Market participants are divided on the impact of the European synthetic leveraged loan index, which is set to launch next month on an updated set of controversial documents. Six dealers already trading single-name loan credit-default swaps on those documents are promoting the iTraxx LevX as a means of jump starting the nascent European LCDS market. But most dealers and investors said they will abstain until new documentation is introduced.
The buzz at IMN's European CDOs & Credit Derivatives Summit in Amsterdam last week was that the development of European LCDS depends on a move toward U.S.-style documentation, which panelists were hoping will happen by the first LevX roll early next year. An inter-dealer and International Swaps and Derivatives Association working group met Wednesday to discuss the transition to non-cancelable documentation and streamlining physical settlement.
The provisional European docs traded by Morgan Stanley, Dresdner Kleinwort, Deutsche Bank, Lehman Brothers, Barclays Capital and most recently Credit Suisse are cancelable and reference loan issues. Opponents of this structure argue it favors protection sellers, compounding the natural imbalance. Robert Lepone, head of European high yield and loan trading at Morgan Stanley in London, said this targets traditional European investors, which are more buy-and-hold hedgers than speculative players, but added everyone agrees a non-cancelable product would boost participation.
"As the market evolves, we need to plan for the future," he said of the discussions. "Once we get a non-cancelable doc, the synthetic market will begin. That's when we'll have an explosion." In the meantime, he said, the LevX--especially once it is tranched--will bolster LCDS. A more liquid market will increase transparency and entice more investors.
"The index will do a lot for this market," said an official at a European house. "It will make the market available to broader investor base. The first version will be on a contract that is less than satisfactory to most of the market. It will be almost like one of the original high-yield CDS indices. But, Rome wasn't built in a day."
