Lehman Brothers says it has seen strong volumes since it introduced credit-default swaps on preferred securities last February. One official said the firm has seen about USD5 billion in two-way trades since it started trading. Ashish Shah, co-head of credit strategy at Lehman, said the increase is being driven by relative value opportunities between cash and longer-dated senior CDS and an increase in new hybrid issues.
In spite of the pickup claimed by Lehman, other market officials remain skeptical of the instruments. "I think USD5 billion sounds excessive," said the head of one New York trading desk. Other officials said USD3 billion sounded closer to the mark.
JPMorgan began making markets in PCDS over the summer (DW, 8/12), and Bear Stearns has traded PCDS, but few if any other dealers have entered the market. Officials at Bank of America, Deutsche Bank, who said in August they were waiting for the market to gain traction, said they are still waiting. "Right now, only one dealer is doing this, so it's an artificial market," said a trader at a U.S. house. "Until we get any dealer consensus on the shape and form, I don't think you're going to see any liquidity."
