The Methodology Behind This Survey

The 2000 Derivatives Strategy Rankings were designed to be the most thorough and objective reader poll possible of leading derivatives dealers. In formulating our survey, we analyzed all the existing capital markets surveys and conferred with dozens of market participants. To make sure it remained free of behind-the-scenes manipulation of participating firms, the study was managed and executed by a leading market research firm.

To gather data for the ranking, Derivatives Strategy randomly distributed more than 3,000 questionnaires to derivatives specialists at major North American corporations, to institutional investors and to U.S.-based members of the international dealer community. Respondents were asked to identify the best providers of financial risk management instruments and services. Each ballot required a signature, firm name and phone number, to avoid duplication. Unidentified ballots were discarded.

The results, based on hundreds of votes by market participants, rank the best dealers in eight key categories: best overall dealer; best Euroland dealer, best interdealer broker; best credit derivatives dealer; best currency derivatives dealer; best interest rate derivatives dealer; best equity derivatives dealer; and best equity derivatives research house. Voters were then asked to name the best dealers in service, pricing, structuring and innovation in a variety of regions and product areas. Each of these votes was then equally weighted and cumulatively tabulated to determine the best dealer for interest rates, currencies and equities in the United States, Euroland, the United Kingdom and Asia.

Voters were asked to skip areas that did not apply. Where certain categories received significantly fewer votes compared with others, they were either eliminated or supplemented with additional research and phone interviews by the staff of Derivatives Strategy.

This survey was conducted in August 1999, solely in the U.S. markets, and thus reflects the opinion and experience of U.S. institutional and corporate investors, and U.S.-based staff of the derivatives dealers.

The readers' choice in 1998 repeats in 1999, thanks to a revitalized commitment to client service.

When Citibank merged with Salomon Smith Barney, financial types quickly christened the new entity as the first true U.S. superbank, capable of dominating all of its chosen businesses and product lines. Apparently someone forgot to tell that to Chase, which has managed to pull off the same feat on its own.

Chase set the stage for its derivatives success way back in 1996, right after its merger with Chemical Bank. Its new philosophy consisted of heavy emphasis on three major functional franchises—liquidity, client service and risk-taking. In 1999, all three areas continued to show great strength, says Don Wilson III, managing director and head of Chase's global trading division.

The events of late 1998 were a particularly galvanizing force. "We have always had, at the top rung of our objectives, the desire to be a continuous provider of liquidity in size for virtually all points on the yield curve in all the markets in which we operate,” says Wilson. "The carryover of 1998 into this year proved that by not blinking, by staying in the markets all the time, we've been able to pick up substantial market share and have cemented some pretty strong relationships around the world. In Asia, for instance, where some of our competition has withdrawn their resources and their commitment, either based on profitability or risk appetite, we have not.” Wilson also cites Chase's commitment to equity and commodity derivatives as an important source of growth.

In the realm of client service, Chase carried out a major internal reorganization in 1999 that is paying big dividends. It integrated the management of all of its foreign exchange and derivatives sales around the world into one group under a huge tent. "Our long-standing view has been that being organized by function is more valuable than being organized by product,” says Wilson. "More and more customers are getting away from acting based on one group's foreign exchange decisions and another group's interest rate yield-curve decisions. More and more are bundling their purchasing behavior, and we find that it's much more effective if more of our distribution can be across the full spectrum of risk management products.”

Another important move was an even more intimate linkage of Chase's derivatives group with its corporate financing franchise (particularly cross-border mergers and acquisitions), a stronger linkage to its custody product line, and a bigger tie-in with its bond business—all of which have helped bolster the firm's swap business.

In terms of risk-taking, Wilson says, Chase is active, but never lets its risk profile dominate its decisions. "We naturally take risks, but if you've got strong client and liquidity franchises, you can be confident in your risk-taking and take risks on your own terms—rather than driving your revenues by risk so that you're worried about your open positions paying for distribution.”

