Dealers working on a tradable index comprised of credit default swaps referencing loans have canceled a meeting planned for today and decided to do another go-around of emails. The group has signed off on a number of names and it looks like the index could have 100, but some said there may only be liquidity in 70 names and are not sure how prudent it is to have a name in the index if no one is making markets in it.
The group has also decided the index will be cash settled, but how it gets done will be the big question and has not yet been decided. Cash settlement differs from the single-name LCDS product, which is physically settled. The decision was made because of the smaller amounts being exchanged on the single names.
Separately, the working group has been trying to make inroads with the ratings agencies regarding a form-approved confirm for LCDS to be used in collateralized loan obligations so individual managers do not need ratings agency approval for each transaction. The process has been stalemated as the ratings agencies have not been able to sit down with the dealers and discuss the product.
JPMorgan research estimated synthetic capacity is somewhere between $13-26 billion for the U.S. CLO market. The bank cites S&P/LCD research that calculated that close to 90% of U.S. CLOs allow for synthetic allocations, generally between 10-20%, but that can vary by individual CLOs.
SunGard Data Systems, Goodyear Tire & Rubber and Allied Waste are three of the more popular LCDS names that are currently in U.S. CLOs, according to JPM and Intex Solutions. One LCDS trader said he has done a lot of trades with CLO managers, but more before the contract was standardized by the International Swaps and Derivatives Association in June (6/12), which could because the form has not received the ratings agencies' approval.