The credit derivatives market underwent a fundamental structural change this year with the launch of two credit-default swap indices, TRAC-X, founded by JPMorgan and Morgan Stanley, and more recently iBoxx, which was brought to market by a consortium of 11 dealers. Market makers pointed to the huge liquidity boost the indices brought the market, with most dealers trading at least one of the instruments. Disputes between the rival consortia behind the indicies, however, have split trading volumes with survival of both indices unlikely over the long-term, they said.
The launch of the credit derivatives indices has been a boon for risk management, noted Krishna Memani, global credit strategist at Credit Suisse First Boston in New York. Instead of only functioning as theoretical tools, as many indices have traditionally done, the products have allowed new types of hedges to be executed. In addition to being a closer proxy these trades are often less expensive.
Credit derivative indices have also had a tremendous impact on structured products, added Sivan Mahadevan, head of credit derivatives and structured credit research at Morgan Stanley in New York. Tradable tranches of default swaps launched off the indices have created a two-way market, allowing investors to take short positions on the structures for the first time, he noted. This has made it easier to balance supply and demand.
JPMorgan and Morgan Stanley launched TRAC-X in Europe and the U.S. in the summer. The index suffered in the months after the launch, however, from allegations of unfair trading practices and concerns over licensing (DW, 8/3). In October iBoxx launched in the U.S. in response to these concerns. TRAC-X has since passed the management and administration of its indices to Dow Jones to ensure independence.
The next frontier for indices is futures, with both TRAC-X and iBoxx busily working toward that goal. Dow Jones is leaving the product development up to licensed exchanges while iBoxx is setting up two consultative groups, one for dealers and one for investors, to come up with the ideal future (DW, 12/14).
