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Indices: ERMBX adds more volatility

Anticipation of the much-discussed but now postponed launch of the European residential mortgage-backed securities index (ERMBX) is behind violent swings in spread levels on single-name credit default swaps on RMBS tranches. Markit, ERMBX’s owner, announced that the index’s debut has been delayed because of market volatility. That volatility, in fact, has been caused by buyers of protection on single-name CDS referencing prime RMBS AAAs, say market participants.

The ERMBX.UK, which is designed to reference synthetic UK prime RMBS, has been under discussion for a while, and some dealers have been preparing to make a market in the product by buying protection on single-name RMBS CDSs. If the ERMBX was launched in order to make a market with the large macro funds that wouldn’t want to do single-name trades, dealers needed to be axed. Through buying protection on the underlying names at the moment when or if the index launches, these trading desks can sell protection on the index to a hedge fund that wishes to buy protection on the UK consumer, for example.

"At the moment this activity has caused a great deal of volatility," says William Davies, director and senior RMBS and consumer ABS analyst at Deutsche Bank in London.

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