Loan-only credit default swap dealers at an afternoon session discussed the trading environment six months in and what could be expected for the product that participants said ranged in volume per week from $500 million to one estimate of up to $700-750 million.
Jeff Kushner, head of trade execution at BlueMountain Capital Management, said he has seen five types of trades in the past few months, with the three most popular being: a bank hedging its risk by buying protection; traders going long the revolver and buying protection against it; and traders doing capital structure arbitrage. He said he has seen two-way markets on 150 names and has seen two-way markets with more than two dealers in 100 names. Tim Milton, the LCDS trader at Goldman Sachs, said that 75% of his trades are with hedge funds.
Up next is a loan index product, LCDX, which has been in the works since the spring. Doug Grossberg, LCDS trader at Credit Suisse, said it will most likely have 100 names and he anticipates that over time, sub-baskets will be introduced. The index is expected to launch in the first quarter of 2007. Lawyers and dealers held a conference call Oct. 11 to discuss the product and the decision was made to push the launch to next year (CIN, 10/16). Some dealers had initially hoped it would launch in September/October (6/23).
Rob Alloway, LCDS trader and head of European CDS trading at Lehman Brothers, said the European contract is under negotiations. Carl Winkworth, a partner at Richards Kibbe & Orbe in London, said an ISDA call was held Wednesday morning in London to discuss the European contract. Dealers in Europe have agreed on a callable document, but that document has not been approved by the International Swaps and Derivatives Association. One dealer said the group is still looking at a non-callable document, which is the next step. A European loan index has been waiting for a standard document from the dealers before launching. At an earlier session, Lisa Watkinson, senior v.p. at Lehman Brothers, said that the launch of the European loan index is coming and it will be called LEVX and be a part of ITraxx. The dealer said it should be launching imminently and the group is just waiting for marketing materials to be finalized.