A slowdown in secured loan credit-default swap trading over the past month looks set to be over after credit derivatives giant JPMorgan has started trading its own book. Officials say the entry has opened up prices and will inject even more liquidity with the imminent finalization of standard U.S. documents.
The market for secured-loan CDS, also called leveraged-loan CDS or LCDS, saw solid liquidity earlier this year after firms including credit mammoth Deutsche Bank ignited trading (DW, 1/27). Volumes, however, have stagnated over the past month, said a London-based broker, because of the lack of new dealers and industry associations treading water on documents. "Things haven't continued to grow as quickly as I thought," agreed a senior dealer.
Despite this, Ben Graves, corporate quantitative researcher at JPMorgan in New York, noted in a report his firm is comfortable with LCDS now that customized transactions on nonstandard documents have been replaced with orthodox contracts. Last week, the firm saw multiple trades each day on more than 50 names, he noted.
An estimated USD4 billion in LCDS has been traded over the past year, by firms including Dresdner Kleinwort Wasserstein, Merrill Lynch, Goldman Sachs and Morgan Stanley, which has been a major market driver. The International Swaps and Derivatives Association and the Loan Syndications and Trading Association are expected to sign off on a U.S. confirm in the coming weeks while across the Atlantic dealers are still finalizing a European contract, according to officials.
Both buy- and sell-siders say LCDS is a major breakthrough and will attract lenders, total-return funds, structured credit vehicles and investors and capital structure investors. Long/short capital structure trades across LCDS and CDS can be used to exploit relative-value opportunities while reducing exposure to default, reducing or eliminating negative carry and reducing mark-to-market exposure, noted Graves.
