Salomon creates derivatives trading unit

NEW YORK -- Salomon Inc. said yesterday it created a new AAA-rated subsidiary to trade complex financial instruments called derivatives.

Salomon officials first announced plans to create the new unit, Salomon-Swapco Inc., last October, but couldn't start trading until the credit rating was issued. Swapco will trade derivatives like swaps, which represent payments based on underlying interest rates, currencies, indexes or commodities.

Moody's Investors Service Inc., Fitch Investors Service Inc. and Standard & Poor's Corp. gave Swapco AAA ratings yesterday. The top rating was important because many derivatives have long maturities. Corporations don't like to trade swaps with firms that have lower credit ratings, because lengthy maturities increase their exposure to the risk of a further credit downgrading or even a default.

Salomon is the second Wall Street firm to set up a separate derivatives trading unit. Merrill Lynch & Co. set up its subsidiary in November 1991. Goldman, Sachs & Co. also formed a derivatives unit in 1992, but the Goldman unit traded only derivatives based on Japanese equities.

Swapco will have a minimum of $175 million of equity capital. Salomon will have to put up more cash as Swapco's credit exposure grows.