Raft of dealers set to market-make Trac-x

“We are aiming to get everyone from Tracers to sign onto Trac-x,” said Lisa Watkinson, global product manager for flow credit default swaps and credit indexation at Morgan Stanley.

She said negotiations were ongoing with Bear Stearns, Lehman Brothers and Merrill Lynch. In addition, Barclays Capital, which has been making markets on the US Trac-x index for the past month, will also sign up to the European Trac-x suite in the near future, said Andrew Whittle, the UK bank’s head of credit derivatives.

This follows an announcement earlier this week that UBS and Credit Suisse First Boston had agreed to act as market makers for the products.

Wilkinson said the Trac-x suite – which currently provides indexes on Japan, Europe, North America, high yield and emerging markets – is looking to release indexes on the Asian and Australasian markets in the near future.

The addition of more market makers is aimed at furthering Trac-x’s position as the most liquid and standardised credit default swap index in the market. It currently competes head-to-head with the iBoxx index, a duration-weighted index referenced to the cash bond market. Trac-x is equal weighted and referenced to the credit derivatives market.

Market participants have been critical of the iBoxx index’s construction. “There are so many more issuers in the credit default swap market than the cash bond market – so basing a credit default swap index on the bond market is back-to-front,” said a credit derivatives structurer at a bank that is a member of iBoxx and makes markets in Trac-x.

Whittle believes both indexes may have a place in the market. He said iBoxx may prove more suitable for real money managers looking for a closer benchmark proxy to the cash bond market, while Trac-x is attractive to hedge funds and other leveraged participants seeking to access the more esoteric names in the derivatives market.

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