The credit derivatives crush

Banks are reportedly licking wounds on junk rated indices, but there's no less demand for credit derivatives expertise.

BNP Paribas is the latest to join the credit derivatives fray. Financial News reports that the French bank has bold plans to continue expanding its structured credit business, and may hire as many as 350 front office professionals this year (not all into credit derivatives, we assume).

Separately, Derivatives Week says Bank of America is upping its credit derivatives sales force in Europe by 25% in the coming months. And Royal Bank of Scotland, HSBC, West LB and Citigroup are also in the market for credit derivatives talent, according to headhunters.

But what of claims that the opaque credit derivatives market, and much of the rest of the financial system, are liable to go belly-up in the event of a major default?

It's all scaremongering, according to Terri Duhon, managing director of B&B Structured Finance, a derivatives advisory firm. "Credit derivatives will not exacerbate a market downturn," says Duhon. "If anything, the credit derivatives market has mitigated the contagion risk by distributing losses to a much larger number of investors."

In the meantime, Duhon says credit derivatives traders are well placed to profit from growing risk aversion: "As credit risk is perceived to be increasing, credit derivatives will increasingly be used as a hedging tool."

Little surprise, therefore, that structured credit desks have been doing well out of the current market, with trading volumes soaring on the back of market volatility. "People have only been losing money in crossover and high yield," says Alex Tracey, MD at Clifton Partners. "On the whole, most desks have done quite well out of widening spreads."

It's also little surprise, then, that banks continue to pile into the market. "It's a bit like property," reflects Tracey. "At this stage of the cycle, it may not look like a good time to be going in, but you don't want to be left on the sidelines."