Morgan Stanley set to launch European synthetic ‘Tracer’

Morgan Stanley plans to launch a synthetic version of its tradable custodial receipt – ‘Tracer’ – product soon in Europe, following its introduction of a Tracer index based on single-name credit default swaps in the US in mid-April, and its launch of cash versions of the product last autumn.

The US synthetic Tracer – based on 50 reference entities – saw volumes of about $1 billion in the first week and a half of trading. The evenly weighted basket of five-and-three-quarter year credit default swaps traded at 105/110 basis points above Libor at issue, widening to 120/125bp above Libor by the start of this month – mainly due to problems with telecoms sector debt.

The European version will track 100 European credit default swaps as reference entities, similar to JP Morgan Chase’s European credit index-linked ‘JECI’ product, launched about two months ago. Higher liquidity levels in European credit default swaps convinced both JP Morgan Chase and Morgan Stanley that credit default swap-based products are more likely than cash credit products to succeed in Europe.

Morgan Stanley’s European ‘maxi’ synthetic Tracer index will be split into four ‘mini’ sectoral indexes: financials, telecoms, non-cyclicals and cyclicals. The financials index will be split further into senior and subordinate debt protection indexes.

Credit default swap indexes are aimed at helping firms control credit exposure, take active and effective sectoral positions, and take advantage of the relative value between the cash and credit default swaps markets.

Morgan Stanley was planning to introduce the European synthetic Tracers next Tuesday, but the rapid widening of spreads on names like telecoms equipment suppliers Alcatel and Ericsson has led to a slight delay. However, sources at the firm say it strongly believes in the product and is planning for an imminent launch.

Rapidly widening spreads and liquidity dry-ups in underlying default swaps has affected all credit derivatives indexes. JP Morgan Chase’s European JECI-100 traded at Libor plus 100bp in early May, which was around 25bp wider than at its launch.

Although the JECI-100 index is static, it can be reformatted every six months. It is unclear whether Morgan Stanley plans a similar process in Europe. In the US, the investment bank’s synthetic Tracer can be reformatted depending on demand.

It is also unclear if Morgan Stanley’s synthetic Tracers will remain proprietary. JP Morgan Chase is close to signing a large European bank to make markets in its JECI product to increase the product’s transparency.