Credit derivatives are the latest hot bit of financial engineering dreamed up by the quants of Wall Street. And institutions like Bankers Trust, Chase Manhattan and Canadian Imperial Bank of Commerce wasted little time chasing a market that's expected to become at least as big as the interest rate swaps market-about $7.2 trillion, according to 1996 numbers from the Office of the Comptroller of the Currency (OCC).
The latest entrant is Bank of America, which expects to go live around the first week of this month. BofA's James H. Gill, vp and manager of the structured securities desk, says the bank is "looking at more traditional products (like) total return swaps off individual (loans), or a basket of securities as well as credit default swaps. The bank is interested being a market maker, as well as using (credit derivatives) for their own portfolio management purposes." Among the likely instruments are emerging markets or sovereign debt; down the road, BofA may also consider credit card portfolios, although Gill says that's not what the bank is looking at initially.
The federal regulators, of course, are keeping a keen eye on the emerging credit derivatives market, and contemplating regulations for it. Currently, eight banks account for 94 percent of the notational amount of derivatives in the banking system, which raises obvious regulatory issues.