Deep crisis, deeper liquidity

Is bringing liquidity to a stilted market the definition of financial innovation? Certainly, it requires a good deal of nous to get out of a hole like the 2007 global housing crash if you’re an investor in an unlisted property fund.

But as with many of FOW’s Awards this year and last, those in the market who saw opportunities to find an innovative way out of a crisis have found rewards.

When the credit crunch really started to bite in the US, interdealer broker GFI Group saw an opportunity to reach investors willing to take hits on their unlisted property portfolios in exchange for seeing the return of liquidity.

In partnership with LA-headquartered international property adviser CB Richard Ellis, GFI set about creating an electronic auction mechanism for real estate.

The result was PropertyMatch, a screen-based secondary trading platform dedicated to unlisted real estate funds. Fund managers and commercial property investors can view and post prices, trading anonymously in a pool of liquidity.

Launched in 2009, the system employs GFI’s trusted hybrid broking model, used in its other platforms such as CreditMatch. Though trading is electronic, all deals are confirmed by phone. GFI has been a trailblazer in the property derivatives segment, and, in partnership with CBRE, was the first firm to broker a swap based on the UK IPD Property Index.

It was also the first to broker a sector-specific swap and a relative value trade in UK housing.

CBRE, meanwhile, has a long record of creating and marketing structured property investments, and in the leasing market. High profile work includes negotiating HSBC’s successive sale and leaseback deals for its London headquarters in 2007 and 2009.

“The whole field of property derivatives, which CBRE-GFI has been instrumental in creating, is a truly innovative development,” said one FOW judge. “PropertyMatch actually takes this innovation to a whole new level by giving customers access to much deeper liquidity than was previously possible. Given that it was launched just over a year ago, it is already well regarded within the industry.”

By far the biggest bank in the Nordic and Baltic forex markets, Skandinaviska Enskilda Banken already has many clients relying on it for accurate forecasting of currency risk.

Developed from its award-winning WebForecast tool and Trading Station FX platform (used by hedgers to manage group FX exposure), SEB’s Cash Flow Hedging solution fills the gap between forecasting, monitoring and trading. The scheme was developed in close partnership with many of the bank’s biggest clients.

The tool consolidates a customer’s cash positions, with all changes in FX risk immediately visible in real time. Monitoring exposure in relation to pre-set target hedge ratios is thereby drastically simplified.

The initiative’s applications are broad in scope, open to banks, investors and corporate hedgers alike. “Of all the banking nominees, I felt this one brought the biggest benefit to the broadest constituents of the market,” said one UK-based judge.

Commodity investment, advanced level

If 2009 was the year commodity ETFs came into their own as bite-sized investment tools, in 2010 most of the world’s banks scrambled to list and market products based on ever more sophisticated commodity-linked underlyings.

Last summer, Credit Suisse boosted its franchise with a family of commodity index investment strategies, rolled out across its investment banking, private banking and asset management divisions.

The most high profile of them, the Credit Suisse Commodities Benchmark, resurrects the physical commodity futures index methodology formulated by Bob Greer in the 1970s. It maintains that index’s key features – rebalancing, multi-period exposure and weighting methodology – to create a global index at the heart of CS’s commodities investment products.

The family also includes three other investment strategies: the Momentum and Volatility Enhanced Return Strategy, which targets an absolute return during all market cycles; the Commodity and Resource Equity Switch, the first hybrid commodities and resource equities strategy introduced to market; and the Credit Suisse Glencore Active Index Strategy, in which the underlying weights of individual commodities are changed monthly based on Glencore’s physical market information. The commodities trading house is a strategic partner of the Swiss bank.

Such a range, the bank feels, offers sophisticated investment opportunities for demanding clients. And FOW’s judges agreed. As one put it: “This sounds like a good way to increase customisable exposure to commodities, which is clearly in demand in the current market.”

Distressed about derivatives? Instruct Mayer Brown

The words ‘credit’, ‘derivative’ and ‘innovation’ have made uneasy bedfellows over the past couple of years. Gone are the heady days of structured finance, when every year brought a slew of more devious ways to slice and dice credit risk.

Now, much of the cutting edge work, for both bankers and lawyers, is in cleaning up the mess, and working out the knock-on effect of every default in your portfolio.

Mayer Brown’s practice under head of derivatives Edmund Parker (author of Credit Derivatives: Documenting & Understanding Credit Derivative Products), boasts an impressive client list, including Citigroup, Bank of America Merrill Lynch, Royal Bank of Scotland/ABN Amro, Fortis/BNP Paribas and KPMG (it advised the auditor on winding up Lehman Brothers’ Asian operations).

The Chicago-based firm has a proud record in advising the bulge bracket banks on everything from managing the impact of multiple credit events on structured credit portfolios to litigation when things turn sour. During the last financial year, Mayer Brown advised on global derivatives deals worth a notional $18bn.

The firm has been acting for Citigroup for several years, and is instructed to act on all credit events affecting corporate reference entities in the bank’s structured products portfolio.

It’s quite a portfolio: synthetic collateralised debt obligations, repackaged notes, unfunded credit derivatives and CDO squared transactions – enough to keep a team of six lawyers in New York and six in London busy. The team has advised the bank on all the major credit events so far in 2010. Mayer Brown has certainly carved out a reputation in distressed derivatives; for that, it deserves credit.