What of the Internet and all the business-bleeding brokerage possibilities it presents? "We have to defend ourselves,” he says. "We have to be intelligently offensive—and then trust that yield curves keep moving, currencies keep moving and capital keeps flowing.”

A derivatives giant that balances market-making with innovation.

Earlier in the last decade, Deutsche Bank tried to break into the front ranks of derivatives—only to beat a hasty retreat. A few years later, it tried again, hiring Edson Mitchell and giving him a simple mandate: to create a world-class derivatives operation. Barely four years later, Deutsche Bank has emerged as the dominant player in an increasingly crowded Euroland.

Mitchell's first move was to refashion the derivatives group's operating philosophy. Hiring a team of like-minded deputies helped. "Our philosophy from the beginning was that derivatives should be a major part of the vital machinery of a modern global markets business,” says Saman Majd, global head of derivatives and government bond trading. "It's not something that sits off in a corner and does it's own thing. We use derivatives as part of the fundamental way we do things around here, and we've applied derivatives-type thinking to a whole range of product areas. Derivatives touch on all the other businesses in an extremely critical way.”

One of Deutsche Bank's strengths is its steadfast refusal to be just another liquidity provider. While its global platform and infrastructure have helped it become a top-notch market-maker, its commitment to innovation is equally striking. In the last four years, the bank boasts of creating scores of cutting-edge products, from Bermuda callable power reverse bonds with foreign-exchange-linked redemptions to correlation swaps and chooser options.

"We didn't want to be a nich player—we wanted to have our cake and eat it too,” says Majd, "in terms of providing liquidity and also having a problem-solving culture where we can address our clients' needs. We have a fully integrated sales effort, so that we can respond to our clients across a whole continuum of products—on duration, convexity and credit. And we do that with a mixture of derivatives specialists and generalists.”

While Deutsche Bank prides itself on its global reach, its bread and butter is Europe, where it has quickly knocked off Credit Suisse First Boston as the biggest dog on the block—surprising some equity derivatives traders who had viewed Deutsche Bank strictly as a B-list player for years. The acquisition of Bankers Trust has helped the firm's U.S. business, but its Euroland success is traceable directly to Mitchell's team. In a scant two years, the bank has created Euroland's second-largest credit derivatives operation, and has built dominant businesses in interest rates and foreign exchange as well.

The advent of the euro hasn't hurt. "Before the euro,” says Majd, "we consolidated our trading desks, which had been split between Frankfurt and London, to a single London site, so we had a high level of centralization in place. That helped an already good working relationship between our derivatives and government bond trading operations, allowing us to use our strength in derivatives to make sure that the whole is greater than the sum of the parts, in terms of providing liquidity and cross-hedging throughout Europe.”

Retrenchment and realignment are the names of the game in the interdealer broker business. No one has succeeded more than Garban–Intercapital.

Financial journalists and market watchers have been lamenting the death of the interdealer broker for years. But while small niche firms are being squeezed on all sides, powerhouses like Garban–Intercapital are retrenching, striking powerful alliances and offering clients better service than ever before. In the last year, such activity has multiplied Intercapital's staff size by a factor of 10 and extended the company's presence around the world.

ICAP has always been the biggest player in the European interest rate derivatives markets, particularly in medium-term products. But this year, the company has repositioned itself for growth in ways it never thought possible. In late 1998, it merged with EXCO, a global broker with first-rate businesses in short-end fixed-income and money-market products. Suddenly, ICAP had claimed a much bigger chunk of the yield curve. And the EXCO merger also gave ICAP a much bigger presence in the United States, where it had always lagged behind the Prebon Yamanes of the world.

Another factor leading to ICAP's success in 1999 was the birth of the euro. In years past, the firm made no bones about its love of London and its reluctance to set up offices elsewhere in Europe—and this City-centric approach positioned the firm well for the euro conversion.

