Goldman Sachs is marketing a suite of standardized property derivatives on U.S. housing indices to institutional and retail clients and has enlisted dealer support to make markets in the instruments, due to launch within the next few months.
Most of the major dealers across the Street, including Bear Stearns,Morgan Stanley,Deutsche Bank,JPMorgan andMerrill Lynch, have committed to trading the contracts and providing two-way pricing to help get the fledgling property derivatives market off the ground.
The group of dealers plans initially to make markets in forwards, total-return swaps and credit-default swaps. It will likely expand into more complex second-generation property-linked derivatives as the market matures. Options and funded notes linked to the contracts could also develop down the line, according to a dealer involved in the project.
In addition to the forward and TRS contracts, dealers also intend to introduce a property contract that will mimic a credit-default swap. The credit event would likely be defined as a fall in the index price below a specified strike. It could not be determined if any such instruments have been priced.
Goldman last month licensed the exclusive use of the S&P/Case-Shiller Home Price Indices from Standard & Poor's. In March, Credit Suisse began pricing derivatives tied to the National Council of Real Investment Fiduciaries Index of commercial properties. Market participants noted that Goldman played up its exclusive right to the index while at the same time asking rival firms to help make a market. The new effort hopes to expand beyond those existing products, which thus far have been used mostly for portfolio hedging rather than expressing property views directly and have seen little trading volume due to the lack of secondary market for the contracts.
Officials at Goldman declined comment.
