The recent merger of the two main credit indices iBoxx and Trac-x into DJ iTraxx constitutes the final step for the standardisation of indices in Europe. The new DJ iTraxx with 20 market-makers, BBVA being the only one in Southern Europe, sets a new standard in terms of liquidity, transparency and diversification. Credit managers have now an investment and a hedging tool with which to maximise their views of credit spreads.
It is important to stress the willingness of all parties involved to develop a liquid product, clearly shown by the success of the index in the first week of trading, to further develop second-order derivatives such as collateralised debt obligations, options, etc. with iTraxx as underlying.
When credit default swaps first appeared in the credit markets, they were regarded as the first ‘credit derivatives’ but they are increasingly becoming a plain vanilla instrument helping the credit markets develop these second-order or ‘true’ derivatives, challenging managers to evaluate their exposures to greeks: delta, correlation, volatility and time decay.
However, it is worth mentioning a ‘victim’ of the increase of index trading and this is single-name credit default swaps. Volumes in the index are greater than those of the individual components and, as mentioned above, the index is the underlying of most derivative products. So are we at the doors of the credit index age? Most certainly we are.
Head of credit trading