The Royal Bank of Scotland is considering developing a sterling credit-default swap index. The firm discussed the need for the index at a meeting with U.K. buyside officials last week and is expected to make a decision this month. Miles Hunt, a member of the RBS principal finance and repackaging team in London who is involved in the initiative, declined to comment on discussions.
An official involved in the consultation said talks about the need, purpose and possible structure of an index were at an early stage. Another official said RBS would look to structure an index because it has strong links to U.K. fund managers, the investors who would use the index. Feedback from these clients will likely determine whether or not the firm proceeds. Details of a possible index structure could not be determined, but market officials said it would likely resemble the European iTraxx indices, which comprises both European and U.K. names.
European traders said there was sufficient demand from investors and liquidity in the sterling CDS market to support an index. One trader at a European house said an index would reduce currency volatility for sterling investors. "For investors which have sterling assets that don't match the European benchmark, there is a risk translating between currencies," said one trader at a European house. "An index would allow more transparency and create a benchmark which is beneficial generally," said another trader, adding it would complement rather than compete against the iTraxx indices.
David Mark, ceo of the International Index Company, which runs the European credit derivative indices, said several U.K. firms have investigated a sterling CDS index in the past six months but he had seen nothing concrete from any house, including RBS. One trading official said possible houses include Barclays Capital and HSBC. Kerry Kennedy, spokeswoman for Barclays Capital, could not determine this by press time and Neil Brazil, spokesman for HSBC, did not return messages. Mark also noted there would be difficulty in deciding what names to include in an index if it comprised CDS referenced only to U.K. names. "How do you define rules about what constitutes a U.K. name?" he questioned.
