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Capital Markets

Credit derivatives: Stunning debut for LCDX

LCDX success gives the green light for the growth of loan derivative products.

Trading volume on the new LCDX, the North American index of loan CDS contracts, hit $11 billion on the first day of its launch. This figure represents a highly successful start for the new index, and exposes the enormous potential of loan derivative products. "On every front, the launch was a big success," says Lisa Watkinson, head of structured credit business development at Lehman Brothers. "It brings to the forefront issues we’ve thought long and hard about as regards structuring a product for both buyers and sellers."

The issues Watkinson refers to are those that continue to hamper the development of the LCDS product, particularly in Europe. As with any relatively new product, the lack of precedent means that there is often confusion as to how to treat it. For example, traditional protection buyers want to view the product as a synthetic loan, whereas protection sellers would rather see it as a CDS reference entity. The European marketplace has faced this problem for more than a year, and many are waiting for finalized documentation before trading on LevX, the European equivalent of the LCDX.

Another issue in the European market is the pivotal debate surrounding whether to concentrate on a cancellable product or a non-cancellable one.

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