and visibility of the market,” says Andy Brindle, global head of credit derivatives. “We are seeing a transition away from the CDS market being viewed as a structured product, ‘buyer beware’ type of market into one that trades regularly and with deep liquidity.”
JPMorgan operates its credit derivatives business on a truly global scale, with trading desks in New York, London, Hong Kong and Tokyo and multiple distribution centres in north America, Europe and Asia.
It has been a leader in the CDO business, both synthetic and cash, it has the biggest business in exotic credit derivatives and it pioneered – along with US fund manager David L Babcock – the first fully managed version of the synthetic arbitrage CDO in 2001.
The firm has also been an early entrant into the new market for collateralized fund obligations – CDOs backed by fund-of-fund hedge fund managers such as Investcorp and Man.
One major development during the past year was the hiring of Stephen Stonberg, who had set up the hugely successful repackaging business at Deutsche Bank, and a team of colleagues to form a new Risk Transformation Group.
Through the repackaging activities group based in London, JPMorgan claims it can now offer virtually any type of risk product to any type of end user – particularly funded investors that cannot buy derivative products such as fund managers and private banks.
It recently launched the JECI product – a credit index instrument that is available in swap and note form and enables investors to invest in a diversified credit portfolio.
“On the distribution side, we are seeing increased interest from private banks in getting involved in structured credit,” says Stonberg.
JP Morgan will not divulge how much money it makes out of credit derivatives. “The margins are attractive, but they are diminishing,” says Brindle. “As we move towards greater visibility, transparency and liquidity, the margins will go down and the market will lose some its attractiveness as far as new entrants are concerned.
“But we are perfectly comfortable with that. Our goal is not to remain a big part of a small market – we are happy to be a smaller part of an enormous market.”
Nick Evans
