Securitization hedging: Indices set to deliver European ABS hedge tool
New cash and synthetic ABS indices will give European market participants the tools to express subtle directional views that have been the preserve of total-return funds and synthetic credit specialists.
By Joti Mangat
The securitization new-issue market might be enjoying record volumes but its secondary market has lagged behind the wider credit sector in having effective mechanisms for hedging. Three new platforms began to emerge in January, starting with the CDS Index Company/Markit-created ABX, an index of CDS on US ABS.
ABX comprises five indices of CDS on US sub-prime RMBS sorted by rating from Aaa to Baa3, each containing 20 reference entities. Fifteen market makers, both European and US, will contribute prices.
In addition, a dealer working group is developing a European CMBS index, again with CDS Index Co/Markit, that references cash instruments. The third product to be rolled out will be the International Index Company’s ABS50, another cash product, referencing the 50 most liquid ABS instruments across the European ABS space.
There are existing European ABS index offerings – Lehman Brothers’ floating-rate ABS index and the Deutsche Bank Index Quant (DBIQ) European AAA Floating Rate Securitized Bond Index – that already track the European cash market based on proprietary pricing. Nevertheless, developers of the new products argue that the next generation of indices will render both of these obsolete.