Markit, a firm that provides credit default swap information and valuation services, is putting the finishing touches on a new total return swap index, dubbed TRX.2, designed to help CMBS lenders hedge their warehoused loans. With the recent volatility in CMBS spreads, securitization shops are anxious to find better techniques for hedging their risk against swings in CMBS pricing.
While the index is almost ready, Markit wants to wait until after Labor Day to debut it because many market participants are on vacation in August. It also wants to start off the index with the largest possible pool of referenced securities, including those from a $1.5-billion conduit issue that Wells Fargo and RBS priced on July 21 and a $1.7-billion offering that Deutsche Bank and UBS priced this week.
The new index will track daily price movements on triple-A-rated, multi-borrower CMBS with weighted average lives of 8-12 years that were floated since last year. So far, Markit has identified more than $7 billion of bonds from 18 conduit deals that meet the criteria. Ultimately, the index will reference securities from the 25 most-recent qualifying CMBS issues, updated on a quarterly basis.
The index will provide a basis for creating and pricing total-return swaps. That would enable CMBS lenders to short senior bonds from the latest crop of deals, thereby hedging their long positions — namely, loans they’ve written and stockpiled for securitization. Dealers would seek counterparties to take the opposite sides of derivatives pegged to the index.
