The Roll Call is a concise, expert‑led discussion presented by LCH CDSClear featuring contributors from S&P and J.P. Morgan, focused on the key themes shaping the upcoming March index roll.
This session explores:
The main index changes coming in the March roll
Expectations and positioning across the CDS market
Recent trends and observations from the index administrator, clearing house and leading dealer perspectives
Factors that may impact liquidity, spreads and trading behaviour around the roll window
Designed as a quick, timely check‑in, The Roll Call provides an overview of market sentiment and the developments to watch as the roll approaches.
Watch the video
Hello everyone and welcome to The Roll Call,CDS Clear's discussion on the upcoming March CDS Credit Index roll.I'm Adam Johnson, Head of Product for CDS Clear at LCH.Over the next 15 to 20 minutes,we'll focus on what really matters for market participants around this roll,what's changing in the indices,what it means for trading risk, and how clearing supports the process.I'm delighted to be joined by Nick Godec and Kai Iverly from S&P Dow Jones Indices,who administer the CDX and iTraxx index families,and by Dimitri Shalouhin, Credit Derivatives Strategist at JPMorgan,bringing a market participant's perspectiveon how these rolls are expected to trade.Let's start in North America with CDX.As high yield index rolls a week later,we'll focus just on the investment grade for now.From a clearing perspective, this roll is all about continuity.CDSClear clears all single names that sit in the CDX indices,both on the run and off the run,which gives participants the widest range of single names availablefor clearing anywhere.Historically, when a name is added to an index,we typically see a pickup in cleared single name activity after the roll.Particular participants trade in or out of constituentsas part of arbitrage or skew strategies.That ability to clear both the index and the underlying names is keyto supporting roll-related trading, compression, and risk reduction.Starting with Nick at S&P Dow Jones Indices,can you walk us through the key constituent changesin CDX North American Investment Grade this fall, and what's driving them?Yeah, definitely. Thanks, Adam, for having me.In terms of what we're seeing for the upcoming roll,we have six names getting removed and six coming in.To start with just the names being removed,five entities that we're removing are based on feedbackthat we received from market participantsaround really entities that are deemed no longer relevantfor the North American credit markets,because they're not expected to continue issuing debtor just that their general size and profiledoesn't really reflect where interest is.Then there's also one name coming out due to downgrade,Paramount Global, which is entering that, or is effectively high yield now.In terms of what we see entering the index, It's quite exciting.We see three of the most liquid hyperscalers entering the index,Alphabet, Meta Platforms, and Microsoft.Then we also see three healthcare names coming in, AbbVie Inc.,Elevance Healthcare Inc., and the Cigna Group.Definitely exciting to see particularly these three hyperscalersentering the index because they join Amazon and Oracle,and together these are some of the most liquid names in CDS markets in general.From an index construction perspective,are there any themes worth calling out this time?Sector shifts, ratings migration, or liquidity considerations?I think on that end, it's really also just keying inon the increased technology exposure we're seeing with the hyperscalersand to a large extent, this is really reflecting trendsthat we're seeing in debt issuance.A few years ago,I don't think anybody really anticipated hyperscalers coming into CDX IG,but what we've seen in terms of investments in data centersand AI-related buildout,these have become some of the most important and sizable issuersin the debt markets.Even looking through the current roll process,it was interesting to note that Oracle, for instance,is the single most actively traded CDS entity in North American IG markets.Really the changes that we're seeing reflect really the natureof changing debt markets.Thanks.Moving on to the market impact with Dmytro from JPMorgan.From a trading desk perspective, how do you expect these constituentchanges to influence roll behavior this time?Thanks, Adam.Just before we get into it,I should just say that the views I'll be sharing today are my ownand do not necessarily represent the views of JPMorgan.In CDX, it's really going to be very interesting to see howthings balance out here.Historically, it was positioning,actually, that was typically the biggest driver of the traded roll levels.Here we see a long risk base in the market right now,and in both CDX indices, and where there are more sellersof protection rather than buyers among the end users.Historically, that tended to drive the roll to tradeinside of flat to fair value in CDX.That has been a consistent pattern in the recent roll cycles.The stock of position out there has been similarly bullish.That means that, again,sellers of protection will be rolling into the