Aiming to create what it calls "a single family of global indices," Markit has acquired International Index Co. and agreed to acquire CDS IndexCo, in what will be the biggest and most important acquisition the company has made to date, according to Kevin Gould, executive vice president at Markit.
The goal is to combine best practices under one platform, including one brand, one set of rules to trade, one delivery system and one standard contract. Having all the indices under one roof will increase market transparency, Gould said. However, the move is not the result of the pricing dislocation in the market. The company had been in talks with CDS IndexCo and International Index Co. before the onset of the credit crisis, Gould said. The deal with CDS IndexCo was expected to close at the end of last week.
The indices Markit will control includes the synthetic indices - ABX.HE, CDX Indices, CMBX, Itraxx Indices, Itraxx LevX and LCDX - as well as cash indices including the iBoxx family.
In fact, Markit had already been running the day-to-day business for CDS IndexCo, including everything from trade processing to filing tax returns, said Brad Levy, a managing director at Goldman Sachs and chairman of the CDS IndexCo The company was also closely involved with the International Index Co.
Eight banks launched CDS IndexCo in an effort to create a standard market index that would generate more liquidity than the individual indices that were in the market, Levy said. The group teamed up with Markit in 2004, based on Markit's Reference Entity Database (RED) product - an industry standard in the CDS market for reference entity and reference obligation identifiers used in online trading, standard documentation and trade settlements. CDS IndexCo used Markit to disseminate data in order to promote transparency, Levy said. Now, 25% of the volume in the synthetic market comes from the index product, Markit said.
As for standardized rules and trade procedures, the details have not been worked out yet. The International Index Co. and the CDS IndexCo have some varying complexities in their trade and settlement processes, which Markit said it would work to harmonize.
Markit also floated ideas surrounding the creation of an Alt-A index, which it speculated could take place next year, as well as the creation of a Global Credit Index, where traders could take one overall position on global credit conditions, instead of, for instance, five individual trades with five different settlement processes. Possible indices comprising of multiple asset classes, as well as more bespoke products, are also in demand, Gould said.
Markit's new index division will be headed by Stephan Flagel who joined the company in June 2007 from Barclays Capital, where he was COO in global research. He will report to Niall Cameron, head of equities and indices. Both will be based in London, but since most of Markit's structured finance team is in New York, Flagel will travel between the two cities. While Markit is not currently making any additions to its staff in the U.S., the company said it expected to do so in the future, according to its needs.
As for the future of the existing ABX Index, Markit is waiting until mid-December to assess whether there will be a 2007-2 series because of the lack of issuance in the second half of the year. However, there is still demand for a new series, because "people still want to hedge their exposure," said Ben Logan, managing director, structured finance at Markit.
"Maybe we will have to tweak the index," Gould said.
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