Dealers headed back to Lehman Brothers last Wednesday to continue discussions about a tradable index comprised of credit default swaps referencing loans. The hour-long meeting centered on how the product, most likely to be dubbed "LCDX," would be structured, when it would be launched and what rules would govern it.
Across the board, participants are leaning toward cash settlement because of the smaller amounts being exchanged and the ease of cash settlement. But the single-name loan-only credit default swaps product is physically settled (CIN, 5/22). "It looks like cash, but how we do cash settlement is still the big question," one trader said. "That's still up in the air."
The index is expected to consist of 100 names and sub-indices are not going to be considered at this point in the discussions. Although there are a number of names participants are certain will be part of the portfolio, none have been selected and a second trader said it is too soon in the process to pick individual names.
The group is now looking at a September/October launch date, although initially there was talk the index could be up and running in August. The second trader said that the group needs adequate time to put the index together. A date for a third meeting has not yet been set.
Separately, Bank of America began trading LCDS last week with Tim FitzPatrick, v.p., as the bank's LCDS trader. An internal transfer from the high-grade desk a few months ago, FitzPatrick reports to Ed Hamilton, head of par loan sales and trading. The bank joins Lehman Brothers, Credit Suisse, Morgan Stanley, Deutsche Bank, JPMorgan and Goldman Sachs, which are all trading the product.
Also last week, the Loan Syndications and Trading Association finalized the physical settlement rider to the LCDS confirm. The International Swaps and Derivatives Association published the confirm June 8 (6/12). An exposure draft of the physical settlement rider was issued in May in conjunction with a market advisory endorsing the market standard indemnity contained within the physical settlement rider (5/29). Even without final approval, dealers began trading on documents put together by the working group, updating their forms each time a new version became available.