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Spring Cleaning In September

12 September 2018 by lberuti

Today was an interesting day for credit indices in Europe. Not really in terms of trading, as they all remained in tight ranges, only giving up a small portion of their recent gains. But Markit published the lists of provisional constituents of the different iTraxx indices. The composition of Crossover (ITXEX) was of particular interest after the many complaints made by index users regarding the basket of the existing series, the series 29. Indeed, it included a number of names that effectively never trade, which made it a fairly difficult instrument to use. The illiquidity of the underlying basket was evidenced by inability of the arbitragers’ community to take advantage of the wild moves of the ITXEX29 basis during the summer. That should all change with the new series, the series 30, which will see a change in the name selection methodology. The minimum spread requirement has been dropped for rated entities, and the main selection criteria for inclusion in ITXEX have now shifted to CDS liquidity. This has expanded the available universe to several BBB- names. One of the results will be a somewhat tighter risk premium compared to series 29, but most importantly the underlying basket will be much cleaner. Steinhoff, Crown European Holdings, Dufry, OI, Nidda Healthcare, Bevco Lux, Verisure, Arcelor Mittal and Europcar are shown the exit, while Clariant, CNH Industrial, Evraz Group, GKN, Metsa, NXP, Schaeffler, Smurfit Kappa and Stora are making their way in.