The data and valuations company plans new indices, dreams of a global credit derivative index
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"The acquisitions will take the index companies to the next level. It’s not just about acquiring them, but bringing the two together and globalizing them around best practices"
Niall Cameron, Markit |
Markit Group has completed the purchase of International Index Company (IIC) and plans to wrap up a deal bringing CDS IndexCo under its control by the year-end. The consolidation of the two index providers behind the prolifically used credit derivative indices, which have revolutionized that market, will result in the launch of new indices related to credit derivatives as well as other asset classes.
Once both deals are complete, Markit will own IIC’s iTraxx Europe and iTraxx Asia credit derivatives indices as well as the iBoxx bond indices. They will also gain control of CDS IndexCo’s CDX credit derivative indices and the synthetic structured finance and loan indices ABX.HE, CMBX and LCDX. Already the indices’ administrator, Markit will be able to streamline their operation once combined.
"The acquisitions will take the index companies to the next level," says Niall Cameron, Markit’s executive vice-president. "It’s not just about acquiring them, but bringing the two together and globalizing them around best practices. Both index companies were consortiums owned by banks. Markit allows for a greater degree of focus."
Heading Markit’s newly created index division is director Stephan Flagel, who joined Markit in June from Barclays Capital where he had been COO of global research. He reports to Cameron, Markit’s head of equities and indices.
"There are two big advantages of these acquisitions," says Flagel. "One is the global integration of the indices. And from a capability point of view, in a lot of ways growth was unsustainable without a dramatic change in infrastructure."
Indeed, new product creation is at the heart of this acquisition, with the first new index launches tentatively scheduled for early in 2008. Flagel would not say which indices would be the first to launch.
"Our aim is to be premier providers of indices in the over-the-counter space. We will be aggressive in product development in regions not currently being serviced," says Flagel. "We aim to bring transparency to opaque markets."
He says Markit will not limit itself to cash and synthetic credit and bond indices. The firm is looking at interest rates, commodities, foreign exchange, emerging markets and, potentially, property.
"The first new indexes will take time," says Flagel. "We’re just starting the pipeline now. A few new indices will come in January and more in the second quarter next year."
In addition, Markit will seek to develop capability in the bespoke credit derivatives index market, as well as potentially retool some existing but less successful products.
Global credit index aspirations
"One of our dreams is setting up a global credit index," says Cameron, declining to elaborate on whether this project was already in the pipeline. Separately, Markit plans to expand IIC’s range of total return CDS indices to CDX and will offer bespoke total return indices on CDX and iTraxx. Currently, IIC already publishes long and short iTraxx total return indices, which are calculated by Markit.
Markit does not plan, however, to try to gain market share by launching indices to challenge incumbents unless a new product could replace an ineffective offering currently on the market. "We’re not looking to reinvent the wheel," says Cameron.
Discussions between Markit and the consortia that owned IIC and CDX IndexCo concerning their purchase had been in the works for some time, revealed Cameron. Serious negotiations aimed at completing a deal were started about six months ago, he added. No one would comment on how much Markit paid for the index companies.
IIC was owned by ABN Amro, Barclays Capital, BNP Paribas, Deutsche Bank, Deutsche Börse, Dresdner Kleinwort, Goldman Sachs, HSBC, JPMorgan, Morgan Stanley and UBS. CDS IndexCo is owned by ABN Amro, Bank of America, Barclays Capital, Bear Stearns, BNP Paribas, Citi, Credit Suisse, Deutsche Bank, Goldman Sachs, HSBC, JPMorgan, Lehman Brothers, Merrill Lynch, Morgan Stanley, UBS and Wachovia.
"From a bank perspective, we’re positive about both transactions," says Fergus Lynch, global head of index development at Deutsche Bank in London and chairman of IIC. "This will be a powerful catalyst for further growth of the credit derivative indices and will unlock the index Garden of Eden for banks."
The indices’ names will remain unchanged but will incorporate the Markit name as a suffix. The IIC indices will be known as Markit iTraxx and Markit iBoxx. This branding strategy may be revisited in the future and any new products will be named Markit indices – although the current brand value of the indices is very high. "One of the things we’ve bought here is brand," says Cameron.
Finally, the combination of the index companies will be able to deliver cost-savings for those who use the products.
"We haven’t set the new pricing policies yet," says Cameron. "We will be able to bundle products together and offer them at a competitive rate."