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The race to take market share in the fast-growing area of credit default swap indices is gathering pace.
At the beginning of last month, European player iBoxx unveiled plans for iBoxx Diversified, using 100 equally referenced entities from 31 Moody’s industry sectors. This will bring up to three the number of iBoxx credit-linked note indices it offers as it will join the existing iBoxx 100 and Corporate Notes, launched in February.
It also announced four new market makers – SG, Citigroup, Dresdner Kleinwort Wasserstein and Barclays Capital – to join founders ABN Amro and Deutsche Bank.
Global rival Trac-X, the joint venture between Morgan Stanley and JPMorgan, then announced the arrival of Barclays Capital and Nomura as market makers, joining Morgan Stanley, JPMorgan, UBS, Credit Suisse First Boston and BNP Paribas.
Lisa Watkinson, global product manager for flow CDS and credit indexation at Morgan Stanley, says Trac-X also rolled out another new index last month – Trac-X Australia. This joins Trac-X Europe, made up of 100 names in the European CDS market; Trac-X North America, 100 names in the US CDS market; Trac-X High Yield, a pool of 100 high-yield names; Trac-X Japan, which references 50 investment-grade Japanese credits; and Trac-X Emerging markets, based on emerging market sovereign credits.
While iBoxx is strong in Europe, Trac-X is the outright leader at this point. JPMorgan’s Jeci indices and Morgan Stanley’s Tracers were already the market-leading products before the two banks merged their products in July. Trac-X involves more market makers and Watkinson says there should be many more soon as the banks signed up to Tracers and Jeci (Tracers alone had 13) sign up to the new Trac-X intellectual property.
With a global suite of indices, Trac-X also has the more diverse geographic and product offering, whereas the iBoxx credit-linked note indices are all euro-denominated and have, to date, focused on the European CDS market. However in September iBoxx announced its intention to expand coverage to a family of US dollar credit indices. “Our objective from the start has been the creation of a complete family of benchmark products for the European credit index market – offered by a comprehensive multi market-maker platform to ensure depth of liquidity,” says Niall Cameron, global head of credit markets at ABN Amro. “An extension of the product range into other currencies and markets would be a logical progression.”
A market standard However, for the moment iBoxx remains exclusively European and Watkinson does not see this as a threat.
“Generically, there is always room for others as long as there is not duplication,” she says. “They have introduced things that look close to duplication and unfortunately the lack of standardization has been one of the key hurdles for getting this sort of product off the ground in the general credit markets. We’ll see how it goes but we feel people are beginning to embrace Trac-X as the market standard.”
Although both the iBoxx suite of indices and the Morgan Stanley and JPMorgan joint product are still very new, some observers are inclined to agree with her, based on Trac-X’s current popularity. Watkinson argues that there has been $100 billion of business across the Trac-X suite of indices since the joint offering was launched.
“It remains to be seen whether market share will equalize between the two, but our understanding is that the majority of volume is done on Trac-X,” says a European credit portfolio strategist. “Since it was launched in the summer, we have also seen it behaving as a benchmark – it reacts the most to changes in investor sentiment.”
But Andrew Whittle, European head of credit derivatives at Barclays Capital, the only market maker to sign up to both products, says he cannot see why they cannot coexist, particularly since they service different needs and bank clients use both.
“If you look at the composition of credits in each index, there are also quite a lot of differences, even though the spreads are roughly the same,” he says. “iBoxx also works on the basis of the outstanding notional amounts of the bonds, while Trac-X gives equal weighting to the perceived 100 most liquid credit default swaps. So they both have their uses.”
Adequate demand Demand certainly seems to be increasing rapidly enough to accommodate both groups of products. Watkinson says that open interest in the respective names of the Trac-X North American constituents has seen an 88% increase in volumes year on year.
Because these products are liquid, cheap and an easy way to gain exposure to CDS, they now appeal to more and more users, including issuers, pension funds, insurance companies and hedge funds.
Watkinson says that Trac-X notes are offered in funded and unfunded form, which makes it easier for European fund managers to use them. “CIOs from many different money managers are asking us to help them get involved with these products,” she says.
Trac-X also plans to expand the family of indices. “For example, we’re looking at doing different maturities such as three years and 10 years, away from the standard five-year notes, as we are hearing demand for that,” says Watkinson. “We may also see sector-based indices in North America.” Trac-X Asia is scheduled for launch this month and a second Trac-X North America is also planned.
Both iBoxx and Trac-X say they will continue the drive to add market makers.
