Derivatives traders' bonuses could fall below 2003 levels

After a rush of last minute hiring by the likes of Barclays Capital, credit derivatives traders on Wall Street could be forgiven for thinking the sector is hot and that they're in line for big bonuses this year. They would be wrong on both counts.

A new salary survey by the Options Group, a Wall Street financial search specialist, found 2004 bonuses for U.S. credit derivatives traders are likely to be less than or equal to bonuses in 2003.

The survey, of hundreds of U.S. candidates and recruiters, put total 2004 compensation for managing directors in structured credit trading as high as $6 million. VPs were on total packages of $200,000 to $1.4 million. Total compensation for directors ranged from $1 million to $3 million.

A spokesperson for the group says many traders will find they earned the same or more last year: 'Credit P&Ls were generally lower this year and bonuses will reflect this.'

She says this will hold particularly true for traders of credit default swaps (CDS), products designed to mitigate the risk that companies will default on corporate bonds. CDS traders are expected to lose out in 2004 after many had their desks (and bonus pools) combined with less profitable corporate bond traders.

Suzie Criqui, a consultant at Teeman Perley Gilmartin, agrees that CDS traders have sunk down the pecking order: 'It used to be that single name CDS was where the money was. Now it's hybrid products like synthetic collateralized debt obligations (CDOs).'

Collateralised debt obligations (CDOs) are securities which are issued on the back of an underlying portfolio of bonds, loans or credit derivatives and divided into different 'tranches' (slices) of risk, according to investors' risk appetite. After difficult years following junk bond defaults such as WorldCom in 2002, global volumes in the CDO market surged around 25% in 2004.

Criqui says junior credit derivatives traders will benefit from the biggest bonus increases: 'There could be a rise of 40% to 50%. These are the guys that everyone wants to hire.'

Ever opportunistic, banks are waiting for the New Year's fallout. The Options Group's spokesperson says: 'Banks are expecting bonuses to be down. We can expect them to be opportunistic about hiring traders for less of a premium than we have seen in the last couple of years.'