Who's to run derivatives at merger-bound First Chicago Corp. and NBD Corp.? First Chicago's derivatives group seems to have the inside track?

In a record-setting September, the group generated 40% more revenue than a year before and pushed January-September results toward 1993's record for the nine months.

The big Chicago and Detroit companies are scheduled to merge at yearend if regulators and shareholders approve, as is expected.

No announcement has been made about who would head the combined derivatives practice. But First Chicago's 12-year-old derivatives group, with offices in Chicago, Tokyo, and London, dwarfs NBD's Detroit-based group.

Craig Bouchard, a senior vice president and "global head" of the First Chicago group, says he has high hopes for the combined operations. In particular, he hopes the bigger customer base will mean extra profits.

"We expect to combine the products of the two companies so we can offer one product set," said Mr. Bouchard. "We're looking at 1996 as a chance to step up and do even better."

First Chicago's ability to maintain its strong customer ties during a difficult period in the derivatives business was crucial to its successes in the last few months, Mr. Bouchard said.

Heinz Binggeli, managing director with Emcor, an Irvington, N.Y.-based derivatives consulting firm, said dealers with a customer emphasis have shown strong performance despite the bad publicity surrounding derivatives. While exotic derivatives have fallen out of favor with most corporate clients, plain-vanilla products are increasingly popular with end-users looking to reduce their funding and commodities costs.

"With long-term interest rates having come down, it may be that more corporations and end users are trying to lock in these attractive rates," Mr. Binggeli said.

Indeed, that's the case at First Union Capital Markets Corp., says Steve Kohlhagen, managing director. In recent months its derivatives operation, like First Chicago's, has been churning out record results, said Mr. Kohlhagen, whose outfit is owned by First Union Corp. of Charlotte, N.C.

Not only are declining rates spurring business, Mr. Kohlhagen pointed out, but customers are also becoming comfortable with these products.

"It's just an attractive time to be hedging," he said. "It's an opportunity for our customers to use these new instruments to take advantage of the situation."

While the bulk of the improved results at First Union are related to interest rate products, Mr. Bouchard said his group has seen increased transactions and dollar volume across a variety of product lines.

Besides interest rate products, the bank has seen increased activity in equity derivatives by companies hedging pension funds' investments. The improvements also came in commodity products, which companies use to hedge purchases of raw material or energy to run their plants.

Despite the bank's recent success, First Chicago is facing stiff competition from its new crosstown rival, NationsBank Corp.

In the latest ranking of derivatives dealers at June 30, the Charlotte, N.C.-based company reported $922.6 billion in notional amount of derivatives outstanding. The 47.1% jump, thanks largely to its Chicago research and trading unit, helped NationsBank leap-frog ahead of First Chicago and into seventh place among commercial banks with derivatives positions.

William Maxwell, president of NationsBank Capital Markets, said the build-up reflects the application of technical capabilities in both exchange-traded and over-the-counter contracts.

While the merger with NBD will help First Chicago parry NationsBank's increased presence in the Midwest, the bank has also invested heavily to enhance its competitive position now.

Over the last 18 months, the company has focused attention and resources on developing its own technical capabilities to create hedging strategies across a customer's portfolio of risks, Mr. Bouchard said.

"To service the customers well, you need to understand their risks," he said. With these new capabilities, Mr. Bouchard said, "We will come up with an optimal hedging strategy" for all of a company's risks.

Like everything else in the derivatives business, though, there's a lot of competition. Though there is a brief window of opportunity in this market thanks to the growing globalization of business, the advantage may be short-lived.

"Being able to create an asset-liability management model to analyze a customer's risk position is important," Mr. Bouchard said. "We're all in the building stage now, but everyone thinks this is where the key to revenue on the customer side will be in the future."

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