The launch of CMBX, a planned index of AAA-rated commercial mortgage-backed securities that will be used to facilitate credit-default swaps, has been pushed back until February. The index is being put together by CDS IndexCo and Markit Group, a consortium of investment banks, and had been expected to be launched in November or December but took longer than expected to structure (DW, 8/5).
Credit-default swaps are expected to become much more widely used once the index is launched and could become more common than total-return swaps, a traditional hedge for the market. The CMBS market is now starting to see long/short trades, which were not available before CMBS, and trades that reference a specific bond. "We are no longer limited by the size of classes and can instead use the index," said Geoffrey Hawkins, executive director at Dividend Capital Investments. "It has been exciting to develop and also tells a lot about where the market sees the most risk."
The CDS market for CMBS is only a little more than one year old, with the first trades completed in late 2004. Even now, with limited use from CMBS investors and dealers, increased volatility is being seen and volatility is expected to increase further. David Lehman, a v.p. at Goldman Sachs, noted the CDS basis--the difference between CDS and CMBS cash spreads--has become more rich for AAA to A rated securities. "The BBB to B CDS basis has been very volatile," he added.
As a result of the introduction of CDS, there are more crossover buyers looking into the sector. Hawkins noted that in December, a group of nontraditional players came in and took positions in the BBB market. "Are we opening a Pandora's box?" he asked. But Scott Stelzer, executive v.p. at Morgan Stanley, said he believes that the introduction of CDS will provide much more efficiency. "We have been trading at an inefficient level," he said.
The development of the CDS market has benefited from the introduction of standardized confirms that were recently published by the International Swaps and Derivatives Association. "This has eased concerns because everyone is now trading off of the same documents and credit events," Lehman said.
