Eight investment banks in Europe are constructing an index that will allow them to buy and sell protection on commercial mortgages they hold on their balance sheets. Participants expect the index to be ready for launch by the fourth quarter. "The idea is to create a market similar to the one for corporate credit default swaps, but referencing commercial mortgage-backed securities," said Ron Miao, head of secondary trading for asset-backed securities at Citigroup in London. Citi is spearheading the initiative. The other banks involved are Barclays Capital, Credit Suisse First Boston, Deutsche Bank, Lehman Brothers, Merrill Lynch, Morgan Stanley and UBS. "The intention is for this group to grow," noted Miao.
The index's rules have not been finalized, but the group is leaning toward at least four categories of collateral--loan pools including single properties versus more granular pools, as well as ones denominated in euros versus sterling.
Legal issues, rather than the actual shape of the index, are slowing down its introduction. The index will be publicly owned and traded, with all the banks involved providing prices. This is in stark contrast to the one existing asset-backed index in Europe, which is offered by Lehman, where prices are provided by the Lehman secondary trading desk and Lehman alone monitors performance. Further, the Lehman index references specific bonds, rather than a hypothetical bond portfolio.