"We had always believed quite strongly in concentrating everything in one center,” says David Gelber, chief operating officer at Garban–Intercapital. "We believed that post-euro, the trading would gravitate to where the liquidity went. We had spent many years before that fostering relationships with all the banks throughout Europe, so that when their national currencies disappeared, they would come to us in the new euro markets.” The bet paid off, says Gelber. "When the euro began to trade last January, we had by far the biggest liquidity of any broker in London, totally dominating the Continent. And as we expected, London has, in my opinion, emerged as the financial center for the euro.”

If ICAP's EXCO merger set the stage for U.S. success in 1999, its blockbuster merger with Garban in September ensured it. Garban's New York unit, known as Guy Butler, for years had been a top derivatives broker in New York in U.S. dollar products, with a strong presence in London as well. In one fell swoop, the new Garban–Intercapital became a Goliath, giving the firm huge businesses in foreign exchange and commodity derivatives as well.

Of course, the company hasn't always sailed smoothly through the markets. ICAP tried to get into energy derivatives in 1998, focusing on electricity and weather, but quickly found out that the market was over-brokered. It pulled out of the business entirely after the Garban merger.

Meanwhile, the threat of electronic trading looms ominously over the brokerage industry. Gelber believes Garban–Intercapital is well-positioned for the onslaught. "We have developed and are continuing to develop our own electronic solutions for our own markets,” he says. "And not every market lends itself to an electronic trading system.”

Already the biggest player, JP Morgan has revamped and revitalized itself in the last two years.

JP Morgan is one example of how size counts in the derivatives world. The company was at the forefront of the credit derivatives revolution in the early 1990s, and in the last few years has dominated the market more than any firm dominates any derivatives market. Besides being the biggest—and not necessarily because of it—JP Morgan is also the best.

JP Morgan's gigantism can't be disputed. Based on figures published by the Office of the Comptroller of the Currency, the company accounted for some 48 percent of the U.S. credit derivatives market among domestic banks and branches of foreign-insured commercial banks in the first half of this year (excluding the activity of all noncommercial bank entities and overseas offices of foreign commercial banks). Even more startling: JP Morgan's $123 billion in notional outstanding was $37 billion more than the next four most-active U.S. commercial bank participants combined.

Such success would seem to breed complacency, but JP Morgan isn't standing pat. In 1999 it became a key backer and the lead equity investor in Creditex, a new on-line credit derivatives exchange. Morgan hopes the venture will improve market liquidity and pricing transparency. "We see benefits from overall growth in liquidity and depth of the credit derivatives market, notwithstanding the fact that the site may cause our market share to decline somewhat, and may even cause margins to erode,” says Blythe Masters, head of credit derivatives marketing at JP Morgan. "As derivatives businesses have matured, margins have become compressed, but volumes have expanded more than proportionately, so we believe overall profitability will continue to grow.”

JP Morgan also practices what it preaches, using credit derivatives to remodel its own portfolio. In December 1997, it publicly set a goal to reduce the economic capital in its credit portfolio by 50 percent by the end of 2000. "We did that because a substantial portion of Morgan's capital was consumed in those businesses, yielding only a 5 percent return on equity, which was clearly not consistent with our overall shareholder objective of returning 15 percent to 20 percent on equity,” says Masters. "Instead of exiting the credit business, we decided to remodel our credit business entirely, away from an originate-and-hold-to-maturity model and toward an underwrite-repackage-and-distribute model.”

The company met the goal of 50 percent risk reduction 18 months ahead of schedule. And a substantial portion of that reduction was achieved through the use of credit derivatives. Masters notes that about $40 billion of Morgan's $123 billion in notional outstanding at the end of the second quarter of 1999 is a result of its own use of the products.

In October, Moody's Investors Service told Morgan that, in light of the risk reduction, it was comfortable with Morgan repurchasing up to $3 billion in common stock over the next 18 months in a stock repurchase program. Moody's reaffirmed Morgan's credit rating and lauded the change to Morgan's credit model.

