Loan-only credit default swap dealers, and a few index specialists, met last Thursday at Lehman Brothers' offices to discuss a tradable index comprised of CDS referencing loans. The approximately hour-and-a-half meeting did not lead to any decisions, but rather the participants used the time to discuss how the product should be structured, whether there should be one index or also sub indices, how many names should be included no specific names were discussed and whether it should be cash or physically settled.
About 25 people participated, either in person or on the phone, with all major groups represented including, Lehman, Credit Suisse, Morgan Stanley, JPMorgan and Bank of America. Participants will meet again in the coming weeks, although a date for the second meeting has not been set. It is anticipated the index will be ready to launch in late summer, early September.
Whether the index is cash settled or physically settled is expected to be a big discussion in the future. One argument for physical settlement is that other CDX indices are settled that way and that the single-name LCDS product is also settled that way, which would reduce the basis risk between the two. On the opposite side is the view that given the size, dealers would rather cash settle because of the smaller amounts being exchanged and the ease cash settlement brings. In terms of what names will be involved, participants are going to submit names to Markit, which will put together an aggregate list to be voted on.
The Loan Syndications and Trade Association's Trade Practices and Forms Committee approved the market advisor regarding market standard indemnity, which is part of the settlement rider, last Thursday, said Elliot Ganz, executive v.p. and general counsel. It was approved by the loan-CDS working group on Monday. An exposure draft will be published on the LSTA Web site on Monday and barring any significant comments, it will become final in 30 days. However Ganz explained that the association expects to continue looking at it and revising it. He also anticipates being involved in the loan index product.
The settlement rider goes hand-in-hand with the confirm the International Swaps and Derivatives Association is putting together. The confirm was distributed to ISDA members May 15 and a conference call is scheduled for today.Kimberly Summe, general counsel, said the association is still aiming to publish the week of June 1, but that timeframe will be dependent upon member reaction during the call.