An index of credit-default swaps on residential mortgages, launching early next year, could be a big fillip to firms looking to structure baskets of synthetic asset-backed securities. The ABX.HE Index will consist of a series of five sub-indices, each consisting of 20-25 CDS referenced to U.S. residential mortgage-backed securities.
The index will offer a standardized way of buying or selling the underlying market, officials said. The current synthetic ABS market consists mostly of CDS on single names. To express a view on the underlying market, or on a basket of single-name CDS on ABS, investors must handpick individual names from a wide variety of assets. Synthetic collateralized debt obligations offer exposure to baskets of CDS on ABS, but they are selected and packaged by individual managers.
If the index generates enough volumes, dealers see it as path to a more efficient, liquid and transparent market. The index provides investors with a more efficient tool to take positions on the underlying market, said Brian McManus, head of CDO research at Wachovia in Charlotte. "It's a little early to tell how liquid and how useful a tool it will be," said another official. "We clearly are going to be making markets in it. It's going to be good for people trying to use it as a hedge and who don't have the time or want to drill into security selection."
"Right now, there is a large menu of securities traded synthetically, but not much liquidity in any one security," an official said, noting the AAA through BBB minus sub-indices will allow traders to focus on smaller pools of assets and investors to hedge and speculate on those pools. "The hope is that the index will provide more liquidity on both sides--for buyers and sellers of protection--and that there will be more volume because of that."
The names in the indices will roll every six months, and investors will be able to access daily levels of where the index is trading. The index is being developed by CDX IndexCo., a consortium of 16 investment banks, and administered by Markit. Ben Logan, v.p. at Markit in New York, declined comment.
