Up to $750 million of today's $3 billion revenue anticipation note issue by California. will be sold as floating-rate securities backed by swaps, market participants said.

Although synthetic fixed-rate structures have been out of the money in recent weeks, California could generate savings by issuing notes tied to a market index and using a swap, derivatives officials said yesterday.

Some market participants said the floating-rate notes would probably pay the Public Securities Association's municipal swap index minus 10 basis points. The state would then enter a swap to lock in a fixed rate of about 4% for the duration of the 11 - month notes. The notes may have an interest rate cap. Price talk on the fixed-rate notes was about 4.20% yesterday.

The floating-rate notes could also be tied to the London Interbank Offered Rate or the Constant Maturity Treasury rate. "It could be Libor or CMT, but I think it will be primarily PSA driven," one professional said.

The state will conduct an informal competitive bidding process for the floating-rate notes. Last year, New York City, New Jersey, and Massachusetts used a similar bidding process.

As much as $500 million of last week's $4 billion warrant issue was turned into derivatives in the secondary market, sources said, although some dealers put the total at less than $200 million.

The 22-month maturity of the warrants reduces the volatility of the secondary market structures.

"Inverse floaters are universally thought of as risky, but on the warrants, there is relatively less risk because of the maturity," one official said.

In other news, Moody's Investors Service reported that the volume of secondary market transactions it rated fell 78% in the second quarter from a year earlier, providing yet another indication that the derivatives market is in the doldrums.

The rating agency said it rated 18 issues totaling $297 million in the second quarter, down from 68 issues totaling $1.24 billion in the second quarter of 1993. The second quarter of 1994 was also 80% below the 74 issues totaling $1.24 billion Moody's rated in the first quarter of this year.

The decline affected the two most popular structures rated by Moody's tender option bonds and floater/inverse floater programs.

The deals Moody's rated in the second quarter included 4 strips issues totaling $109.5 million, 3 tender option bonds totaling $73.9 million, and 11 floater/inverse floaters totaling $113.6 million.

The agency said its numbers do not reflect all deals sold in the second quarter. In the secondary market, some issues are sold before a rating is issued, so deals sold at the end of the quarter might not be included in the Moody's second quarter information.

The volume also does not reflect primary market derivatives or secondary market issues that were rated only by Standard & Poor's Corp. Standard & Poor's has not yet released its second quarter volume.

Moody's said it rated two new programs in the second quarter. J.P. Morgan Securities started a new puttable floater/inverse floater program and PaineWebber Inc. initiated a tender option bond program with liquidity support from Canadian Imperial Bank of Commerce.

New Derivatives Firm

Two well-known derivatives professionals have started a firm, Capital Market Risk Advisors, to help market participants better measure and manage risk. The founders, Tanya Styblo Beder and Leslie Lynn Rahl, said they were among the "early pioneers" of derivatives in the 1980s.

Beder, 38, spent almost ten years working for CS First Boston and helped establish the firm's capital markets swap group. In 1986, she founded her own firm, Capital Market Advisors.

Rahl, 44, was the head of Citibank's risk management group for nine years. In 1991, she founded her own advisory firm, Leslie Rahl Associates.

With big corporate losses from derivatives and the possibility of new regulations in the air, "this is obviously an opportune time to merge our talents and go after new business," Rahl and Beder said in a statement.

Beder testified at a July 13 hearing on derivatives before the House sub-committee on telecommunications and finance. She said that while losses on derivatives for the previous ten years totaled $2.1 billion, losses for the 12 months ended July 8 totaled $6 billion.

"Losses should always be reviewed in context," she told the subcommittee. Her firm "estimates the derivatives market stood at $18 trillion in notional amount at year-end 1993. The implied loss rate is less than one-twentieth of 1% when compared to the notional amount."

Using a another measure of the size of the derivatives market -- replacement value -- Beder said the losses constituted 1.1% of the market. Almost $2 billion of losses came from two users: Metallgesellschaft lost $1.3 billion in oil futures and Askin Securities lost $600 million in mortgage-backed derivatives, she said.

"It is important to keep in mind that risk unto itself is not bad," she said. "What must be avoided are risks taken without proper compensation, risks left unmanaged, or risks too large relative to capital."

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