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Capital Markets

Synthetics: Great expectations

Dealers are hoping a new-look contract will finally get the European leveraged loan credit default swap market off the ground.

When leveraged loan credit default swaps (LCDS) were unveiled almost two years ago they were greeted with optimism. The instruments were hailed as a boon for loan book hedgers as well as a way of giving more investors a way to trade in the loan market. Although these early promises have come to fruition in the US version of the product, the European market has lagged behind.

Despite dealers’ best efforts, two years after launch the European market for single-name LCDS lacks the liquidity and volumes seen in the US. The US market has topped $52 billion in volumes but in Europe volumes are languishing at the €15 billion to €20 billion mark. Some dealers admit that even that number might be a bit optimistic.

The European leveraged loan index, the LevX, is also underperforming. The US loan index, the LCDX, which only appeared in June, is already having more success than the LevX, which launched late last year. Trading on LevX has been described as moribund, posting about €10 billion in trades.

"In the European contract there is only a small handful of dealers who have been making a market in it and for the most part they have slowed down their markets," says Leander Christofides, head of loan trading at JPMorgan in London.

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