Fitch Ratings, Moody's Investors Service and Standard & Poor's are planning to allow investment vehicles set up by banks and fund managers, known as structured investment vehicles or SIVs, to sell credit-default swaps for the first time. SIVs can only invest in instruments approved by the rating agencies. The rating agencies are taking this initiative now because liquidity in credit-default swaps is improving and because capital adequacy, settlement and documentation issues relevant to SIVs have been ironed out, according to Serj Walia, associate director in structured finance at S&P in London. The development is significant because some USD80 billion is invested in SIVs.
Scott Eaton, European head of integrated credit trading at Deutsche Bank in London, said, "this could be very big. It could be a great thing for the product."
Quandrant Capital, which runs two SIVs with a total of approximately USD5 billion in assets, plans to sell credit protection once the move is sanctioned by the rating agencies, said Dimitris Papadopoulos, structured product manager in London. He predicted credit default exposure could represent up to 25% of its assets.
Vas Kosseris, senior director in European structured finance at Fitch Ratings in London, said the agency is looking at opening the door to SIVs because it was asked to by clients. Officials at Moody's confirmed the move.
SIVs use their AAA rating to purchase high-grade debt, typically asset-backed securities, financed by the issue of commercial paper, medium-term notes and capital notes. Their high credit rating allows them to take advantage of credit and maturity arbitrage opportunities.
