Help could be at hand for market makers in jumbo Pfandbriefe that want to hedge spread movements between different issuers.
While the travails of AHBR put the spotlight back on liquidity in the jumbo Pfandbrief market last month, JPMorgan was trading the first Pfandbrief credit derivative. The derivative references an issuer’s public sector or its mortgage Pfandbriefe, and is triggered by a failure to pay on any of these bonds, which are physically deliverable.
“Unlike some other credit derivatives backed by securities, such as CDS of ABS, this trade is quite simple,” says JPMorgan’s Michael Poppel, vice-president in financial institutions derivatives marketing. JPMorgan is not saying which name its first trade was written on, although it is not AHBR.
No default
Pfandbrief investors are not obviously in need of credit protection. Famously, there hasn’t been a Pfandbrief default in the product’s 236-year history. “There are always protection sellers,” says Poppel. But there are also potential buyers.
First, some derivative dealers use Pfandbriefe as cash collateral when they transfer risk into funded synthetic CDO SPVs. This effectively exposes them to counterparty risk in the shape of the Pfandbrief collateral, which they need to hedge.