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Who Is In? Who Is Out?

07 February 2018 by lberuti

The last roll was the opportunity for Markit to introduce in the series 28 of iTraxx Credit Default Swaps referencing Holding Companies rather than Operating Companies for a number of banks – it mainly impacted Swiss and UK banks included in iTraxx Main (ITXEB) and iTraxx Financials (ITXES) -. On the back of that move, CDS referencing OpCo banks have become less liquid and now trade at an even bigger discount than they probably should do compared with CDS referencing HoldCo banks. Yesterday, they announced that, from the next series onwards, ITXEB and ITXES will include CDS referencing Non-Preferred Senior debt for French banks rather than Senior Unsecured debt. That move had been discussed for a while, but its implementation date was not certain. Also, people were wondering whether Italian and Spanish banks would be included in the change. It was finally decided to wait until there is more clarity regarding MREL (Minimum Requirement for own funds and Eligible Liabilities) requirements and issuance patterns. While it was a small negative for Unicredit, Santander and BBVA which are left out from the transition for now, Markit's decision was the main driver of the outperformance of CDS referencing Credit Agricole, Société Générale and BNP – which were 2.5bps, 3bps and 3bps tighter respectively - which will soon become a less efficient hedging tool in their current form.