Credit options players in Europe are split over proposed changes to expiry dates, which have been touted as a key to modernizing a market seen as too labor-intensive. Growth has idled this year because of the combination of wide bid/offer spreads and a lack of liquidity (DW, 3/8). Different trading set-ups, however, mean some want expiry to come in line with equity option expiries, while others are fighting to keep expiry in line with the credit index roll dates.
At the first formal discussion between market makers earlier this month, an idea to move expiries to the third Friday of each month, instead of the 20th day, was only supported by a handful of the 15 houses in attendance, including Citigroup. Other shops, such as Morgan Stanley want to leave the system as is.
Traders in favor appear to be those jointly responsible for options and credit index trading, officials said. Art Lu, trader at Citi, said labor-intensive expiry processes could be eased if they didn't coincide with quarterly credit-default swap contract rolls and bi-annual credit indices rolls. "We want to spread it over several days rather than do it all on one," he said.
Other dealers fear the change would drive away new entrants. "I am less keen on the idea," said Matt Piper, executive director and credit trader at Morgan Stanley in London, who trades credit options alongside convertible bonds. Piper noted clients who could use options on indices to hedge roll risk will want expiries to match. "Rather than make administration easier to cope with, let's increase potential for market liquidity," he added. Ahsan Nazeer, exotic credit trader at The Royal Bank of Scotland, agreed client feedback is a key to a decision. "They [investors] don't want to be left with an opening of a few days with no way to hedge exposure," he noted.
Simon Christofides, trader at Goldman Sachs in London, said he is happy for the current system to remain if a tradable credit spread fixing calculation is implemented at 4 p.m. on the 20th of each month, instead of 11 a.m., for each of the three major indices. This will create a reference point from which options can be automatically exercised. "There is simply too much administrative risk when exercising manually and this will stagnate the growth of the market," he said.
Further forums will be held by summer.
