October 2020 | Issue 228

News

Dealers power up as tranche trading hits new heights

A big year for index tranche trading has taken volume within grasping distance of full-year 2019, a post-financial crisis record, with a deepening pool of dealers adding support.

As highlighted at Creditflux’s Credit Dimensions virtual conference last month, volume and liquidity have picked up during the covid-19 months, with investors using tranches for hedging and to express nuanced views on systemic and idiosyncratic risk. According to DTCC and IHS Markit numbers, CDX IG and HY tranche volumes this year have surpassed 2019 at time of press. Information from DTCC TIW, where market participants were engaging in market risk activity including new trades, termination of an existing transaction or an assignment of an existing transaction, showed overall 2020 YTD index tranche notional volume at $200.2 billion on 23 September, about $10 billion short of FY19.

Isolating new trades, data from IHS Markit’s DSMatch platform shows that trade levels peaked at $36.8 billion in March. Initially the investment grade indices drove volumes, but since May most of the trades have centred on CDX HY and iTraxx Xover. “The tranche market filled the void,” said Akram Ayyash, structured credit trader at BNP Paribas on a Credit Dimensions panel. “CLO investors were able to put on placeholder longs… This may have surprised a lot of people who thought correlation was dead.” Banks have stepped in to meet rising demand. Citi, long a market leader in synthetic bespoke portfolios, is said to have developed a sizeable presence in index tranches, viewing the business as an important part of its overall structured credit franchise. Morgan Stanley is reckoned to have grown most in market share, heightening competition for the likes of BNP Paribas, Goldman Sachs and JP Morgan. Growth has been focused on the US, with Europe fragmented, but Barclays is rumoured to be entering that market. Officials at the bank did not respond to a request for comment. Bank of America is also growing its US index tranche market share. Officials say its tranche volumes are up 85% year over year. New York-based Jon Klein, head of US investment grade and macro credit trading, says: “One area that has attracted attention is decompression trades between IG and HY indices.”