JPMorgan wins our credit derivatives award for the second year in a row, holding off not just long-term arch-rival Deutsche Bank, but also Morgan Stanley, which has vastly increased its business and wins the most improved category.
JPMorgan, though, remains the standard for the market to beat. It trades over 1,600 names globally and will do so in size, having traded both sides of the market with ticket sizes of $250 million. Derivatives brokers GFI and Creditex both rank it as the number one trader on their platforms. It is also, by its own reckoning, executing more trades on Morgan Stanley’s synthetic Tracers index than the latter is doing itself. “We have scale in all different areas and we’re integrated into all of the credit businesses,” says Andy Brindle, global head of credit derivatives at JPMorgan.
With such a powerful franchise, accounting for over 30% of all credit derivatives volume, you might expect JPMorgan to be defending its territory against newcomers. Far from it. The bank is in fact the most active in trying to expand the market, to bring in new players and users, and to define market standards. Having created credit modelling system Creditgrades in early 2002, along with Deutsche Bank and Goldman Sachs, JPMorgan followed this up in June with Red, or reference entity database. Developed with the same partners JPMorgan asked to join it in CreditGrades, Red is designed to set a standard that ought virtually to eliminate errors in specification of names. It’s a big step towards fully automating the process of confirming credit derivatives trades.
For JPMorgan, these are crucial steps if the market is to develop and mature. “It’s got to be about increasing transparency and liquidity,” says Brindle’s colleague Andrew Palmer. JPMorgan has an added advantage in pushing for this in that several of the bank’s senior managers have exactly the right experience, having been through the process before with other products. Brindle, for example, had worked on interest rate derivatives and equity derivatives when those markets were in earlier stages of development.
One of the biggest steps taken on the trading side this year has involved combining and expanding the best credit derivative indices. JPMorgan took a leading role on that, approaching Morgan Stanley to see if it would be interested in combining its successful 50-name US Tracers tradable index with two of JPMorgan’s own products: Jeci, which was JPMorgan’s answer to tracers, and Hydi, its high-yield index. Morgan Stanley agreed, and the two announced the launch of the suite of indices in April. JPMorgan is also working on a Japanese and Asian index.
The firm has had a tougher year in CDOs. It has been at the forefront of developing reverse-enquiry products for CDO investors such as their Merit technology. But it has also lost several senior managers from the New York office in the past six months. Brindle, though, says the firm has a deep bench and has recovered quickly. “We decided to fundamentally redesign structured finance. It used to be siloed, almost like SWAT teams, in the 1990s as we were building it. As it progressed into a more legitimate, long-term business we decided to integrate the product more. Not everyone was happy with that. But we’re doing well, and won four mandates just last week.”
