Spurred by the rapidly growing credit derivatives market, both Fitch Ratings and Standard & Poor's last week announced sizable enhancements to their credit default swap data offerings. The intention of both moves was to provide more information regarding the sometimes opaque world of corporate CDS pricing.
Both rating agencies said the developments were the result of customer demand, and at least for Fitch, it is the rating agency's first step toward providing the pricing data.
On Aug. 4, S&P announced an agreement with independent mark-to-market pricing and asset valuation company Markit Group Limited to distribute its benchmark CDS price data. The prices will be incorporated with S&P's CDS information service called Xpress data feed. On the heels of that announcement, last Tuesday Fitch announced intentions to acquire credit derivative pricing business ValuSpread Credit, which is owned by Lombard Risk Management. The deal will cost Fitch roughly 6 million ($10.7 million), and, at press time, was expected to close shortly.
"First and foremost customers are asking for more transparency in this fast-growing marketplace," said Kim Slawek a group managing director in Fitch's European structured finance group, "This summarizes everything they were asking for."
The increase in demand for pricing can be attributed to the rapid growth of synthetic structures within the U.S., as well as within the more established European market. Much of that product is enticing for CDO managers, both for use as collateral in synthetic CDO structures, and for diversified protection purposes.
For example, synthetic structured finance CDO volume could reach $38 billion in total issuance in the second half of this year, which would be a 483% increase over the $7 billion of issuance seen in this year's first half, according to Merrill Lynch.
The investment bank anticipates synthetic structured finance CDO issuance could outpace its cash counterpart in the second half of the year - with a forecast of 32 cash deals in the third and fourth quarters, versus a forecast of 38 synthetic deals.
Tradable indices for CDS of ABS and commercial mortgage backed securities are expected by the end of the quarter, which would add much more liquidity to those markets. Several groups have launched initiatives aimed at increasing liquidity and information sharing in regard to CDS of ABS, but the search for steady and reliable secondary market data on these trades has so far left many wanting more (see ASR 7/18/05).
In any sector, the demand for timely and accurate CDS pricing continues to rise, as at least the buyers who are not profiting from them would like to eliminate market inefficiencies and increase liquidity.
In April, Fitch situated Slawek to head business developments within the credit derivatives market, as part of its goal to "develop a leading position in the credit derivatives marketplace," it said at the time.
ValuSpread, which launched in 1999 and claims to be the first service of its kind, will act as an independent business unit within Fitch. The business gathers the over-the-counter CDS spread data from traders at roughly two-dozen contributing banks daily; the contributing banks then receive composite rankings, or the market average trade for those securities, the following morning. That composite pricing is also sold publicly to subscribers.
Fitch is aiming for the acquisition to increase overall subscribers to the information, as well as the number of contributing participants to the pricing service. The service currently covers about 3,000 entities, and is thus far concentrated in corporate and structured CDS.
Markit boasts 50 financial institutions that contribute to its pricing information on some 2,400 individual entities tiers, and provides data at the tier, currency and documentation clause levels, according to the company. The service requires three contributors at each level before data is released; S&P's agreement - the cost of which was not disclosed - will provide daily closing prices for five-year CDS that reference corporate names, said S&P spokesman Adam Tempkin.
Tempkin said customers frequently ask for pricing along with ratings guidelines for the CDS.
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