S&P unveils CDS indexes

Index provider Standard & Poor's Index Services (S&P) has launched three US credit default swap (CDS) indexes designed to evaluate the performance of the credit derivatives market.

The launch was originally scheduled for the first quarter of 2008, but S&P said it delayed for a year to drum up more market support - 2008 saw the first decline in multi-name CDS volumes outstanding, according to the International Swaps and Derivatives Association, which said in November that the amount fell 6.5% to $24 trillion in the first half of the year.

The new indexes are the S&P 100 CDS Index, covering the 82 members of the S&P 100 that have CDSs of sufficient liquidity, the S&P CDS US Investment Grade (IG) Index, which consists of 100 equally weighted investment-grade US corporate credits, and the S&P CDS US High Yield (HY) Index, which consists of 80 equally weighted high-yield US corporate credits. The composition of the S&P 100 CDS index will be adjusted based on changes in the membership of the S&P 100 and in the liquidity of members' CDS.

All the indexes were launched on January 21 and are available online, along with historical values for the indexes - the S&P 100 CDS Index and the S&P CDS US IG Index were back-dated to March 20 2007 and the S&P CDS US HY Index was back-dated to September 20 2007.

The S&P 100 CDS Index is the first to track the performance of the reference entities of an equity index. "The index seeks to provide a gauge as to the price of default protection on the S&P 100 Index and seeks to track the performance of investing in a portfolio or basket of CDSs of the entities within it," explains James Rieger, S&P's head of fixed-income indexes. "Market participants thought having the ability to look at different parts of the capital market structure would be beneficial, and this is a first step in that evolution."

Rieger revealed that the next move for S&P will be to create a bond index for the obligations of the same entities: "This will provide a perspective on the price of default protection and the performance of an investment in a portfolio of CDSs with the S&P 100 CDS Index, a view into the returns of investing in a portfolio of bonds with the pending bond index, and a view into the performance of the equities of those entities with the S&P 100 Index."

See also: S&P to launch three CDS indexes
SocGen launching tradeable CDS index