Masters notes that JP Morgan is also adept at integrating credit derivatives with other types of structured finance. Last December, it pulled off what is believed to be the biggest credit derivative deal ever—a $13 billion BISTRO transaction that involves a three-year second-loss credit swap that synthetically securitizes a client's $13 billion pool of asset-backed securities. "It's hard to point to any single factor that explains our success this year,” she says. "All of those factors have been in play.”

A multifaceted bank scores points for its integrated approach.

There are plenty of dealers that can write a no-frills, vanilla currency derivative cheaply. But when a multinational corporate needs to understand the full range of its currency exposures and devise an appropriate risk management strategy, no derivatives chop house can top Citibank/Salomon Smith Barney's smorgasbord of products.

The key to the firm's success in the currency markets, says Fred Chapey, global head of derivatives marketing and structuring, is integration. "The approach we take with clients is multifaceted,” he says. "We aren't as much product-oriented as we are risk management strategy-oriented. Currency is core to our risk management dialogue, which is linked with all the other businesses within the firm. I don't think there's any competitor that comes close to our overall capabilities, both in strategy and execution.”

Clearly the advent of the euro has been the biggest event in the currency markets in a long time. But while the euro was supposed to simplify currency risk management, Citibank believes the euro has made the kinds of services it provides even more necessary. The concentration of risk, Citibank believes, makes the currency question more difficult—and more necessary—to understand.

"Historically,” says Paul Deards, cohead of derivatives capital markets in the United States, "there were a plethora of European currencies, and a typical U.S. corporation had small sets of assets in most currencies in Europe. If you were a U.S. corporation looking to modify your debt portfolio, you ended up with relatively small amounts of Deutsche mark debt, peseta debt and French franc debt. Now, because one currency funds the entirety of your European assets, absent the sterling, you can intelligently do large, cost-effective capital markets and derivative transactions to modify a portfolio.”

This development, coupled with a steadily declining euro vs. the dollar, has sent clients running into the arms of Citibank. "Most of our clients,” says Deards, "are interested in using our analytics to answer one question: How should I reposition my debt portfolio with a view to better match the funding of my global asset base and its cash flow? We've had a lot of focus on that throughout the year.”

Another development that's helped Citibank this year has been the impending implementation of Financial Accounting Standard 133, which is expected to wreak havoc on the balance sheets of multinationals—particularly those that use long-dated derivative transactions to create synthetic nondollar debt. Citibank has been visiting clients and mine-sweeping their balance sheets for months. The firm's holistic, integrated approach to currency risk management has helped put clients at ease.

"For a long time,” says Lynn Feintech, cohead of derivatives capital markets in the United States, "we've taken an approach that looks at the overarching risk the firm is facing. Then we design solutions that encompass a variety of transactions done across asset classes. This leads to extremely focused advice and execution, and the strategic currency discussion is quite core to that process.”

A top commercial bank goes with the flow.

Chase was voted top overall derivatives dealer this year, and the company's interest rate derivatives capability was a big reason why. Only a handful of companies, however, contended seriously for the interest rate award. What set Chase above the rest?

In a word, says Rob Standing, head of global trading in Europe, Chase's success in interest rate products boils down to bigness. "To be a top derivatives house, you have to be one of the top banks in the world,” he says. "The advantage is that as your portfolio grows bigger, you have more ability to put various types of risks together—you get more natural hedging from the different products and you're not required to spend as much money managing and hedging that portfolio. The more you hit a critical mass in a product area, the more natural risk hedging you get done as part of the business.”

But bigness alone does not a top derivatives house make. Chase cites its intransigence in the face of global market volatility over the last few years as central to its success. "In times of difficulty and crisis, counterparties know that Chase always has traders looking to take and manage risks on their behalf,” says Standing. "That's been proven over the last three years—both in August 1998 and the autumn of 1997. Chase has always been there with risk management tools when the markets needed them the most. People have remembered that Chase has always maintained its commitment to its product base, even when others have had periods of being less committed.”