new series,pushing the difference between the new and the old series lower,or in market jargon, flatter.That said, there are a few factors working in the other direction.The optics of the relatively flat roll, meaning that the new series protectionwill appear as a cheap hedge, which could drawin the buyers of protection.Then on top of that, as Nick alluded to,we are seeing a very ongoing demand for hedges around hyperscalerand software exposures.The additional addition of three AI-related namesare likely to generate an incremental bid for protection,especially given that the new index will now have about 12% exposureto the tech sector overall in terms of single-name weights.All told, I think while the net long risk investor base,argues for the roll to trade flat to fair value, it's not going to be,by a wide margin.We are talking about a fraction of basis point, I would say.Okay.Do you have any expectations on the roll levelsand how much will be due to curveand how much due to the constituent changes?Sure, we've done some calculationsand if I break it down into two components,as you mentioned the considering impactis roughly around negative 1.8 basis points.The new names coming in are tighter than the names coming out,largely driven by this downgraded and wide Paramount CDS.Then the curve extension component adds about basis 5.6 pointsas we move to a new 5-year maturity point.That nets out to roughly +3.8 basis points in total roll fair valuebased on current levels, trading levels.To put that into historical context,the historical average over the past 10 yearsat current spread levels has been around 5.5 basis points.We have 3.8 basis points.This is relatively flat roll compared to history.Excellent, thanks for that.Moving on, one important development in this rollis the launch of the CDX Financials indices on April 13th.From CDS Clear's side, we will look to support thisin the future, subject to reg approval,and hope to see good volumes from the start.Back to Nick from S&P,what was the rationale behind launching the CDX Financials indices now,and how should participants think about its roll versus CDX NA IG?Yeah, definitely.CDX investment grade,for instance, tracks broad corporate credit markets.In that sense has been an exceptional productin terms of liquidity and providing exposure.However, around the period of the Silicon Valley Bank crisis,we heard from market participants that it would be greatto have really more of a pure play product to provide exposure to financials.That's really what started to get us thinking about this in general.Then also the discussion moved to where are there segmentsof financial exposure today that aren't reflected in CDX IGthat could be captured by a new index.To that end, CDX Financials, in terms of how it was designed,includes some of the most liquid financial CDS in the market,both some of which are in CDX IG, some of which are not.But then it also includes some firm profilesthat don't have a presence in CDS markets today,specifically business development corporations, BDCs,which provide exposure to private credit markets,which is an ever-increasing financial exposure in North American credit markets,but then also regional banks, which is such a tool were available,would've better reflected in a focused way some of what transpiredaround the SVB crisis.How did you approach constituent selection and liquidity thresholdfor this new index?In a few ways, the starting point for construction was really CDS liquidity.Single name liquidity that we observed in the market,which tends to be our starting point for constructing any of the CDS indices.We really viewed having that liquid anchor to be importantfor a new product to get up and running.But then after we have that liquidity anchor point,we then looked largely to cash-based criteria for additional selections.The next step being the addition of the three largest BDCsthat we observe in the market where we measure the size purelyby debt outstanding the market.After we select those three BDCs,we then look to add banks by a score,which is an aggregate of debt outstanding, trace trading volumes.A measure of really what's topicaland where there's trading interest in the market.Then CDS liquidity to the extent that there is any.Then we do that last step until we reach a total of 25 entities,which is the fixed number of entities in the index.Lastly, just as a note, globally systematic important banksare purposefully excluded from the index.We've been working with some of those G-SIB entities,in terms of the design and expect them to be liquidity providers in the index.There were concerns raised around self-referencing aspects,basically for their ability to provide liquidity.Our understanding from the market is that the value of having the G-SIBsinvolved from a liquidity perspectivewas really critical to launching this product.With all those different points considered,we feel this is a really good balance of liquidity concernswith the right exposures to how the financial sector has evolved.Moving on to the expected trading dynamics with Dmytro.How do you see CDX Financials being used initially?Directional risk, relative value