So marked has Morgan Stanley’s increased profile and improvement in credit derivatives been that we were within a whisker of giving it the top award. But Morgan Stanley still has one or two gaps, such as in high-yield default-swap trading where it has lagged behind JPMorgan in the joint product they unveiled in April.
But Morgan Stanley is without doubt the name most of its peers mention as the most active on the Street, pushing innovation, gaining market share, and rivalling JPMorgan and Deutsche as standard bearers for broadening the appeal of the product and seeking market standardization.
What seems to have done most to help Morgan Stanley’s rise is its synthetic Tracers product. Structured as a five-year bullet tradable index referenced off 50 of the most liquid names in the credit markets, it soon became widely quoted on the Street and in the press as a way of gauging investor sentiment during one of the most volatile periods the credit markets have experienced. It also became a popular tradable instrument.
At the start of April the firm announced a joint venture with JPMorgan to develop the index further. Synthetic Tracers were to be expanded to 100 names, and were to form part of a package consisting of JPMorgan’s high-yield index, Hydi, its Jeci index, and Asian and Japanese indices that it is creating. At least eight market-makers have committed themselves to the Tracers part of the offering since the product was launched.
As a result of developing the synthetic tracers tradable index Morgan Stanley’s trading flow has increased substantially. “We have to trade the underlying default swaps as part of the process of trading Tracers,” explains Suzanne Cain, co-head of credit sales at Morgan Stanley. “So we’ve really increased our market share in the single-name default swap market. Two years ago default swap trading was more a prop-trading business than a client business here. That’s completely changed, and clients now represent about 76% of total business, as opposed to just 30% before.”
In those two years the bank has increased its credit derivative counterparties from 450 to 950. The push to trade has brought with it a need to invest. Cain, for example, was poached from Deutsche Bank last year, as was Alain Marcus, who runs the credit derivatives sales desk dealing with hedge funds. The firm has doubled trading staff and increased sales and marketing in the US by 200% and in Europe by 100%. Research staff has grown by 70%.
The other, related, area that has benefited from this investment is the CDO group. Morgan Stanley has always had a large CDO business, and the increased commitment to credit derivatives has strengthened the franchise. Last year the firm structured the largest managed CDO to come to market and the largest-ever private equity securitization.
