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Derivatives

Firms Plot Index To Kick Start CDS Of ABS

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Credit derivative houses in Europe are looking to develop an index for credit-default swaps referenced to asset-backed securities to build on the current craze for CDS of ABS.

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Credit derivative houses in Europe are looking to develop an index for credit-default swaps referenced to asset-backed securities to build on the current craze for CDS of ABS. Derivative officials and the International Index Company, which runs the main European credit derivative index, in a series of meetings and conference calls have been focusing on the type of ABS that should be referenced, as well as the need, purpose and possible structure of an index.

The move could bring more players to the market and boost the number of synthetic ABS transactions, said Marcus Schüler, managing director of integrated credit marketing at Deutsche Bank in London, who has been involved in the talks. "In any asset class there is room for synthetic products and index products," he said. "It's a bit of an exploration project."

David Mark, ceo of the International Index Company in Frankfurt, said, "Sometimes you have to have an index to kick start growth." He added the index would be a natural progression of the indices it already provides. One official at a London-based firm speculated a likely structure would be indices of AAA, AA, A and BBB-rated underlying, each including roughly 40 names subject to periodic updates. "It would work in the same way as the corporate iTraxx index," he said.

A number of cash and synthetic ABS traders, however, questioned the relevance of a synthetic ABS index in what is still an illiquid market. "ABS CDS is still in its early stages," said one trader. "You need to crawl before you can run and we are still crawling." Another trader said because the number of synthetic ABS traded is small, trades would require a lot of credit analysis to put a viable price on a tranched transaction.

Mark responded that an index would increase liquidity. "Four years ago people thought the CDS iTraxx indices were premature, but that brought new players into the market and now trading volumes are huge," he said.

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