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Peering through murky waters

The drive to make the murky world of credit derivatives more transparent to end-users is taking a leap forward with the launch of two developments linked to RiskMetrics Group.

The financial analytics and technology firm, spun off from JP Morgan in 1998, has launched a credit pricing assessment tool called CreditGrades backed by Deutsche Bank, Goldman Sachs and JPMorgan Chase, which dominate trading in credit derivatives.

RiskMetrics also announced that it would incorporate data from CreditTrade, the electronic broker and information provider in credit derivatives, into its DataMetrics system, making it easier for risk managers to integrate credit default swap prices.

The CreditGrades development brings equity and credit information together as a way of giving indicative price information and shows the sensitivity of the leading banks in the fast-growing credit derivatives markets to complaints about opacity.

A CreditGrade is an indicative five-year credit spread calculated from equity price history, balance sheet information and a standard set of assumptions and is designed to enable more informed credit decisions. Its promoters say it provides a tool for investors to understand how the equity and credit markets are pricing credit risk and can serve as an indicative price for an illiquid credit.

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