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Dealers Split Over Need To Bolster ABX

25 May 2006

ABX, the index of asset-backed credit-default swaps launched earlier this year, is at the center of a struggle between dealers who think flows are too low and others who think it is ticking along fine.

ABX, the index of asset-backed credit-default swaps launched earlier this year, is at the center of a struggle between dealers who think flows are too low and others who think it is ticking along fine. The debate is a prickly one because ABX was seen as a way for firms to quickly and efficiently buy or sell asset-backed risk, but some players say it hasn't met those expectations.

In the index bear camp, there is a desire to tweak the composition to encourage more trading. But in the bull camp, that is seen as a way to add needless complexity and operations costs.

The index has proved popular with hedge funds and dealers, but it hasn't taken off with real money investors (DW, 2/17). "The people who play the index are more people who just want to trade," said one trader. But, even as a trading tool for sophisticated players, the ABX is proving less successful than many had hoped. Although volatility across markets and last week's roll boosted trading volumes, some traders estimate average volumes prior to the pickup were stuck around USD100 million a week while others pin the figure closer to USD1 billion.

The main reason those dealers say is that it still includes only 20 names--compared with 100 in corporate indices--despite a relative abundance of available names. This makes it both unrepresentative of the market and difficult to tranche, traders said. "People are doing customized trades instead," explained one trader last week, even as volumes picked up.

An inter-dealer consortium working under the auspices of Markit Group has debated adding names to the ABX at July's roll. But the idea was taken off the table for the time being after a majority of players voted against it.

Officials involved in discussions said there is an informal agreement to revisit the discussions ahead of next January's roll and to continue looking for ways to tranche the existing index, held to be key to its development.

"Tranching inherently fosters more trading volume," said one trader who favored increasing names. "It may not cause the ABX to surpass single-name trading, but would help it become a competing product." Another option to be discussed is combining different vintages of the index after its roll.

25 May 2006