The European synthetic leveraged loan index set to launch next Monday may not have much of an impact at first. That's because many would-be investors are apparently holding off pending new documents that would eliminate concerns contracts will unwind in the face of loan restructuring.
"There will be some lift in volumes," said one official about the impact of the iTraxx LevX. "But I think it's just going to be a precursor to the introduction of a non-cancellable product." Indeed, an International Swaps and Derivatives Association working group met Wednesday and officials involved in the discussions hope to finalize non-cancellable documentation by the first LevX roll in March.
A shortage of participants in the index means both that the underlying LCDS market, which has been slow to take off in Europe, will remain illiquid and that next generation products such as index tranches and options are unlikely to develop. Correlation traders are divided on the feasibility of creating these products on a cancelable structure. "You'd always have names dropping out," said one official. "You just can't do it." Others said anything is possible, but the effort depends on client demand.
"Right now, the people who are supporting the index feel strongly this is the way to go," said Tobias Sproehnle, iTraxx developer at International Index Co. in Frankfurt. Six dealers currently trade on the cancelable docs and three others are tipped to start trading. "I know there are parties with the opposite view. But dealers supporting the index feel this will lead to success, and these are the guys who talk to the clients every day." Sproehnle added that there should not be any problems switching to new documentation at a future roll.