The changeover to the euro helped the bank as well. Standing says Chase has risen to the top three interest rate dealers in Euroland—and this elevated status in the new currency has helped business around the world. "The euro is a G-3 currency, and having strength in a G-3 is very important as part of a derivatives business. The fact that a U.S. institution has broken into the top ranks of this new market is a sign of Chase's commitment to the derivatives business globally. That presence has helped us build up not only our euro derivatives business but our general capital markets presence in Europe.”

Experience, size and broad product coverage keep Morgan Stanley Dean Witter ahead of the pack.

When Morgan Stanley merged with Dean Witter in 1997, the new company's equity capabilities grabbed all the headlines. But Morgan Stanely also brought to the marriage a boatload of expertise in the equity derivatives markets, where it had been active since the 1970s. In the intervening quarter-century, while derivatives groups at other firms have come and gone like flavors of the month, Morgan Stanley has steadfastly stuck to its original focus.

"While people talk about being a global organization,” says Tom Clark, head of product management in the firm's equity derivatives group, "we really have proven that we've set the standard for building a global infrastructure and global coordination. We've invested heavily in technology to make ourselves as efficient as possible, and we deliver on all of the services we promise our clients.”

Of course, Morgan Stanley's impressive cash capabilities create tremendous synergy with the equity derivatives team. Being market-makers in virtually all U.S. equities gives the firm a decided advantage over rivals in pricing derivatives, and Morgan Stanley's merger with Dean Witter only adds to the firm's cash business. And it's not a one-way street: Morgan Stanley's derivatives traders have been known to enter the cash markets to help the firm's cash clients as well.

But Morgan's sheer breadth of product coverage is perhaps its most impressive attribute. The company's modest goals: to be first or second in every one of its product groups, which include a top-flight futures business, a stock and index option business, a portfolio trading function, financing businesses engaged in stock lending, prime brokerage and swaps. In addition, an exchange-traded fund business—including products such as WEBS, OPALS and other vehicles—gives clients easy access to markets.

"What differentiates us,” says Clark, "is our ability to deliver cross-border flow capability to clients. We've also put a great deal of emphasis on research and providing good money-making ideas for our clients. We're very creative in the way we approach the markets, we have a tremendous amount of flow, and that flow helps us to be creative in helping clients.”

Another way to differentiate Morgan from its rivals, he says, is the company's market discipline—which has been tested severely in the last few years. "We try to be consistent in how we deal with clients, in good times and bad. We've put a great deal of emphasis on risk management, both technology and oversight, so that when disruptions happen, we can step up and maintain our consistency with our customer base. Those volatile periods have not hurt us—in fact, they've helped us in building a rapport with our customers.”

There's no disputing Goldman's role as king of the derivatives research universe.

Most derivatives dealers gear their research efforts toward the development of new products, which they hope to pitch impressively to end-users. But end-users, for their part, recognize this as a fact of life, and often discount the research and analysis that dealers attach to their products, or supplement it with consultant or other third-party research.

In our survey last August, we asked our readers to identify the top firms in equity, fixed-income and foreign exchange derivatives research. Not surprisingly, the results were a bit sketchy. The responses in the fixed-income and foreign exchange categories, in fact, were so few as to be statistically insignificant. Players in these dealer-heavy markets typically don't ask other firms to hold their hands as they jump into the breach.

But equity derivatives research was a different story, where Goldman Sachs prevailed by a wide margin. Why the strong showing? Goldman has built a strong niche business providing customized equity research to clients structuring deals of their own. "Our philosophy is to help clients answer questions,” says Joanne Hill, managing director in equity derivative research at Goldman Sachs. "We devote a lot of time to helping clients develop products. If they have to write a report about the risk of synthetic equity or talk about it at a client meeting, we give them statistics to help them make their points. We act as a third party providing information about derivatives that they can use with their clients.”

