Derivatives hot spots: Sector view

Derivatives are here to stay. But with margins tightening, which ones will be the hot ticket for jobs and pay in the years to come?

When bonuses for credit derivatives staff were announced this year, recruiters say there was a degree of consternation: after several years of ever bigger and better payouts, some people were faced with a pay cut.

Predictably, it was mid-ranking hirelings rather than the masters of the credit derivatives universe who saw their pay fall some 10% to 20%. "Credit derivatives have got to the stage where average performers are going to be paid less than three to four years' ago," says one derivatives-specialist recruiter in London. "For a lot of young people in this space, it's been a shock - they're used to compensation growing exponentially and have never been through a downswing before."

Paradoxically, the downswing in bonuses comes despite continued growth and hiring in the credit derivatives sector. According to the International Swaps and Derivatives Association, notional volumes traded in the global credit derivatives market rose 105% last year, to a record $17.4 trillion. This followed growth of 120% in 2005.

Russell Clarke, a director at London-based headhunter Mantis partners, says the expansion of the market is prompting banks to boost their credit derivative teams, particularly when it comes to specialists in synthetic collateralised debt obligations (CDOs), which allow banks to distribute tranches of securitisations based on underlying credit derivative products.

"There's been no drop off at all in recruitment," he says. "Several banks are hiring across trading, sales, marketing and structuring. Among other things, recruitment is being driven by the acceptance of credit default swaps products by investors that traditionally invested in cash products."

Who's hiring in credit derivatives?

Recruiters elsewhere tell a similar story. "I'm flat out trying to find people for CDOs right now," says Aaron Stewart, a consultant at Hong Kong-based Pelham Search Pacific. "A good credit derivatives structurer who speaks Mandarin can expect multiple job offers."

Established players such as Merrill Lynch and Deutsche Bank have made recent headlines with big name structured credit hires, but recruiters say the big credit derivative recruiters in London this year are instead set to be the second-tier banks, which are entering the market somewhat late.

ABN AMRO is restructuring to focus on fixed income derivative products, BNP Paribas is said to be weak in cash CDOs. Dresdner Kleinwort Wasserstein is said to be similarly keen to add expertise.

Late entrants are also recruiting in other locations. Swiss Re is setting up a credit structuring operation in Asia, while the more established Deutsche Bank is said to be retooling its Asian structuring operation. UniCredit Banca Mobiliare has been hiring in Italy, and Olivia Vigneron, head of structured credit trading at the bank, says there are plans to add credit derivative traders in London. Barclays Capital, which already operates a 17-man collateralized debt obligation team in the US is said to be looking for a further eight hires. Meanwhile, UBS is said to be looking to build up its synthetic CDO teams in London, New York and Asia.

"CDO hiring remains hot," says Peter Arian at New York-based Analytic recruiting.

The bonus story

If credit derivative hiring is hot, why were bonuses poor? Recruiters point to last year's travails in the credit market.

"The downgrades of General Motors and Ford really tested the CDO market last year," says Clark at Mantis Partners. "Bonuses suffered as a result, but the market is now back on track."

Despite Clark's confidence, last week's news that accounting errors at General Motors will push the company's 2005 losses to $10.5bn have the potential to reawaken jitters over defaults. And falling margins are also an issue. "Growth in the market is plateauing and margins are under pressure," says a former head of credit trading-turned headhunter. "Therefore people are going to be paid less."

Equity derivatives back on top

If the credit derivatives market looks a tad shaky, the smaller equity derivatives market has benefited from an improvement in its fortunes. Last year, for example, growth in the equity derivatives market accelerated to 35% as volumes rose to $5.6 trillion globally.

"Following the Enron and WorldCom scandals, investors in the US were very reluctant to have anything to do with equity derivatives," says Anna Pinedo, a partner specialising in derivatives at the New York office of law firm Morrison & Foerster. "This combined with accounting changes that made equity products more challenging. But people have got beyond that now."

The upswing in interest equity derivatives is driving recruitment at the likes of UBS, Wachovia and BNP Paribas in New York and London, and the Royal Bank of Scotland in Japan, for example.

"Soc Gen, BNP Paribas, Calyon and Ixis are all hiring again in equity derivatives," says Guy de Brabois, a senior consultant at Robert Walters in Paris.

Future hot spots

While credit and equity derivative products are likely to continue to account for the bulk of derivatives employment, new jobs are also being generated from other sources.

One is hybrid derivative products. "We're seeing hybrids of all different kinds of derivative product taking off," says Kara Lemont Sportelli, a director at BNP Paribas in London. "This year, inflation and interest rate hybrids are proving popular, as are equity interest rate hybrids." BNP Paribas currently has four full-time hybrid structurers on the fixed income side in London, plus two traders and a researcher. Lemont Sportelli says another three hires are likely in the next 12 months.

Another is fund-linked derivatives. Jonathan Astbury, a consultant at recruitment firm the Sandton Group, says HSBC and Merrill Lynch are among the banks looking for fund-linked specialists in London, and that Citigroup is hiring 14 for its US fund derivatives team.

Keith Styrcula, founder of the Structured Products Association, recently forecast 20% to 25% growth this year thanks to retail investors' demand for fund-linked products.

"Fund-linked derivatives are a huge growth area right now," says Astbury. "All the big banks are looking for structurers, salespeople and due diligence specialists, both in London and the US."

Pay derived from region

OK, some credit derivatives specialists may have winced when they learned their bonuses for 2005, but this doesn't mean they're badly off by most standards.

A recent salary survey of 2,500 derivatives specialists by Napier Scott Executive Search found that London-based managing directors working in top-tier investment banks commanded average packages of nearly 1.8m last year. Associate directors with about five years experience earned nearly 300,000.

As ever, continental European staff are paupers by comparison. Guy de Brabois, a senior consultant at Robert Walters in Paris, says pay for credit derivative salespeople with five years' experience averages just €100,000. Parisian credit derivative specialists may want to emigrate to Italy: one Italian recruiter says Milanese-based salespeople can command twice this amount.