S&P, ISDA offer new CDS indices that can aid treasurers with counterparty risk management.
Standard and Poor’s and the International Swaps and Derivatives Association introduced two new credit-default swap indices this week, one targeting a select list of 10 US financials names and another with 15 European banks. While these can be used to hedge bank risk collectively, these indices provide another tool by which treasurers can compare the banks in their bank group to the other banks from a credit risk standpoint.
US Names in the Financials Select 10
- American Express Company
- Bank of America Corp.
- Capital One Financial Corp.
- Citigroup Inc.
- General Electric Capital Corp.
- Goldman Sachs Group Inc.
- HSBC Finance Corporation.
- JP Morgan Chase & Co.
- Morgan Stanley
- Wells Fargo & Company
European Names in the Select 15
- Banca Monte dei Paschi di Siena SpA
- Bank of Scotland Plc
- Barclays Bank Plc
- BNP Paribas
- Commerzbank AG
- Credit Agricole SA
- Credit Suisse Group
- Deutsche Bank AG
- HSBC Bank PLC
- Lloyds TSB Bank Plc
- Royal Bank of Scotland PLC
- Societe Generale SA
- UBS AG
- UniCredit SpA
- Banco Popolare SC
The more indices available and the more readily accessible via Bloomberg or Thompson Reuters, the better chance treasurers will have to shift away from ratings-based tools and policy guidelines to manage counterparty credit risk. And these tools need not be limited to banks. S&P Indices and ISDA also target other industries.
The current family of S&P/ISDA CDS Sector Indices includes:
- S&P/ISDA CDS U.S. Homebuilders Select 10
- S&P/ISDA CDS U.S. Consumer Discretionary Select 20
- S&P/ISDA CDS U.S. Consumer Staples Select 10
- S&P/ISDA CDS U.S. Energy Select 10
- S&P/ISDA CDS U.S. Health Care Select 10
- S&P/ISDA CDS U.S. Financials Select 10 Index
- S&P/ISDA CDS European Banks Select 15 Index
And these are not the only indices out there (see those from Markit, for example). S&P also has a broader 1200 Banks and Diversified Financials index, which we have seen treasurers use as a credit risk benchmark, too. Movements in equity pricing can also serve as a credit risk indicator.