Hedge fund firms Anchorage Capital Group and BlueMountain Capital Management are leading investors pushing to overhaul credit derivatives indexes that they say have become too disconnected from the market they're supposed to track, according to four people with knowledge of the discussions.
The problem has emerged because index rules require them to be composed of companies with the most actively traded credit-default swaps contracts. Since the financial crisis, trading in swaps has plunged while issuance of corporate debt soared. Swaps tied to recent issuers failed to develop in tandem, leaving the indexes divorced from the underlying market.
The investor group, which also includes BlackRock, met recently with index owner Markit to discuss changing composition rules, two of the people said. The proposal is being backed by some of the biggest credit-swaps dealers, including J.P. Morgan Chase, Goldman Sachs, Barclays and Citigroup, said the people, who asked not to be identified because the discussions are private.
The hedge funds want to make indexes more representative of the underlying market by altering composition rules to include bond-trading amounts. They have proposed starting with the high-yield swaps index, then expanding the rules to cover the investment-grade benchmark, the people said.
“Everyone sees the elephant in the room and that needs to be addressed,” Robert Douglass, chief operating officer of U.S. corporate debt trading at Barclays, said of efforts to revive trading in the credit-swaps market. “There are a lot of things going on in the industry to improve the liquidity in the product.”
“Markit continues to work with market participants to discuss potential rule changes before finalizing and implementing them,” said Ed Canaday, a spokesman for the index owner. He said the company will continue to administer the benchmarks “in such a way as to reflect market conditions and promote index liquidity and relevance.”
Spokesmen for Anchorage, BlueMountain, BlackRock, J.P. Morgan, Goldman Sachs and Citigroup declined to comment.
Fixing the swaps indexes has taken on greater urgency amid concern that investors will flee bond markets as the Federal Reserve moves to increase interest rates for the first time since 2006. Dealers have retreated from the market in response to post-crisis regulations, making it harder to buy and sell corporate debt. Credit swaps are seen as an alternative for investors looking to quickly get in and out of the market.