European credit derivatives dealers have voted for the newly merged credit derivatives index to use rankings of trading volumes to select the index constituents. Two weeks ago around 20 dealers were offered four alternative methodologies to select which credits are included in the Dow Jones iTraxx, the merged TRAC-X and iBoxx credit derivatives indices. The dealers are thought to have opted for rankings over actual volumes because of an unwillingness to disclose their volumes even if it is to an independent third party.
The drawback with a ranking over actual volumes is that a small regional bank will have equal say in what names are chosen as Deutsche Bank and JPMorgan, the two giants of the credit derivatives market. The small players' volumes could also distort the index as they may only trade one type of credit, such as Italian corporates. A dealers' poll, a method used in the U.S. credit indices, was the last choice. One credit trader said this was because banks want to ensure that the names would be reasonably predictable so they could pre-hedge the names.
