“We will create a pool of assets that is invested in liquid money market securities while simultaneously selling protection in a basket of CDS names. Every six months we’ll roll over positions and recapitalise,” explained Lehmann.
Credindex will be modelled on the most liquid contracts at any given time, the iTraxx in Europe and CDX in the US. SG hopes retail investors will use the index to access the credit markets.
Hubert le Liepvre, global head of credit structuring for the French bank, acknowledged there are likely to be compliance issues involved in marketing it to retail investors: “It will require a lot of explanation,” said le Liepvre. The bank is also considering creating a capital-guaranteed product based on the CDS index.
The bank said it will downplay historical performance when marketing the new product. The past four years have seen credit spreads tighten, resulting in positive investment performance for sellers of credit protection. The performance of a tradeable CDS index is therefore likely to suffer should spreads begin to widen. However, Lehmann noted investors can also profit from a widening of spreads by shorting the index.