Goldman is also known for its published equity derivatives research, which often is so compelling that it finds its way into the pages of this magazine. Goldman's biggest and most avid readers are plan sponsors and overlay managers, hedge funds and other buy-siders. "The published research is aimed at users of both listed and over-the-counter markets, to give them the day-to-day information they need—not just trade ideas but also the various dimensions of risk management,” says Hill. "It's based on pricing, volume of trading, volatility and so on. We always keep in mind that derivatives are not ends in themselves—they're tools in a broader strategy.”

Among Goldman's must-reads in 1999: "The Dynamics of Tracking Error,” which looks at the impact of return measurement periods on tracking error; and "The Y2K Liquidity Trap: Hedging Strategies and Lessons From the 1999 Transition to the Euro,” which showed that a general buildup in cash balances toward year end can be followed by rapid and sharp upward price moves.

"You have to make derivatives research meaningful to people doing different things,” says Hill. "For many of our clients, equity derivatives are only one of the many things they do.”

Best Overall		Runner-up
USA	Morgan Stanley Dean Witter	USA	Goldman Sachs
Euroland (including the UK)	Deutsche Bank	Euroland (including the UK)	Morgan Stanley Dean Witter
ASIA	Goldman Sachs	ASIA	Morgan Stanley Dean Witter

The technology-sector juggernaut kept rolling in 1999, kicking up innovation in the derivatives markets.

There can be little doubt that the story of 1999 in the equity markets was the extraordinary success of the technology sector—and in particular Internet stocks. While the Standard & Poor's 100 improved its value by 50 percent in 1999, the Nasdaq 100 rallied by 85 percent—far outpacing the broader indices, which were weighed down by just about everything else.

The task for most equity derivatives teams in 1999 was to market products and devise new ones to meet the demands of these runaway—and highly volatile—sectors. Derivatives dealers were up to the task, using innovative approaches at every turn. One strategy that came of age in 1999 was based on the return of a basket of technology stocks, where, in exchange for more risk, investors bought exposure to, say, the best two stocks out of a basket of 10.

The boom in Internet stocks also gave a shot in the arm to the convertible market—one of the oldest equity derivative products. A variation on the standard convert that enjoyed popularity in 1999 was a share issued by one company into which is embedded an option exercisable in the stock of another. In this way a firm can monetize the value of a stock held in a different company. Products designed to assist and hedge firms that are engaged in share repurchase programs, particularly accelerated share repurchase programs, continued to be popular.

But these were only some of the novel equity derivatives approaches taken by dealers last year. Predictably, Morgan Stanley Dean Witter, which garnered the top award in overall equity derivatives, dominated in several regions as well, prevailing in the United States and finishing as runner up in Euroland (including the United Kingdom) and Asia. The company's broad strategy mix and huge retail base set it a cut above contenders in the States.

Deutsche Bank, with a fairly large customer base of its own, topped the Euroland category, while Goldman Sachs—long recognized as a top player in the Far East—triumphed in Asia.

Best Overall		Runner-up
North America	Chase	North America	Citigroup
Euroland	Deutsche Bank	Euroland	Chase
United Kingdom	Barclays Capital	United Kingdom	Deutsche Bank
ASIA	JP Morgan	ASIA	Chase

North American players had swaps fever, while the euro conversion and the Asian hangover dominated foreign markets.

The last year of the 20th century saw the dollar interest rate swap market finally come of age. For years it has been perceived as an arcane and little-understood area of the financial markets. But in the high summer of 1999 it was difficult to talk to any Wall Street professional without hearing the words "swap spreads,” or to pick up any financial newspaper without running into lengthy pieces on the subject.

At the end of year, 10-year swap spreads were trading at around 83 basis points over the 10-year Treasury bond—only about 6 basis points wider than they had been in January. But in August, 10-year spreads had traded at 117 basis points after widening 12 basis points in a 24-hour period.

