Fitch: New Loan-Only CDS vs. Cash Market; LCDS Standardization May Drive Growth.NEW YORK New York, state, United States New York, Middle Atlantic state of the United States. It is bordered by Vermont, Massachusetts, Connecticut, and the Atlantic Ocean (E), New Jersey and Pennsylvania (S), Lakes Erie and Ontario and the Canadian province of -- Fitch Ratings Fitch Ratings An international rating agency for financial institutions, insurance companies, and corporate, sovereign, and municipal debt. Fitch Ratings has headquarters in New York and London and is wholly owned by FIMALAC of Paris. compares the unique structural aspects of loan-only CDS with the cash loan market and suggests that the creation of a standardized trading framework for loan-only credit default swaps (LCDS) may help spur the use of this structure. Fitch has published a comprehensive report on LCDS, which serves as a primer on this emerging market, outlining the general growth of the loan market, the basic LCDS structure, how LCDS differs from CDS and the relevant loan instrument, and general nuances investors should consider. The International Swaps and Derivatives Association The International Swaps and Derivatives Association (ISDA) is a trade organization of participants in the market for over-the-counter derivatives. It is headquartered in New York, and has created a standardized contract (the ISDA Master Agreement) to enter (ISDA ISDA See: International Swap Dealers Association ) is about to circulate standardized terms with regard to LCDS. Although Fitch notes that there has already been trading in these structures, the creation of a standardized confirmation could promote further growth. In general, LCDS provides the same investor benefits as CDS for bonds. LCDS allow investors to take short credit (long protection) positions for hedging or speculative purposes, simple long credit (short protection) positions as an alternative to a long cash (loan) position, and combination long/short portfolio strategies. That said, there are unique structural aspects to LCDS that can lead to pricing differences vis-a-vis a comparable loan obligation. The emergence of LCDS comes amid a skyrocketing of syndicated loan volumes in both the U.S. and Europe, with levels approaching $3 trillion at the end of 2005. Leveraged loans now make up over one-third of total U.S. syndicated lending, with much of the volume being held by collateralized loan obligations (CLOs). In the CLO CLO See: Collateralized Loan Obligation. market, LCDS may eventually allow for more rapid construction and greater diversification of synthetic CLOs than cash CLOs, assuming liquidity supports the trading of more off-the-run names. It is possible that the use of this structure will grow meaningfully over time, though Fitch believes CLO managers and other investors will need to understand and manage the unique aspects of LCDS. Fitch will host a webcast on Today, June 1 at 10:00 a.m. EDT EDT abbr. Eastern Daylight Time EDT Eastern Daylight Time EDT n abbr (US) (= Eastern Daylight Time) → hora de verano de Nueva York EDT . The link for the webcast is available on the Fitch Ratings web site at www.fitchratings.com along with presentation materials for viewing and downloading. The event can also be accessed at http://www.visualwebcaster.com/event.asp?id=34064. Interested participants should log on approximately 10-15 minutes prior to the 10 a.m. start time. The full report 'Loan-Only Credit Default Swaps' is available at www.fitchcdx.com. Fitch's rating definitions and the terms of use Terms of Use are rules set up by the owner of an intellectual property or service to govern how they may be legally used. In many cases, terms of service are used as a contractual agreement between a company and users of a service they provide. of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures Policies and Procedures are a set of documents that describe an organization's policies for operation and the procedures necessary to fulfill the policies. They are often initiated because of some external requirement, such as environmental compliance or other governmental are also available from the 'Code of Conduct' section of this site. |
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