Loan-only credit default swap traders have been meeting with representatives from the International Swaps and Derivatives Association every Wednesday to discuss LCDX, a loan index, expected to launch next quarter. The most important developments from last week's meeting is that the traders will wait until the index launches before they begin to think about using a cash settlement feature for single-name trades.
Cash settlement has been a large issue of discussion throughout the single-name LCDS discussions and now during the LCDX discussions. The single-name product is currently physically settled, while the index product is expected to be cash settled (CIN, 6/9, 7/24).
The meeting also followed up on an earlier discussion about the use of a cash settlement protocol, now used for credit events in the bond CDS world, for LCDX. During an Oct. 30 "training session," as dubbed by Kimberly Summe, ISDA general counsel, about 30-35 individuals attended a meeting at JPMorgan, with another 20 or so on the phone, to familiarize loan traders with how the bond settlement protocol has worked to date. ISDA and the dealers discussed existing CDS protocols and the method used to determine how to cash settle trades and how to derive a price following a credit event.
"If we want to build a product to settle by way of auction, we need to make sure the people trading that product feel comfortable with that," Summe said.