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Derivatives

Standardized Tranches May Steal ABX Users

The launch of standardized tranches on the synthetic ABX index are expected to prompt participants to switch from buying protection on the whole index to placing more customized views.

The launch of standardized tranches on the synthetic ABX index are expected to prompt participants to switch from buying protection on the whole index to placing more customized views.

Macro hedge funds in the past year have bought large amounts of protection on the index as an easy way to profit if the U.S. housing market has a hard landing. "The index tranches might take away the bid for CDS currently coming from hedge funds," said Vincent Fiorillo, managing director at TCW Asset Management, speaking at Opal Financial Group's CDO summit two weeks ago.

A dealer, however, said the tranches will also attract new investors to the index. "Some people think that net/net the tranches will steal trading volumes from the ABX itself but mostly it will bring in new and different investors," he explained.

The standardized tranches are slated to launch in January.

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