Loan CDS index set for launch
By Paul J Davies and Gillian Tett
ft.com
Published: September 13 2006 21:09
The first indices to track the performance of derivatives based on tradeable high- yield loans are set to be launched in Europe and the US in a matter of weeks, marking another step forward in the fast-growing credit derivatives markets.
The European index, known as LevX, is expected to come first – although its launch date is drifting later than an original target of next Wednesday – in spite of the fact a number of large dealer banks will not support it.
Both indices will track movements in loan credit default swaps, or LCDSs, which offer a kind of insurance against non-payment of high-yield secured loans.
“We will be launching an LCDS index, under the brand LevX, soon in Europe,” said Robert Lepone, a managing director at Morgan Stanley, which is spearheading the development of a European index.
Other banks to support LevX include Dresdner Kleinwort, Lehman Brothers, Barclays Capital, Credit Suisse and Deutsche Bank.
However, development of LCDSs in Europe has suffered some controversy, leaving banks such as JPMorgan and Citigroup uninterested in co-operating in the new index and Goldman Sachs reviewing its stance.
The dispute has been over the form of LCDS contracts, with those pushed by Morgan Stanley and Dresdner Kleinwort differing in one important aspect from the standard that has developed in the US.
In Europe, once a particular loan to a company has been refinanced, the LCDS contract is then cancelled, with new contracts drawn up for new loans. In the US, the contract can remain open if there is a new loan that participants agree can be referenced by the LCDS.
The European contract is expected to become similar to the US one in the early months of an index, in part because of the way trading in the underlying loans is developing in Europe.
“What is the point of trading an index when the documentation will change after series one or two? It is just confusing for investors,” said one trader at a large dealer bank.
Meanwhile, the US index, known as LCDX, is set to be launched this autumn with the support of all dealer banks. Markit Group, a data supplier, will calculate both indices on behalf of the companies that run them – International Index Company in Europe and CDSIndex Co in the US.
Tom Price, director of loans and LCDSs at Markit, feels that the index will gravitate toward a US-style document.
“As the market importance of institutional investors grows, the need for a cancellable contract diminishes,” he said.
Copyright The Financial Times Limited 2006 |
