"Since everyone is already comfortable pricing options using Fenics, it's a natural extension to use it as a platform for real-time trading.” —Mike Gooch

The question on everybody's mind, however, is "Would the Fed let them get away with it or would it insist that restructuring construed a credit event, as logic might dictate?”

The first inkling about the Fed's response occurred on November 16, at a credit derivatives conference sponsored by Derivatives Strategy and Chase Securities.

Tom Boemio, a senior supervisory analyst at the Federal Reserve, dropped a thinly veiled warning to the predominantly credit-derivatives trader crowd: Don't even think about removing restructuring provisions from credit derivative contracts!

"I have heard about possible efforts to take restructuring out of the ISDA documentation for credit derivatives, " he said. "And I just wanted to say that if restructuring is taken out of credit derivatives, then my colleagues and I unanimously believe that people will just ignore credit derivatives for the purposes of capital relief, period.”

In other words, if restructuring provisions are removed, the regulators won't continue to tolerate the use of credit derivatives to extend credit lines and offset regulatory capital requirements.

Speaking later, Boemio explained: "I just don't see how excluding restructuring as a possible credit event means a credit derivatives contract can still constitute credit protection. And if there's no protection, there shouldn't be any capital relief.”

Conference attendees laughed Boemio down after he offered his impromptu comments, but it soon became clear that the humor was simply to hide the nerves.

"It sounds like the Fed is onto us about the restructuring thing,” said one credit derivatives trader over the lunch that followed. "I was really hoping we'd manage to keep that quiet.”

And that's exactly why Boemio raised the issue, he explained later. "The market should know we're onto this and we won't just let it slide. There are a lot of people in the regulatory community who are very concerned.”

"The industry wants to rewrite what constitutes a credit event just because some banks lost money on the Conseco deal,” Boemio explained. "But that's just not going to fly. If banks want to talk about ways to modify the payout on a credit derivative contract in the event of restructuring, then, fine, we're open to suggestions. But removing the provision altogether? Forget about it.” —William Rhode

It shouldn't be surprising, then, that GFInet Inc., the hybrid voice and on-line brokerage company, recently gobbled up Fenics Software Ltd., the London-based technology and options analytics developer. "Fenics is a brand name in foreign exchange options trading that already resides in more than 90 percent of banks worldwide,” says Mike Gooch, chairman and CEO of GFInet. "While GFI already has brokerage inroads with many of the larger money-center banks, Fenics' customer base expands those inroads to many smaller second-tier players. And since everyone is already comfortable pricing options using Fenics, it's a natural extension to use it as a platform for real-time trading.”

GFInet intends to combine Fenics' pricing and analytics with an on-line foreign exchange option trading platform, which is due to be launched early in the new year. The platform will offer easy, one-stop pricing, trading and trade reporting. GFInet also plans to extend and link Fenics to all existing and future GFInet markets such as electricity and credit derivatives.

GFInet's tactical move comes less than two months after bank consortium Volbroker.com launched its own on-line trading presence in foreign exchange options. It also comes after GFInet spent considerable time, effort and money trying to build its own analytical platform from scratch. "Much of that work will be saved and integrated with Fenics,” says Gooch, "but now with a much higher overall certainty of success.”

Fenics was built by Chase derivatives trader Peter Cyrus in the early 1980s as a front-office pricing tool. The company added risk and back-office functionalities through the early 1990s, before being bought by a group of new investors (formerly named I nventure Software) in 1995. Exotic options pricing and further risk management enhancements followed. When the ASP version of the platform, Fenics.com, was finally launched in July 2000, more than 1,400 trial subscribers signed up to use it within two weeks.

Fenics has long contemplated extending its product line into other markets, but it proved an elusive dream. GFInet's current plans to do so may be more difficult than the company hopes. "Fenics was always known as a fast options pricing system,” says a senior executive at a London-based risk management software company, "but its analytical capabilities were always secondary. It's been a niche player in one market, but that will not necessarily make it an acceptable pricing and analytical vehicle in other markets.”

