ERMBX.UK, the index designed to reference synthetic U.K. prime MBS, looked set for an early launch a few weeks ago, with market reports indicating that the new index could go live earlier than the ECMBX.
However, adverse market conditions have negatively impacted Markit's latest innovation, and the index's launch date has been postponed until further notice.
The index - which references the seven U.K. RMBS master trust issuers, excluding Granite - would have offered exposure at triple-A and triple-B points of the capital structure. The indices are based on pay-as-you-go CDS contracts that closely mimic underlying bond cash flows, requiring payments on any principal impairment or interest shortfall. There would have been one eligible bond per issuer that was denominated in euros with an average life of three to six years. The bonds were required to be publicly placed tranches with the corresponding subordinated tranche of the triple-B piece included in the triple-A index.
In light of the current volatile market conditions, Markit said in a statement early last week that the majority of the index participants agreed that any decision regarding the launch of the new index will be made at a later date.
"It is Markit's desire to create an index that will attract market support and be actively traded," said Ben Logan, managing director of structured finance at Markit. "We will continue to work toward completing the documentation for the index and will update the market on any decisions that are taken about the launch in due course."
Markit gave participants two options in its impromptu vote last week. They could either progress along the previously agreed upon timeline and work toward having documentation signed off by the end of February or delay work on the product and revisit the decision at a later date.
"Our conversations led us to believe that at least 17 banks (including Royal Bank of Scotland) voted [on the latter] and at least two abstained," said RBS analysts.
Markit confirmed that eight dealers voted to continue within the original timeframe.
Doubts about the concept of the index as well as the poor timing of the launch have always persisted. The concern was that an ill-timed launch could potentially further destabilize the market.
In the current environment, the index would cause price transparency, but at a wide level where few cash sellers would participate and the few forced sellers in the market would potentially mark the entire market even wider.
"The general consensus is that an index would allow spreads to be pushed much wider than those able to invest at present would be comfortable with," Societe Generale analysts said. "Many European investors who are actively buying would be comfortable with tighter spreads than we currently see. For most, price stability and transparency are the biggest factors impacting confidence."
RBS analysts said that in light of the news, paper from HBOS, Permanent RMBS and triple-A CDS were picked up at 150 basis points on the Street. "Until RMBS investors are convinced that the project has been shelved until a sunnier day, RMBS spreads will remain jumpy," analysts said. "We may need to wait until March 3 for the official vote on the progress or otherwise of this index, and a public vote might make the situation rather clearer than this private vote has done."
The ECMBX, the European analogue of the U.S. CMBX index that references euro- denominated CMBS, was postponed to potentially March from the original Jan. 14 launch date, according to market reports.
The plan is to have four ECMBX variants - AAA' and BBB' in both euros and sterling. Each index will have CDS referencing 20 constituent bonds, slightly less than the 25 names in the CMBX.
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