A credit default swap (CDS) index referencing North American financial institutions is slated to relaunch on April 13, according to a report by Risk.net, but will exclude the largest U.S. Banks, a significant departure from previous iterations.
The revamped index will not include global systemically significant banks (G-SIBs), a decision that diminishes one of the key features of the S&P’s CDX Financials index, the report states. The initial version of the index was put on hold nearly two years ago due to regulatory concerns.
The move comes as interest in credit derivatives tied to financial institutions is growing, with some firms seeking to hedge against potential risks. According to a Reuters report, Saba Capital Management, founded by Boaz Weinstein, is selling credit derivatives on Massive Tech companies, citing growing risks associated with artificial intelligence. This activity suggests a broader market appetite for instruments that protect against credit events.
Credit default swaps are financial contracts that provide insurance against the default of a borrower. A CDS index allows investors to take a position on the creditworthiness of a basket of companies, rather than individual entities. The Federal Reserve Board has published a report detailing how banks utilize CDS, noting their role in managing credit risk.
The Bank for International Settlements recently published an analysis of the credit default swap market, observing changes over the past decade. The new index also adds business development companies (BDCs) as constituents, a move intended to broaden the scope of hedging opportunities. Although, questions remain regarding the practical applications of the index without the inclusion of G-SIBs.
Saba Capital Management was named Hedge Fund of the Year by Risk.net, highlighting the firm’s expertise in credit markets. The firm’s recent activity in selling credit derivatives on tech companies underscores a growing perception of risk in the sector.
A new CDS index aiming to broaden hedging of US bank exposure is set to launch, but the exclusion of the largest US banks raises questions about its utility and market adoption.
