Fitch predicts single-name CDS will share spotlight with index contracts in future

By Michelle Anderson

Rochester, N.H., March 6 - Single name credit default swaps will lose their dominant position in the structured credit market as indexes gain in popularity, according to Derivative Fitch, which noted the market's tremendous growth in size and complexity over the last few years. Additionally, high-yield names are expected to grow.

During a web cast on Tuesday the company stated that since the last downturn, single name CDSs accounted for the majority of the market but indexes have also grown tremendously. Year over year indexes have grown 90% and Fitch predicts this sector will overtake the single name area.

Additionally, 90% of the credit derivatives and structured credit volumes are coming from the global banking entities as opposed to insurance and financial guaranty entities.

"The other notable development is the move down the credit curve," Roger Merritt, managing director at Derivative Fitch, said on a conference call Tuesday.

More high-yield names are being seen, he said. The high yield end will continue to grow as long as there is a healthy appetite for credits at this rating level.

Spreads, meanwhile, continue to tighten, according to James Batterman, senior director at Derivative Fitch. However there was an abrupt reversal in the trend last week, he said, as investment-grade spreads were 6 basis points wider at the close of last week versus the start.

Although there has been a significant jump in the volume of single name trading in the United States, the jump has been larger in Europe.

While some areas of concern have been addressed within the market, there are still areas that bear scrutiny: liquidity, transparency and pricing, according to Fitch.

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