Morgan Stanley
The credit derivatives market in the past 12 months has been dominated by the launch of various tradable indices. They have proved a phenomenal success, increasing liquidity and transparency and, as a result, the number of players and types of trade possible.
As that has also led to a narrowing of bid-offer spreads, the easy money for the broker-dealers has gone, forcing them to find new ways of making money from the product as well as being competitive in the flow business.
Morgan Stanley, last year?s winner of the most improved award in this category, has been at the forefront of all these developments. The US investment bank was instrumental in pushing the development of the index market in the past couple of years. Its Tracers product formed the core part of the Trac-X US product developed last year in conjunction with JPMorgan. This year, when iBoxx and Trac-X merged their European and Asian credit derivatives indices, Morgan Stanley was often in the position of being chief negotiator and arbiter of disputes. Senior members of the team have also been active in educating the market about the various uses of credit derivatives, spending time with consultants and organizations such as the Association for Investment Management and Research.
While the two traditional leaders, Deutsche Bank and JPMorgan, continue to do well, Morgan Stanley is the firm that often seems to be on the lips of market participants as the one to beat now. According to Orion Consultants, the firm has pulled ahead of these two and has attained ?a number-one standing in terms of both market penetration and average business done?. The buy side, says the survey, give the firm praise for ?its top-notch market-making, pricing, execution and structuring capabilities?.
The growth of business at the firm is impressive. Figures produced by Creditflux for the first quarter of this year place Morgan Stanley comfortably in the lead as a portfolio credit swap counterparty, with a 15% market share. True customer business has increased 288% since 2002, the number of Trac-X trades has increased 605% in just one year, and the notional amount of traded high-yield credit default swaps in the first four months of this year is up by 878%.
The firm was the first to merge its high-grade and high-yield credit derivatives trading desks. Head of trading Jared Epstein says: ?Trading high-yield credit derivatives was more akin to a hobby, so we changed the structure of our trading desk. I?ve organized it by sectors, rather than by credit rating. I want the traders to be credit literate, not just trading flows, so the type of market shouldn?t matter.?
It is in the structured area that Morgan Stanley really shines. One area is the ABS credit default swap market in the US, where the firm has a market share of around 80%. Morgan Stanley is at the forefront of developing new products based on the greater hedging flexibility allowed by the indices. These include credit derivative options trading and tranched trading, the latter being a major factor behind the rapid growth of correlation trading.
