Some traditional credit fund managers are holding off entering the loan credit-default swap market because of uncertainty about how they would handle physical delivery of the underlying asset. "If there was a credit event, we are not equipped to take [the] underlying loan," said one bond and CDS fund manager in London, citing his firm's lack of knowledge of the loan market.
There is no market-wide consensus among European dealers on standard documents and points including the extent of cash settlement options are still being thrashed out (DW, 14/7). One market maker said loan CDS appeals to such a vast array of investors that the reluctance of credit managers to join the fray will not dint the growth of the market.
Separately, Moody's Investors Service this week published an analysis of the International Swaps and Derivatives Associations' template for U.S. syndicated loan CDS, which clarifies how the agency would rate LCDS transactions. Market officials said this is an important step toward cash investors becoming comfortable with the synthetic instrument.
