CDS futures: Exchange-traded contracts set to attract new client base
Plans by International Index Company (IIC) and Eurex to launch a CDS future have yet to resolve the question of how cash settlement will be achieved on reference entities that have defaulted. But once this problem has been solved, the initiative should open up the CDS market to investors that have so far been blocked from trading the OTC market.
“Once we have a futures contract on the CDS index some people currently trading OTC might migrate to trading futures, but I think it is more likely that this will open up new client bases,” says David Mark, chief executive officer at IIC. “There are many asset managers with pension fund clients who do not permit them to trade CDS but would if they were listed on a recognized futures exchange.”
The futures contracts will be written against IIC’s iTraxx Europe CDS Index, a static portfolio of 125 CDS on European entities that is rolled every six months. IIC chose to go with Eurex alone in order to keep things simple. “We didn’t want to split liquidity,” says Mark at IIC. “We could have held an auction process and got a number of exchanges involved. But I don’t know how many banks would be prepared to support an untested and untried product with three or four different contracts out there.”
|“I remain to be convinced that this is a retail market. How much retail business do you see in stock futures?”
David Mark, IIC
The hope is that a CDS future will increase liquidity and the number of participants in a market.