ICE Unveils Credit Index Futures - Analyst Blog
Earlier this week, IntercontinentalExchange Inc. ( ICE ) announced its intention to launch four credit index futures (CDX), which will be based on the Markit CDX and Markit iTraxx indices. While the release is scheduled for May this year, it is subject to the review of Commodity Futures Trading Commission (CFTC).
CDX are contracts that offer greater efficiency in credit risk management while hedging in the corporate credit market. These futures also tap the expanded client base, including non-traditional CDS market participants as it operates in a transparent and regulated market structure.
Further, these derivatives can be used to hedge against credit exposure as it provides risk-protection to the buyer and guarantee of the credit worthiness of the debt or loan from the seller. As a result, CDX also helps eliminating the risk of a default.
Accordingly, IntercontinentalExchange tends to offer four contracts based on the Markit indices including CDX NA IG, CDX NA HY, iTraxx Europe (Main) and iTraxx Crossover. Moreover, all the contracts will be settled in cash. Meanwhile, these CDX contracts will be listed on ICE Futures U.S. and cleared by ICE Clear U.S.
Additionally, IntercontinentalExchange has decided to list these CDX contracts twice annually, while its expiration will be on the dates of the commencement of the trading of a new series in the swaps market.
Going ahead, IntercontinentalExchange aims to launch more credit derivatives based on the market response and demand from clients. Over the past years, other derivative players such as CME Group Inc. ( CME ), CBOE Holdings Inc. ( CBOE ) and Deutsche Boerse's Euronext have introduced such credit derivatives into the market. However, these products did not showcase the desired growth momentum, which makes us skeptical on the future of IntercontinentalExchange's products.
While IntercontinentalExchange, CME Group and CBOE carry a Zacks Rank #3 (Hold), another outperformer of the financial sector, Moody's Corp. ( MCO ),carries a Zacks Rank #1 (Strong Buy), and appears impressive.
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