The Roll is truly in the Past

OTCStreaming has captured since the beginning of 2018 the open interests of cleared credit indices at Ice and LCH clearing houses. OTCStreaming is able to monitor in “real-time” the index rebalancing. The chart displays the daily evolution of the fraction of the ‘new’ vintage open interest over the total open interest (new and previous vintage) on the most active credit indices. From day 1, a third of of the index open interest was rolled; after a week, two thirds of the open interest has been rolled. The only exception is the Europe Financial Senior index, the ITXES, which has rolled at half the rate of the other indices. The fastest index to roll was CDX Emerging markets (the CDXEM). The North America high yield index, the CDXHY, rolled a week after the other indices - it caught up quickly with almost half of the open interest rolled the first day of the new vintage launch.

Investors are chasing liquidity on credit index contracts. Rolling their investments, or hedges, as quickly as possible is in their best interest. The high ratio of the roll is an evidence of the tactical nature of the credit indices. The low level of the roll for the Europe Financial Senior index is disturbing -especially as a hedging tool. The french banks’ seniority in the new vintage is SLAC (Secondary Loss Absorbing Capacity) versus senior in the previous series. SLAC debt could be involved in any bail-in. Senior debt involvement is a much more remote risk. The new vintage is the best tool to hedge. Investors should be at an advantage to roll. Investors were more active in rolling the European Crossover, the ITXEX. This is quite a positive surprise given the uncertainty of the roll value - with 10 new index members having never traded in CDS, there was some dispersion among estimates of the “true” value of the roll.

Except ITXES, the roll is truly in the past and investors are now focused on trading the credit macro with the new vintages.