Finally, the banks behind Trac-x, iBoxx and the CJ 50 have announced they will merge into a single global family of credit default swap indexes. For the last year, dealers and investors alike have been pretty much unanimous in the belief that having more than one CDS index provider just doesn’t make sense. The decision to pull the products together is a victory for common sense, and will hopefully generate greater liquidity, greater transparency, and entice more new players into the index market.
While iBoxx had not actually launched an index in Asia before the merger announcement, a number of banks in the region had opted to sit on the sidelines, waiting for the iBoxx consortium to develop a regional index or for a global merger between the two groups. In fact, iBoxx was planning to launch a pan-Asian index earlier this year, but held off after the merger talks started. Now that all the major dealers are backing a single index, many of those banks waiting on the sidelines will feel more inclined to get involved.
There are still some issues to be decided, however. Portfolio composition and the rules for choosing which credits should be included in the combined index are still, for the most part, up in the air. In some respects, it could be easier to come up with a consensus in Asia than elsewhere in the world. While iBoxx had been working on an Asia ex-Japan index, Trac-x Asia is the only multi-dealer index traded at the moment. In Japan, there’s the CJ 50 Index and Trac-x Japan, which could make things a little trickier. iBoxx was in discussions with CJ 50 dealers to use the CJ 50 basket as a basis for a combined index. Now that Trac-x is involved in the discussions, it adds an extra level of complexity to the discussions. However, the dealers involved have all said they want to see a single index up and running sooner rather than later. Hopefully, this will mean that any political wrangling will be at a minimum (see page 22).
Elsewhere, the story is still the tight credit spread environment. While there is still strong demand for single tranche synthetic CDOs from first-time buyers across the region, a growing number of the more sophisticated investors in Asia ex-Japan are turning their attention to multi-sector CDOs and CDOs of CDOs in the search for higher yields. Singapore’s UOB Asset Management was involved in one of the recent deals, a $1 billion multi-sector CDO, arranged in conjunction with Bank of America. Several other houses are also known to be close to launching CDO of CDO deals, a sign that the region’s investors are becoming more comfortable with CDO technology and are willing to move to the next stage in terms of complexity (see page 26).