S&P to introduce new CDS indexes offering two variations of index calculation in 2008

By Jennifer Lanning Drey

Portland, Ore., Nov. 29 - Standard & Poor's plans to launch three U.S.-based credit default swap indexes focused on the $28.8 trillion credit derivatives market in the first quarter of 2008, according to an agency news release.

The new S&P indexes are: the S&P Investment Grade CDS index, the S&P High Yield CDS index and the S&P 100 CDS index.

The investment grade CDS index will consist of 100 equally weighted investment grade U.S. corporate credits, while the high-yield CDS index will consist of 80 equally weighted high-yield U.S. corporate credits.

The S&P 100 CDS index will consist of 80 to 90 members of the S&P 100 Equity index that have CDS with sufficient liquidity, and the weight of each constituent in the 100 CDS index will correspond to its weight in the 100 Equity index.

"The S&P U.S. CDS Indices are designed to be liquid and efficient enough to support investment products such as index funds, index portfolios and derivatives. We expect a good amount of interest in these indexes by both institutional investors and dealers alike," said David Blitzer, managing director and chairman of the index committee at S&P, in the release.

S&P believes its new indexes will set themselves apart from already well-established indexes by offering two variations of index calculation, the independence of an S&P CDS index Committee, third party pricing and the first-ever capitalization-weighted indexes, David Guarino, a spokesperson for S&P told Prospect News.

The agency plans to offer two forms of CDS indexes that reflect the performance of a basket of single name credit default swaps. The first type of index will incorporate all credit events that have occurred into its pricing, while the other will effectively remove the relevant credit from a given index when a credit event occurs.

Index levels will be reported as a spread and as a price.

New series of indexes will be generated every six months to maintain sufficient liquidity and to accurately reflect changes in the credit market. CMA Datavision will be the primary source of pricing for the indexes.

"What we are looking to do with the launch of these indexes is extend our reach and expertise beyond equity indexes and into other areas of the capital market - in particular the fixed-income index space," Guarino said.

He added that S&P believes the CDS industry will benefit from the presence of multiple index providers.

An independent CDS index Committee will determine and declare items such as credit events and defaults and make the final determination about how a succession event will be treated, according to Guarino.

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