S&P Launches Indexes Tracking U.S. CDS Markets

Standard & Poor’s launched a set of indexes designed to deliver greater transparency into the private credit derivative swap (CDS) market in mid-January. The Standard & Poor’s CDS U.S. Indices will track the price of CDS contracts on top U.S. companies as well as investment-grade corporate debt and high-yield bond issues.

Credit default swaps are private contracts between parties that act like insurance in case of default by a company on its bonds. It has become a popular way for institutional investors to hedge their bets—or to speculate on a firm’s failure—most notably of late in financial services. The agreements guarantee a certain payout if a company defaults on its debt. In return, participants in such swaps make regular payments for a specified period. Indexes tracking activity in CDS markets essentially provide real-time gauges of how markets are pricing the possibility that a big bank or asset manager might face serious financial problems.

The benchmarks include the following:

• The S&P 100 CDS Index. It includes the most liquid CDS market participants in the S&P 100 Stock Index. It’s expected that it will include about 80–90 different names, each weighted based on its corresponding weight in the S&P 100.

• The S&P CDS U.S. Investment Grade Index. It is an equal-weighted benchmark of 100 highly liquid investment-grade U.S. corporate credits.

• The S&P CDS U.S. High Yield Index. It is also equal-weighted and holds about 80 liquid so-called “junk”-rated corporate credits.

S&P is using CMA DataVision, the credit information specialist, as its primary source of pricing for the indexes.

The trio of new indexes is designed to underlie investment products such as index funds, index portfolios, and derivatives.

NASDAQ Launches TARP Index

The NASDAQ OMX Group rolled out its Government Relief Index in early January. The new index will follow not only companies getting financial backing through the Troubled Asset Relief Program but also any firm receiving direct government investments from other programs. Presumably, that could include President Obama’s proposed $775 billion in additional bailout support to boost jobs and the economy.

Potential benefactors in business from such moves could include industries focused on infrastructure improvements and alternative energy sources, among others.

The new index includes firms that have received a direct investment from the U.S. government greater than $1 billion. NASDAQ says it plans to launch a series of related indexes in the future.

Markit Revamps Bond Index Pricing

Markit has announced that it will implement changes to the rules governing the consolidation of prices for the Markit iBoxx fixed-income indices. The indices are calculated daily, using price contributions from 10 banks that are consolidated by Markit using stringent filters and consolidation algorithms.

Recent volatility and a reduction in liquidity in the fixed-income markets have resulted in diminished price contributions and greater variance among prices. This, in turn, has led to the rejection of a greater number of prices due to the Markit iBoxx consolidation rules.

To solve the problem and improve pricing in illiquid and volatile markets, Markit has updated its rules. Starting Dec. 29, an additional step was introduced in the calculation of the daily index price whereby a new “Control Price,” based upon a forward matrix model, will serve as a proxy price for bonds affected by low liquidity or disparate pricing.

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