Credit derivatives: volumes up, bonuses not (necessarily)

Data from the International Swaps and Derivatives Association suggests credit derivatives volumes doubled in the first half of this year. Does this imply bonuses will double too? Unfortunately not.

"It's not possible to extrapolate from ISDA volume figures to bonuses," says Alex Tracey, managing director of search firm Clifden Partners. "Given the margin compression within the product, it will have been a lot more difficult to make money on those increased trades."

A derivatives analyst in a US bank adds weight to this unedifying verdict. "The ISDA numbers aren't terribly informative," he says. "They tend to increase exponentially simply due to the nature of the product and aren't really indicative of the performance of the business - except in the back office."

Nevertheless, he says strong demand for credit derivatives expertise continues to exert a favourable influence on pay. "There's enough of a bid out there that recruitment demand is an important driver of compensation. The real risk this year is that banks are over- paying to build their franchises."

Another derivatives recruiter, who declined to be named, told us bonuses for credit derivatives pros look promising. "There is a relative shortage of talent and people are well bid. We're still seeing some moves and guarantees that are 30% higher than bonuses for 2005."

Morgan Stanley highlighted its fixed income trading division as a significant contributor to strong third quarter profits when it announced its results yesterday.