2nd UPDATE: Markit Announces Plan For New European ABS Index

10th Jun 2010 18:09

(Adds further comment, in the 14th through 17th paragraphs) By Mark Brown Of DOW JONES NEWSWIRES LONDON (Dow Jones)--Financial-information-services company Markit, which owns the iBoxx corporate-bond and iTraxx credit-default-swap indexes, said Thursday it plans to launch a European asset-backed-securities index later this year. The new Markit iBoxx ABS index will track the performance of European floating-rate ABS. There will be 10 sub-indexes, based on sub-sections of the market. "The design of the product is at an advanced stage, and we are looking to receive feedback from potential users between now and the launch in the third quarter," said Richard Paddle, head of European structured finance at Markit. He said Markit had been working on the initiative for around six months. "Historically, bond indices have been built around fixed-rate instruments and, with the bulk of European ABS being a floating-rate product, it's been hard to include ABS in bond funds that are benchmarked against fixed-rate indices without creating a tracking error," said Chris Ames, head of asset-backed and mortgage-backed securities at Schroder Investment Management Ltd. "As fund managers, this new index will enable us to go to our clients, like pension funds, and demonstrate the performance of European ABS in a way that they are comfortable with," Ames said. Already, 19 financial institutions have agreed to contribute prices. "There are existing products, but the advantage of this one is that you are not reliant on a single bank for the prices," Ames said. Asset-backed securities are backed by repayments on credit assets such as mortgages and auto leases. They are often divided up into tranches, with different exposures to losses in the underlying loans. In 2007, Markit was involved in efforts to develop a tradable, synthetic index called ECMBX, which would have let investors buy or sell credit protection on commercial mortgage-backed securities. There were also discussions on creating a similar index based on U.K. residential mortgage-backed securities. These initiatives were put on hold, partly because some market participants thought it unwise to create tradable indexes on which investors could bet on a decline in CMBS or RMBS at a time when confidence in these securities was fragile as the financial crisis took hold. But Markit's Paddle said the new bond index was a different type of product. "We were approached by portfolio managers who wanted a benchmark product to measure the relative performance of their portfolios," he said. "This isn't a tradable index, it doesn't have the characteristics of a tradable index, and we do not expect dealers to make markets in it." Ronald Thompson, global head of ABS strategy at broker-dealer Knight Libertas, said there were "many challenges" in putting together indexes of European ABS. For example, a sub-index of U.K. prime RMBS would have to reflect the dominance of "master trusts" that U.K. banks use to issue RMBS, where a large and changing pool of mortgages backs a series of different bonds. And a sub-index of U.K. buy-to-let RMBS could be dominated by bonds backed by mortgages from one specialist lender--Paragon Group of Cos. PLC (PAG.LN)--which has the most outstanding bonds. "Much depends on the final construction of the indexes," Thompson said. ABS were an important source of lending before the U.S. subprime-mortgage market collapsed. Supporting the European ABS market is seen as an important way to aid the economic recovery. -By Mark Brown, Dow Jones Newswires; + 44 (0)207 842 9485; [email protected] (END) Dow Jones Newswires June 10, 2010 13:09 ET (17:09 GMT)