Preferred pick-up

Preferred credit default swaps have been trumpeted by some dealers as the next big thing. The one-year-old market's growth has been steady rather than spectacular, but that now looks set to change.

Dealers are always on the look-out for new sources of revenue growth in the credit derivatives market. So it is no surprise that as more banks, insurance companies and real estate investment trusts in the US issue preferred securities – instruments that combine debt and equity-like characteristics – a market for preferred credit default swaps (CDSs) has also emerged.

Single-name contracts began trading in February 2005, and 60 reference entities are now actively traded. Lehman Brothers is the