iBoxx, the provider of multiple-contributor euro and sterling fixed-income indices, and RiskMetrics Group, the risk analytics firm, last month announced an agreement to create and publish a family of US dollar fixed-income prices and indices.
David Mark, CEO of iBoxx, says that the move to provide market participants with high-quality, independent, and accessible bond pricing and indices for the US market is the next step toward a series of global investment-grade indices.
“Our experience in Europe demonstrates that the market is keen to adopt neutral transparent pricing sources for indexation, valuation, and risk measurement. In addition, iBoxx data supports a range of derivative- and fund-based products in a rapidly growing market segment,” he says.
The new indices will cover the US investment-grade market and will be the first US dollar bond indices constructed in accordance with iBoxx’s principles of selected multiple-contributor pricing, third-party quality controls, neutrality, and open access for all fixed-income market participants.
The new index family will complement iBoxx’s existing European indices with sub-indices by issuer type (including treasury, agency, ABS/MBS, and corporate debt), maturity, rating, and sector.
As an independent organization, iBoxx determines the rules for its indices. The participating investment banks will submit bond prices to RiskMetrics, where they are subjected to a series of rigorous quality controls before being consolidated, published, and used for index construction.
The consolidated bond prices, the new indices, and a range of analytical values will be made available to the market under the iBoxx brand in the first quarter of 2004.
Delays dog Basel II
At a consultation meeting in Geneva last month, the Basel II Committee announced a further delay of six months to finalize the Basel II Capital Accord, which is now earmarked for mid-2004.
“You could just feel the tension in the room with the Basel II committee,” says Laurie Mayer, group head of Basel II and credit systems co-ordination at Royal Bank of Scotland.
The key areas to address now during this period, she adds, include the re-calibration to unexpected loss, redefinition of tier 1 and tier 2 capital, securitization, and credit mitigation. Also, some degree of quantitative impact study may be required following these changes, which will take place some time after mid-2004.
In Europe, where the EU Commission was aiming to propose Cad 3 (Capital Adequacy Directive) to the EU parliament in the second quarter of 2004, the delay in finalizing Basel II will likely cause knock-on delays in the proposal of Cad 3 until the beginning of the fourth quarter of 2004.
Also, the delay will mean that the Committee will have to work with a new European Parliament – parliamentary elections are set for mid-2004 – and the new countries set to accede to the Union.
But Mayer believes that the delay will not be significant as most of the initiatives, such as better systems and controls, news analysis, and reporting infrastructures will have been implemented prior to Basel II.
“Infrastructure investments of this scope and complexity take years to plan and complete,” she says. “The Basel Committee realizes this and has therefore encouraged banks to carry on despite the delay, and because in the end, much of what is required makes good risk management sense.”
AMore technology news...• FinancialCAD has updated its financial instrument modeling application for Microsoft Excel, Fincad XL version 7. Enhancements include tools for building better pricing curves, expanded model coverage for credit derivatives, exotic interest rate derivatives, and option models for FX, equity and commodities. FinancialCAD Analytics is also available as a math library via Fincad Developer.
• Algorithmics has upgraded Algo Suite to support the data consolidation, computation, and reporting requirements of Basel II functionality as well as support for Linux and distributed computing systems. The risk management firm has also updated Algo Risk to give fixed-income managers and traders improved risk measurement functions to allow them to isolate and quantify interest rate risks.
• Banco Espírito Santo has become the first Portuguese dealer to join BondVision, the system which gives investors access to bond liquidity on MTS, the electronic market for European fixed income. BES is the third dealer to join BondVision in the past three months, bringing the total number of dealers to 27.
• Reuters customers are now able to access electronic trading platform JPMorgan eXpress. The move will allow JPMorgan to reach authorized Reuters clients, who have access to inventory and tradable real-time prices on more than 3,700 fixed-income securities in 10 currencies. Clients will be able to trade directly with JPMorgan from their Reuters terminals.
• Dresdner Kleinwort Wasserstein has implemented a real-time trade capture system for its credit derivatives operations worldwide. The system has been developed by Tamesis, supplier of new-generation risk management and trading solutions. Tamesis Risk Informer will provide real-time risk, profit and loss, and dynamic trade capture for DrKW's credit derivatives traders.
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