Officials at several major derivatives houses are protesting a requirement to seek permission from JPMorgan and Morgan Stanley to structure trades on the TRAC-X index. They say the rule, required under licensing agreements, could stifle liquidity and innovation related to TRAC-X and prompt a move toward trades structured on arbitrary baskets.
TRAC-X combines the credit derivative indices of Morgan Stanley and JPMorgan, which formerly operated independently, and comprises 100 of the most liquid credit-default swaps.
"Unlike other index providers like Standard & Poor's, TRAC-X is run by a competitor and there is no way in hell I would present proprietary information to a competitor," said one credit professional. To avoid approaching TRAC-X with trade information firms could, for example, easily create portfolios that differed to the TRAC-X 100 by one or two names, he noted.
Not all firms agree, however. Alex Reyfman, U.S. credit derivatives strategist at Goldman Sachs in New York, said that the most important lesson from the Synthetic TRACERS experience is that the market wants standardized products quoted by more than one or two dealers. For this reason it is unlikely that liquid, portfolio-based derivative products will develop outside the TRAC-X platform, he said.
Jim Hill, executive director in structured credit at Morgan Stanley in New York, defended the licensing rule noting that any trademark requires permission to be replicated and it is also a normal demand for an index. The rule is designed to ensure the standardization of documentation with, for example, each trade having the same credit events and start dates. This in turn aids the liquidity of the index, he said. The demand is not a new one, having also been required for trades made through TRACERs, he added. TRACERs was the Morgan Stanley operated index merged into TRAC-X earlier this year.
When licensing agreements with TRACERs were forged the index was still new and in a way experimental, with players not seriously considering structuring derivatives referencing the product, explained one official. As tranched trades and options begin to be traded more interesting structures are now being considered and the requirement that competitors seek permission has become more serious, he added.
TRAC-X officials had also been asking that other dealers give volume numbers for trades made through the index. This demand, however, was dropped after meeting resistance from broker/dealers, Hill said.
