Printer Friendly
While the credit crisis raised concerns about counterparty risk, the buy side is relying on the bulge bracket firms for access to algorithms, execution management systems and dark pools.
With the collapse of Bear Stearns and more than $200 billion in write-downs accumulating on Wall Street, fears that the credit crisis could take down other firms are intensifying, and buy-side traders are carefully considering counterparty risk when evaluating their relationships with bulge-bracket brokers.
"I'm always nervous with my counterparty when I get out of a trade," says Stephen Davenport, SVP, risk management and investment management, at Wilmington Trust in Atlanta, who executes a lot of options, swaps and structured products. "I've always felt like your hand is in the lion's mouth when you want to get out [of a trade.]"
The Bear Stearns debacle, Davenport continues, "has made me rethink even more whenever I have a position with a counterparty -- how much do I have with a certain counterparty?" He notes that Bear Stearns approached him about starting a relationship for trading structured products shortly before its collapse and says Merrill Lynch has been asking about entering a relationship as well.
"People are going to think about [which] counterparties [they enter relationships with] and about who is strong and who is not," Davenport says, adding that Wilmington Trust uses five dealers for structured products. "The idea is that you want to get a selection of quotes, and you want to get good access to firms that you want to be your counterparty," he explains. "This whole credit thing isn't over, and we're going to be diligent about trying to get the right firms to add as a counterparty."
