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Derivatives

J.P. Morgan Halts Index To Revise Rules

J.P. Morgan has suspended its European credit-default swap index and is in the process of retooling it to better represent the most-liquid names in the European market. "It's on pause for now and our goal is to come up with a means of identifying a liquid credit-default market using a rules-based approach," said Lee McGinty, index strategist in London. He explained the index was launched about two years ago to include the largest 100 European companies, investment-grade and below, based on their outstanding equity. But McGinty said that became problematic as companies, such as Anglo American, increased their equity issuance, in Anglo's case via a London listing, but avoided the debt markets. This affected their position in the index but not in default-swap liquidity. "The rules we had led to completely illiquid names that in some cases were not possible to price," he said.

Although McGinty acknowledged buyside involvement in credit derivatives is still at a nascent stage, he said it is increasing and should continue to do so. "If investors are using credit derivatives as investments, they are going to need an index to tell how well they are doing," he noted.

McGinty said J.P. Morgan will recalculate the index once it has developed a new methodology that will produce the most liquid credit-default swap names. "We are considering the amount of outstanding debt in the bond and syndication markets. In [cash-based, credit indices] we look at how often bonds are quoted and traded, which is often a good proxy for liquidity," he said. McGinty said the new index should be finished by the summer.

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