CDS Index - Markit
CDS IndexCo and Markit Launch Loan Credit Default Swap Index
Business Wire (press release) -
LCDX will start trading on May 22, 2007, and will trade based on the North American Loan Credit Default Swap (LCDS) contract.
US loan derivative index launch to spur liquidity
US loan derivative index launch to spur liquidity
May 21, 2007 04:00 PM Eastern Daylight Time
CDS IndexCo and Markit Launch Loan Credit Default Swap Index
LCDX, a Credit Derivative Index, Allows Investors to Go Long or Short U.S. Leveraged Loans
NEW YORK–(BUSINESS WIRE)–CDS IndexCo LLC (“CDS IndexCo”), a consortium of 16 investment banks licensed as market makers in the ABX, CDX and CMBX indices, and Markit Group Limited (“Markit”), the leading provider of independent data, portfolio valuations and OTC derivatives trade processing to the global financial markets, announced today the launch of LCDX, a credit default swap index referencing U.S. leveraged loans.
The index will provide investors with the ability to hedge or gain exposure to the leveraged loan market in a transparent, standardized and efficient manner. LCDX will start trading on May 22, 2007, and will trade based on the North American Loan Credit Default Swap (LCDS) contract.
LCDX comprises a basket of 100 credit default swaps referencing first-lien loans. Deliverable obligations will consist of first-lien loans as defined by Markit RED Loans in accordance with its Syndicated Secured List for North America. RED Loans confirms reference entities and the key identifying information for credit agreements, loan facilities and loan tranches.
As with the CDX and iTraxx credit derivative indices, the LCDX index will roll every six months. It will trade with a five-year coupon, and additional maturities will be added in due course. Only Failure to Pay and Bankruptcy will be treated as credit events.
Brad Levy, Managing Director, eBusiness Group at Goldman Sachs and acting Chairman of CDS IndexCo, said: “LCDX is the first widely supported Loan CDS index in North America, and its launch has been keenly anticipated by the marketplace. It will provide institutional investors with a unique tool for participating in the leveraged loan markets in an unfunded manner, and will boost the growth and liquidity of the nascent Loan CDS market.”
“Markit has worked closely with the loan dealer community to create an index that is truly tradeable and transparent,” commented Tom Price, Managing Director and Head of Loans and CDS at Markit. “We believe that LCDX will satisfy investor demand for access to U.S. leveraged loans through a liquid, synthetic product.”
Markit will act as administration, calculation, and marketing agent for LCDX, a remit which spans capturing daily price fixings; handling operations, marketing, and analytics; negotiating dealer and data licenses; and communicating information to the wider market.
The investment banks launching the index acting as market-makers are: Bank of America; Barclays Capital; Bear Stearns; BNP Paribas; Citigroup; Credit Suisse; Deutsche Bank; Goldman Sachs; JPMorgan; Lehman Brothers; Merrill Lynch; Morgan Stanley; and UBS.
For information on LCDX, see www.markit.com or contact:
CDS IndexCo Michael Mandelbaum Tel: +1 310 785-0810 Email: michael@mandelbaummorgan.com Markit Teresa Chick Tel: +44 20 7260 2094
Email: teresa.chick@markit.com
About CDS IndexCo
CDS IndexCo is a consortium of 16 investment banks which are licensed as market makers in the ABX, CMBX and CDX indices. The market makers include: ABN AMRO, Bank of America, Barclays Capital, Bear Stearns, BNP Paribas, Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, HSBC, JPMorgan, Lehman Brothers, Merrill Lynch, Morgan Stanley, UBS, and Wachovia.
About Markit
Markit Group Limited is the leading provider of independent data, portfolio valuations and OTC derivatives trade processing to the global financial and commodities markets. The company receives daily data contributions from over 80 dealing firms, and its services are used by almost 1,000 institutions to enhance trading operations, reduce risk and manage compliance.
For more information, see www.markit.com.
Contacts
CDS IndexCo
Michael Mandelbaum, 310-785-0810
michael@mandelbaummorgan.com
or
Markit
Teresa Chick, +44 20 7260 2094
teresa.chick@markit.com
U.S. loan derivative index launch to spur liquidity
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NEW YORK, May 21 (Reuters) - The fledgling loan derivative market will get a shot of adrenaline this week when the first U.S. index of loan derivatives is launched, which is expected to underpin the already rapid growth in trading the securities.
The index, the latest in a series of indexes that include derivative indexes based on senior unsecured corporate debt, sovereign debt and asset-backed securities, will launch on Tuesday and be based on 100 credit default swaps backed by corporate loans.
Credit default swaps (CDS) are insurance-like securities that protect against borrowers defaulting on their debt.
“I think it will have a significant impact in the market and will increase liquidity in single-name loan CDS,” said Jeremy Vogelmann, loan credit default swap trader at Barclays Capital in New York.
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“There are quite a number of strategies that people use to trade an index versus single names and versus other products that will allow it to grow considerably,” he said.
Volumes in credit default swaps have surged globally to $34.5 trillion, though the majority of the contracts are backed by senior unsecured corporate debt.
The LCDX index will be quoted by price and have a fixed coupon, similar to the derivative index based on high-yield corporate senior unsecured debt.
Traders expect the index moves will be correlated with that of the high-yield CDX index, though the degree of price moves would be less severe due to the loans’ seniority in corporate capital structure.
Loan default swap volumes grew 50 percent in April from the previous month, and U.S. volumes are estimated around $50 billion, said Brad Rogoff, a high-yield credit derivatives strategist at Lehman Brothers in New York. “Volumes are likely to at least double by year end, helped by the index,” he said. Continued…
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“Ahead of the index there were probably 75 names that were decently liquid in CDS, mainly auto companies and larger LBO-type names, and the launch of an index will help improve liquidity in the remaining names,” Rogoff said.
The index is also likely to be more active than the ABX index, which has been volatile in recent months on concerns about defaults by subprime mortgage borrowers.
“LCDX could be more liquid than ABX as the underlying on the ABX are mostly smaller deals, more complicated assets,” Rogoff said.
Hedge funds will likely be very involved in LCDX, as they are in most derivative products. The Collateralized Loan Obligation (CLO) market hasn’t had an efficient vehicle for hedging and this could very well provide that, Rogoff added.
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Trading in tranche deals, in which investors can take leveraged positions on the credits in the index, is also expected to be spurred on by the index launch.
“Tranches in LCDX will start trading shortly after the launch. Whether this acts to tighten spreads or make them wider is to be seen at this point,” Barclays’ Vogelmann said. “I think that in general there’s probably going to be good two-way flow.”
Sales of tranche trades on the indexes backed by corporate bonds have been cited as a factor that has kept the index spreads relatively tight.
“Buyers of protection may include banks that are hedging their loan portfolio and use the index as a macro hedge,” Vogelmann said.
“Protection sellers may include investors who are very active in the other CDX indexes, and may trade the LCDX versus the other indexes if they see relative richness of cheapness,” he added.
http://www.reuters.com/article/bondsNews/idUSN2131931220070521?pageNumber=2