In response to the bulging proportion of floating-rate issues in the ABS market, Lehman Brothers plans to launch its first ever U.S. ABS Floating Rate Index. The index, initially covering $253 billion worth of transactions, is scheduled to go live May 1.

In a release, Lehman said the index will be limited to home equity, credit card, retail and wholesale auto loans, and student loans, and will only include deals greater than or equal to $500 million of combined fixed- and floating-rate notes. For inclusion, outstanding transactions must have at least $25 million outstanding and tranches with weighted average lives of shorter than one year will be omitted.

The index will be priced daily, and structured to mimic the scope, size, sub-sector proportions and rating distribution of the market. By asset type, the Index will be composed of 41% home equities, 36% credit cards, 17% student loans and 6% auto loans. Lehman also noted that only top-tier issuers will be included to "ensure pricing quality, liquidity and transparency."

According to a release from Lehman, the most natural use of the index will be as a benchmark for floating-rate portfolio performance, and investors will be able to buy or sell the index through a total-return swap.

Lehman launched its U.S. ABS fixed-rate index in 1992, when fixed-rate notes made up the vast majority of the market. Since then, the percentage of floating-rate notes in the market has risen to nearly 75%. Investors will be able to index the entire U.S. ABS market through Lehman's combined fixed- and floating-rate indices, which will have an approximate market value of $370 billion.

Copyright 2005 Thomson Media Inc. All Rights Reserved.

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