Lifting the veil

Recent steps to improve price and structural transparency in the credit derivatives and structured credit markets are encouraging. The dealers that have, in many cases, sponsored these initiatives no doubt realise that they will lead to less lucrative pricing. They hope greater transparency will attract more institutions to the market, boosting volumes.

Credit is the market of the moment, one of the few where banks are still hiring. Risk’s salary survey, published last month, showed that credit sales and trading staff remain in demand, while their colleagues in the rates and foreign exchange derivatives businesses are finding it harder to secure jobs.

But it is still a market where end-users have few independent sources of price information. Compare this with the interest rate swap market. An end-user can get swap rates compiled by the International Swaps and Derivatives Association via Reuters or the US Federal Reserve’s website. Market data vendors sell swap information, and many fixed-income analytics can calculate indicative spreads. There are listed swaps futures and options on swaps futures. The wire services post stories on swap rates several times a day.

Credit derivatives end-users can get a view of prices in the market from e-brokers such as CreditTrade or Creditex, and a growing number of news organisations – including RiskNews, Risk’s online news service – have begun posting regular reports on the credit default swap market. But in the end, most of this information comes from the dealers themselves: end-users still had no way of getting independent prices.

One attempt at a solution is the CreditGrades website, launched last month by RiskMetrics Group and backed by JP Morgan Chase, Goldman Sachs and Deutsche Bank. The free Merton model-based tool calculates credit spreads and probabilities of default for publicly traded companies (see review). It registered 1,828 users within its first 10 days, a RiskMetrics official says. Clearly there is an appetite for this information.

There is a similar demand for structural transparency. Institutions are beginning to respond. Fitch gave its clients access to its database of collateralised debt obligations last year, a step several structured finance investors hailed at the time. More recently, Goldman Sachs began making its proprietary cashflow CDO models available to all subscribers of Intex CDO analytics. Goldman hopes that, by giving potential investors access to data on cashflow mechanics and collateral, it will improve the market’s liquidity.

Efforts at improving transparency always contain the seeds of commoditisation, but they can also attract new players, such as reinsurers, asset managers, finance companies and corporations. As these initiatives and others like them squeeze credit product margins, it will be interesting to see if the dealer community consolidates, or expands.
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