The biggest reason for this period of intense volatility: far more market participants began to use interest rate swaps in far more ways than ever before. Underwriters were placing a tremendous volume of debt, and turned to the swaps market rather than an increasingly unreliable Treasury market to hedge inventory, putting upward pressure on spreads. Swaps became more closely integrated with other product areas, and they began to be seen by agency, mortgage and corporate bond traders as a leading market indicator. Chase and Citigroup, both well-integrated global players, capitalized on their massive infrastructures and ended the year as the top players in North America.

The launch of the euro last January created a new interest rate swap market that quickly rivaled the dollar market in terms of volume. There was tremendous issuance in the new currency, and a significant amount of this was swapped to floating euros against Euribor, which quickly established itself as the premier floating rate index. The launch of the euro understandably gave a tremendous fillip to the German banks—particularly Deutsche Bank, which is clearly the market leader in the new currency. But Chase held its own in Euroland interest rate products as well.

Meanwhile, sterling swaps traded increasingly skittishly, being deprived of liquidity by the new currency. The sterling swaps curve was inverted for the entire year, making spread plays on either greater or lesser inversion the most popular speculative trade among dealers. Barclays Capital and Deutsche Bank—which had already moved all its trading desks to London—were the best at navigating through these choppy waters.

Asian markets were still in the doldrums, but the Japanese economy began to revive in 1999. With this, liquidity in yen swaps began to improve as well, aided by the sudden revival of the yen bond market for overseas borrowers at the end of the year. JP Morgan and Chase, both longtime players in Asia, topped our readers' lists this year.

Best Overall		Runner-up
US dollar/ EURO	Deutsche Bank	US dollar/ EURO	Citibank/Salomon Smith Barney
US dollar/ STERLING	Barclays Capital	US dollar/ STERLING	NatWest
ASIAN currencies	Citibank/Salomon Smith Barney	ASIAN currencies	Bank of America

U.S. corporates were largely priced out of the euro foreign exchange swap markets, but the sterling and yen markets picked up the slack.

The biggest story of the year was undoubtedly the launch of the euro and the enormous volume of bond issuance in the new currency. During the first few weeks of the year, issuance averaged close to 20 billion euros, and it sometimes surpassed that of the dollar market. Even the most gung-ho of euro proponents had not expected this to happen so quickly.

Nonetheless, the value of the euro declined steadily throughout 1999, from $1.17 in January to near parity by year's end. The strength of the U.S. economy put inexorable pressure on other currencies, while it was claimed by some that the euro was overvalued from the beginning. At the same time, indigenous obstacles to the creation of a true pan-European market have proved intractable.

With the abolition of 11 domestic currencies and their absorption into one new one, the possibilities of currency swap arbitrage were understandably greatly diminished. And the increase in volume in euro interest rate swaps did not compensate for this decline. Moreover, there was very little cross-currency swapping out of euros; like the dollar market, those euro-bonds that were swapped went into floating euros.

This trend was exacerbated by the basis swap costs of swapping from euros to a different currency. American borrowers wishing to take advantage of the new euro market faced a basis swap cost of about 3 basis points at five years, deterring some U.S. names from issuing in euros. Deutsche Bank was eager to help those that did, however, quickly asserting itself as the premier liquidity provider in U.S. dollar/euro products, with Citibank/Salomon Smith Barney finishing a strong second.

The inversion of the sterling yield curve and the shortage of gilts made the long end an attractive place to issue for many borrowers, especially toward the end of the year. Most swap-driven bonds were taken to floating sterling, but some ended up in euros. Paradoxically, this made liquidity in long-dated sterling swaps often better than it was further down the curve. Barclays Capital and NatWest, big U.K. clearers with retail client bases, were in the best position to take advantage of this development.

In Asia, demand for overseas issuers picked up in Japan late in the year, and a number of American names issued large yen-denominated global bonds and swapped back to dollars. Citibank/Salomon Smith Barney and Bank of America proved to be the top houses for the task.