S&P launches indices to reflect performance of US credit default swap market

Date: Thursday, January 22, 2009
Author: Hedgeweek.com

Standard & Poor's Index Services has announced the launch of the S&P CDS US Indices, which are designed to measure the performance of the US credit derivatives market, worth a notional USD29trn, according to DTCC Deriv/Serve.

'With the launch of the S&P CDS US Indices, Standard & Poor's is responding to the market's need for transparent and objectively-run credit default swap indices,' says James Rieger, vice president for fixed-income indices at Standard & Poor's Index Services

'Working closely with market participants, Standard & Poor's designed the indices to track the most liquid credit default swaps and be efficient enough to support investment products such as index funds, index portfolios and derivatives.'

Standard & Poor's is launching three US based CDS indices.

The S&P 100 CDS Index initially consists of the 80-90 members of the S&P 100[2] that have CDS with sufficient liquidity. The weight of each constituent in the S&P 100 CDS Index is based upon its weight in the S&P 100.

The S&P CDS US Investment Grade Index consists of 100 equally weighted investment grade US corporate credits which meet certain liquidity criteria.

The S&P CDS US High Yield Index consists of 80 equally weighted high yield US corporate credits which meet certain liquidity criteria

Each CDS Index will offer three calculations that reflect the performance of a basket of single name credit default swaps. The first type of calculation, consistent with industry standards, removes a reference obligation from the index upon a credit event. The second type (S&P CDS Event Inclusive Indices) will augment its calculation of the performance of the CDS indices by incorporating the effect of credit events and corporate actions on the affected issues. The third type (S&P CDS Rolling Indices) will calculate the performance of each CDS basket on a continuous basis.

'The S&P 100 CDS Index is the first index to track the performance of the reference entities of an equity index,' says Rieger. 'With this first-of-its-type index, Standard & Poor's is providing market participants with a view of the relationship between the equity market and the CDS market for the S&P 100 constituents.'

Standard & Poor's is using CMA DataVision, the credit information specialist, as its primary source of pricing for the Indices. Software from SuperDerivatives has been chosen to calculate the Indices.