electronic platforms eye the portfolio swap prize
Credit Magazine, November 2

Earlier this year, the buzz in the credit derivatives market concerned whether web platforms such as CreditTrade and Creditex could seize market share from traditional brokers and market makers. Would the single-name credit swaps which make up the bulk of the market migrate to the internet?

Only a few months later, there is a new buzzword in the market: portfolio swaps. Like old-fashioned cashflow CLOs, these are portfolios of credit risk that are transferred from a bank's balance sheet through a series of credit swaps. Now, the online marketplaces are moving quickly to capture some of this business too.

Creditex can boast the first publicly disclosed portfolio swap. In late September SG hedged a $282 million portfolio using the platform. "Our technology was not originally built to handle portfolio transactions," says Creditex chief executive John McEvoy. "But we made some quick adaptations and came up with a technology solution which allowed SG to post the transaction in a full and complete way."

This has taken some by surprise. "At the beginning of this year I would have predicted that an electronic platform such as Creditex could never be used for portfolio trades," says one credit derivatives banker. However, the SG trade was not a tranched portfolio. Neither Creditex nor CreditTrade have yet had a CLO-type portfolio transaction completed online, although both platforms say that some traders have started posting prices for these deals.

"Traditionally, synthetic tranches of CLOs have not been bought through broker markets," says Charlotte Kypriotis, responsible for online credit sales at CreditTrade. "They have required education, so banks have used their marketing teams. But now these trades are becoming more commoditised and efficient which makes them more suitable for a platform such as ours which focuses on the most liquid products."

With demand for these structures strong, it seems quite likely that some highly-rated portfolio tranches may soon begin to trade online.

But the more tailored mezzanine and equity pieces may be a tougher nut for the online platforms to crack. And there are plenty of credit derivative bankers who remain highly sceptical about the whole business of online credit swap trading.

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