Every lecture hall has a few wiseacres in the back annotating what the speaker is dishing up. Internet conferences, at least in theory, streamline the lecture-hall experience. They eliminate the traveling, the waiting, the phlegmy coughing of neighbors, and the slurping sounds coming from just over your shoulder.

On the tail of this Teutonic coffee klatsch, someone named Peter threw out a question to the group at large: "Nihongo hanseru hitotachi ga imasu ka?”

But they can't always keep the peace. At a recent on-line teleconference sponsored by ERisk.com (at the time, eRisks.com), the scheduled discussion about quantifying midmarket default risk faced stiff—if not overwhelming—competition from the rear-wall wisenheimers.

Here's how the conference worked. Attendees dialed an 800 number to hear what Eric Falkenstein, a vice president at Moody's Risk Management Services, had to say. The visuals took place on the web site. In the top-right corner of the screen was a static picture of Falkenstein. In the middle were colorful pie charts, questions for the audience and poll results. A chat box occupied the bottom of the screen, presumably for users to comment on the lecture and make queries. But while Falkenstein talked about ratios, ratings and models, the vox populi got uppity.

Ten minutes into the presentation, some of the phone lines went dead, and the chat box overheated. "I lost audio”
"where's eric”
"phone”
"REDIAL!”
"my god...THE CHAOS”
"Everybody without audio vote yes”
"how can validation occur when performance/testing crosses both long time horizons and various economic cycles”
"jump!!”
"I'm on hold with the music from the elevator”
"more muzak”
"Houston...we have a problem!”
"This conference is a bit wonky”
"I don't think Eric is monitoring the chatline right now”
"What does wonky mean?”

Eventually, ERisk righted its ship and most attendees redialed. The more diligent among them asked Falkenstein questions about why triple-A default rates were higher than single-As last year and whether he had any insight into emerging-market default experience.

But soon enough, the people ticker was overrun by men and women bent on figuring out if they once worked together in the same crib. The German-speaking contingent got particularly bold, turning the chat box into a heady stew of bilingual scribblings. Thorsten, Hans, Ronnie and Monika tried to figure out if they knew each other. Here's some of what they said (in translation):

Thorsten Does anybody speak German here?!
Monika Apparently, a lot of us do!
Thorsten Incredible. Where are you from?
Ronnie Thorsten, I work at Moody's!!
Hans Thorsten…Bluhm?
Thorsten In NYC for Commerzbank
Monika Thorsten, I think you know where I'm from!
Thorsten Monika, where?!
Hans Never mind, Thorsten. I was just wondering whether you're a former colleague of mine.
Monika London, but sometimes also in Frankfurt or New York!
Hans [to Thorsten] I think we once e-mailed about CR+
Thorsten Hans, I don't believe it! That was last year about GARP!
Hans Bingo! That was it! The world is an e-village

Monika Thorsten, I guess we don't really know each other. There must be two Thorstens in New York who have something to do with Commerzbank

Thorsten Hmmmm, Monika, I don't think so. I'm the only Thorsten here!

On the tail of this Teutonic coffee klatsch, someone named Peter threw out a question to the group at large: "Nihongo hanseru hitotachi ga imasu ka?” Perhaps in reply, Dev later said, "moo ichido kudasai.” Moments later, Monika was back in the saddle, telling JimT she had been to Indonesia a long time ago ("forgot most of it though!”). By this time, Thorsten had amended Hans' earlier pronouncement: "Die Welt scheint kein Dorf, sondern ein Kaff zu sein!” ["The world is not a village, but an even smaller neighborhood!”] An oblivious Falkenstein, meanwhile, continued his soliloquy.

At the end of the conference, a few people slavishly thanked Eric and ERisk for organizing the on-line powwow. Someone said he liked the web site logo. One determined soul asked for a translation of "that German Conversation between Hanz and Monika.” On-line conferences have their obvious advantages, but so far neither eRisks.com nor ERisk.com has met that particular challenge.