Data provider Markit Group has launched the first independent, daily consensus spread service for credit default swaps referencing asset-backed securities (ABCDS).
Markit sources say the service was created partly due to a lack of supply of cash paper and a desire to take on short exposures to certain sectors of the market synthetically. Synthetic CDOs of ABCDS, an increasing focus in both U.S. and Europe synthetic ABS trading, have great potential, and investors want to participate by referencing pools of European deals, according to Ben Logan, managing director of structured finance at Markit.
"Hedge funds are expressing interest in investing synthetically in some sectors of European ABS, such as subprime U.K. mortgages and Spanish RMBS," Logan said.
Markit's ABCDS spread service will begin to provide some history on the performance of single-name ABCDS for those in Europe who are looking to assemble new deals. Logan said that Markit also signed a comparatively small number of accounts for actual trade valuations in this area, compared with spread data.
The service will act as an aid to fully understanding valuations of ABCDS, which are still relatively young. Gerry O'Donnell, director of structured finance at Markit, said they have gathered the major players as contributors to the service and expect to add more in the months to come.
CDS of ABS is a growing market with a significant spread pickup available for subordinated bonds in several sectors, according to Christopher Greener, director and ABS senior credit research analyst at Societe Generale.
"We believe that growing CDS of ABS volumes will cause senior spreads to tighten," he said.
Markit added, in a statement, that the service will increase transparency and foster growth in the structured finance markets and provide independent spreads for "mark-to-market, research and valuation purposes." The service will also help satisfy the accounting requirements of Financial Accounting Standards (FAS) 157, which requires a market-based measurement in order to recognise trading-book profit and loss. FAS 157 will come into full effect this November, the report said.
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