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Recently, there has been an increase in straight payout structures being priced and traded in the interest rate derivatives market. Unusual market conditions and a general aversion to conventional exotics has helped these trades evolve relatively quickly. Although they are very complex trades to value these simple exotics offer very clear and straight forward payouts and allow speculation on or hedging of very specific types of risk. Often the more simple the payout, the more complex the initial pricing and modeling can be.
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In response to controversial sales practices relating to reverse exchangeable securities (reverse convertibles), the U.S. Financial Industry Regulatory Authority recently issued two documents--a regulatory notice and an Investor Alert--on the instruments.
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A recent decision in the U.S. Lehman Brothers bankruptcy case held that investors in a collateralized debt obligation called Dante did not have the right to jump ahead of Lehman to get repaid, contradicting an English court decision and raising questions about how similar deals will be treated.
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The credit crunch has focused a lot of attention on bank capital ratios. With recent large write-downs in asset values, the implementation of Basel II's risk based capital requirements and the possible introduction of further changes following the Basel Committee's December consultation paper, banks face the prospect of holding increasing levels of regulatory capital as the assets they own deteriorate in both credit and rating quality.
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This week's Learning Curve focuses on the effect of equity structured products on the market for equity index correlation.
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This is Part II of a two-part Learning Curve on equity index correlation. Part I, which appeared last week, explained how many retail structured products are long correlation. Part II begins with another example of a worst-of product that is long correlation, the daily range accrual note, and concludes with a section on outperformance options and the market for equity correlation.
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The dispute resolution mechanism established as part of the Big Bang Protocol was recently put to the test for the first time in connection with Cemex.
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On December 11, 2009 the U.S. House of Representatives passed sweeping legislation entitled The Wall Street Reform and Consumer Protection Act of 2009.
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On Oct. 20, the European Commission published a document titled: "Ensuring efficient, safe and sound derivatives markets: future policy actions."
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Counterparty credit risk management has been evolving for over a decade from passive risk quantification and reserves to active management and hedging.