Credit derivatives index provider iBoxx is preparing to join the already crowded Asian index market with the launch of an Asia-Pacific product. However, unlike the two existing multi-dealer indexes in the region, iBoxx is planning to launch a single, region-wide credit default swaps index.
“The structure will be superior to anything that’s out there and it will cover the Asian market in a way no-one else is,” says Fergus Lynch, managing director, global head of index development at Deutsche Bank in London. Following preliminary discussions with market-makers in the region, the concept of a region-wide index has “proven to be quite popular among banks,” he adds.
The index will comprise an overall Asia-Pacific basket with sub-sectors for Japan, Asia ex-Japan and Australia, says Lynch. The basket components are still being finalised, while no date has been set for release of the index.
iBoxx was created last October by a consortium of dealers, led by Deutsche Bank, ABN Amro and Citigroup, that were unhappy with the way the Trac-x indexes, originally created by JP Morgan Chase and Morgan Stanley, were being managed. Liquidity in Europe and the US has since been split between the two indexes, and market participants have been pushing for iBoxx and Trac-x to merge.
Trac-x, now managed by Dow Jones Indexes, currently has three existing credit derivatives indexes in the region, one each in Australia, Asia ex-Japan and Japan. Meanwhile, the CJ 50 Index, launched last February by BNP Paribas, tracks the 50 most liquid credit default swaps in Japan.
Some dealers, such as BNP Paribas, don’t see the arrival of iBoxx as a problem: “Everyone is welcome,” says Emmanuel Ramambason, head of credit trading and derivatives for Asia-Pacific at BNP Paribas in Tokyo. “Of course, it will dilute liquidity and hopefully in due course we hope to see the different indexes in Japan possibly converging and allowing a major index to remain.”
While iBoxx is looking to create a region-wide index, BNP Paribas has opted to focus on its Japanese product, adds Ramambason. “CJ 50 has a dominant position that we want to keep in Japan and we want to keep its local flavour.” An Asia ex-Japan index may eventually be on the cards for the French bank, but “that’s not a priority”, says Ramambason.
Other dealers in Asia, however, aren’t looking at the arrival of iBoxx very positively. “If iBoxx comes [to Asia], it would dry up liquidity in the short-term,” notes one dealer in Tokyo.
With Deutsche Bank and Citigroup involved, the new index would have the backing of two regional heavyweights, both major liquidity providers in Asia’s credit markets.
However, the success of the index will very much depend on the level of support provided to users in the Asian time zone, says Adam Josephson, a consultant with Celent Communications in Boston. “An index doesn’t automatically generate liquidity. What’s arguably most important is what kind of support iBoxx is providing on the ground,” he says. (see Credit Indexes article on page S14).