Some people find themselves at the right place at the right time.
So it was for Terri Duhon when she joined JPMorgan in New York a decade ago. After three years on the interest rate derivatives desk, Bill Demchak, now vice chairman of PNC Financial Services Group, pulled the Massachusetts Institute of Technology math major aside and asked her to help build the bank’s exotic credit derivatives trading book. “I had heard of it, but I really didn’t know its potential,” Duhon says. She took the plunge anyway, and, with credit derivatives now a booming industry, it paid off.
Two years ago, Duhon left banking after helping develop ABN Amro’s credit business, to start her own credit derivatives consulting firm, B&B Structured Finance.
“I realized there was a tremendous demand for anyone with recent, relevant credit derivatives knowledge, because it was a growing industry and every financial institution on the planet” – from hedge funds to the big banks themselves – “had education and consulting needs,” she says, “since those people pretty much do not exist outside the investment banks.”
Today, Duhon and her London-based firm are filling that niche. She spoke with InstitutionalInvestor.com’s Jonathan Shazar about who needs her help, scary headlines and the surprisingly peaceful push for standardization.
InstitutionalInvestor.com: With the credit derivatives market growing explosively, is there a need for more consulting firms such as yours?
Terri Duhon: There’s always a demand for education and consulting-based work. This issue is whether you have qualified individuals that can do it. The demand has been around for some time; it’s untapped. While there are various different educational institutions... that can provide the very basic training in this area, ultimately, a lot of clients want someone who can stand up and say that they did it before.
II.com: Where is that demand coming from, other than small banks?
TD: Financial institutions of all sorts. We do a lot of business with the large banks. Some of that is the training program for their analysts, some of that is just keeping their sales force up to date. A lot of it is operations; as you know, operations is a huge issue right now.
II.com: The standardization issue?
TD: Yes. Ultimately, the more standardization we see in the documentation area, the easier it will be to process these transactions. But there will always be transactions which are not standardized. We can talk about standardizing confirmations all day long, but ultimately, if a client wants something that’s non-standard, or a little bit more tailored, to the extent that a bank is willing to do that transaction, they will. That’s what derivatives are all about.
II.com: So what is to the answer?
TD: There are a lot of initiatives being taken in the market to help the various backlogs and the various operational issues that are being highlighted. A lot of different third-party vendors are putting forward systems or concepts. Banks have all got task forces that seem to be working furiously on these issues. I would be surprised if a huge unforeseen issue comes and blows up the industry.
The initial press about all of these initiatives was along the lines of, “Danger! Credit derivatives industry about to blow up,” when, actually, people were trying to take steps to address the issues that they knew existed – and they were the right steps. As far as what we’re being told by the banks and by the regulators, what we’re seeing is people very rationally and very capably addressing these issues.
II.com: Is innovation going to arouse further regulatory suspicion?
TD: [There’s a juxtaposition of], on the one hand, standardization – the more simple flow credit derivatives products – and, on the other hand, the fact that the headlines are talking about all of the new products that are coming out. It makes it seem that perhaps all of these efforts that we’re making may not actually put a dent in the operational and backlog issues.
The points that are missing are [that] the number of people involved in this industry is growing. We’re not talking about a static pool of 10 people who are all trying to deal with the increasing volume in the flow business and the standardization of those confirms, as well as addressing the backlog and innovating products. We’re talking about a growing group of people working in the credit derivatives industry.
Two, every time we do introduce a lot of these new products, what [the industry is] seeing very rapidly is that the market’s coming to agreement on with respect to documentation. Everybody’s talking about the new synthetic ABS business. The fact of the matter is, synthetic ABS, or ABCDS, have been a feature of the credit derivatives market since 1999, so they’re not exactly new. What is new is the standardization around those products. While it looks like there’s some innovation, what’s actually happening is that products that have actually been around for a long time are just getting standardized, because the market recognizes that without standardization, systems and liquid markets don’t exist. Even when there are relatively new products in this space, like options or constant maturity credit default swaps, it was only at the point that some documentation standards were agreed upon that dealers actually really considered jumping into those markets.
II.com: What’s driving that?
TD: One, for products that have existed for a long time, people are addressing the issue of standardization more rapidly today. Two, as new products come out that people see potential in, they’re trying to address the issue of standardization quicker than they had in the past, where, previously, a lot of banks had tried to keep a lot of things very proprietary. Banks are realizing now that keeping things close to the vest actually doesn’t necessarily bring any value to the industry, because to the extent that you ultimately want to create a liquid market around something, then you need to get it out there and you need to get it standardized and you need to get other dealers to agree to the documentation standards.
II.com: Any investment advising?
TD: No. We don’t. We could, to the extent that we were interested in going down that route, but we don’t. To date, most people have been happy with general education.
II.com: Thanks, Terri.