versus CDX IG, or hedging financial exposure?Yes, I would say I would expect a mix of all of the above.But the early adoption is likely to be led by hedging use cases.Think CVA desks, insurance companies, or firms looking to managetheir private credit exposure.Alongside that, I would expect also to see directional long risk views out there.For instance, people looking to pick up additional spreador fade the recent underperformance of US financials.There are also plenty of use cases for relative value as well.For instance, there could be a relative value against corporates in CDX IGor versus European financials in the form of Senior Finns, iTraxx,or even against other asset classes like CMBS or bank equities.Combining CDX FINS with CDX IG also allows you to replicate the cash index betterin CDS format and track it much more closely.That opens the opportunity to trade CDS versus bond basison the index level and trade it more effectively.One useful parallel here is how iTraxx Financials developed in Europe.Granted, it was many years ago, but it started small with a mix of hedgingand directional trading.But the user base broadened over time.Now it's a very liquid product, obviously.For one, it's also a very popular index to monetize the pricing mismatchbetween index and constituents via so-called skew lists.That brings a lot of float and liquidity to both index and single-name markets.Given that it's a smaller index, it's a smaller basket of names,the logistics of execution are much easier than for indices with 100+ names.I can envision that a similar dynamic develops in CDX down the roadas basis between index and constituents becomes a tradable opportunityin its own right.Do you expect liquidity to build quickly from the launchor just more gradually for this index?Realistically, it's going to be very gradual to start.These things take time.In early phase, I think dealer commitment to making markets is important,but crucially, the availability of clearing will be criticalto build the momentum.On the end-user side, on the buy side, I think there are practical matterssuch as new product approvals, risk management sign-offs,which famously take time.Another precondition, I would say,is active market in the underlying single names.Many names in the proposed composition are already trading actively.The addition of macro instrument to the market should aid the developmentof more granular single-name productsand driving a healthy symbiosis, if I may.All told, I think it'll probably take one full series or one roll cyclebefore the liquidity really starts to ramp up.But over medium term, I expect volumes to grow steadilyas more and more existing CDX user base beginsto incorporate the new index in their workflow.Do you have any initial thoughts on the level the index will trade at initially?Yes, based on the current sort of anticipated basket of constituents,we estimate the theoretical value to be around 105 basis points.That's for the new June 2031 maturity point.But obviously, that can change as market changes.In terms of traded value, I think whether the traded valuesits where it sits relative to fair value,that will be a function of systemic versus idiosyncratic trade-off.In other words, whether there will be more demand for single name or index protectionon balance.As I said, hedgers will probably be the early adopters on the index leg,but there is also a lot of demand on single-name protection level,a lot of topical names there were demand for hedges.It may well be that the two forces offset each otherand we end up with a very narrow basis between the index and the constituents.Very interesting. Thank you.Turning to Europe, the same principles apply.CDS Clear clears the full iTraxx suite of indices—main, crossover,senior financials, and subfinancials— as well as the MSCI ESG indexacross current and legacy series, including all constituents.Turning now to Kai from S&P Dow Jones Indices.What are the key changes across iTraxx Europe mainand iTraxx Europe crossover indices this roll?Great, thanks, Adam.In iTraxx Europe Main, which is a 125-name index,there were three removals and three additions in the non-financial sub-index,which itself is 95 names.Two of these removals were rating downgrades, Stellantis and Südzucker,which made those two names ineligible for iTraxx Main.The third, Leonardo, was removed to the outstanding debt bin called.In terms of the addition, they were all due to liquidity on the DTCC roll report,and we added Adecco, GSK, and SSE to the index.Moving on to iTraxx's crossover, which is 75 names,there were five removals and five additions.Of the five removals, one was due to a rating upgrade, Syngenta.The other four removals were names that did not have any trading activityin the eight weeks prior to the roll cutoff date,which is Friday the 27th of February, and per the index rolls,these are removed.Out of the five additions, two were due to rating downgradesand incoming from iTraxx Main, namely Suzuka and Stellantis.The other three additions were new names,namely Iron Platform Finance, Infrastrutture Wireless Italiane,and Opal Bitco, and these names were chosenfrom the so-called supplementary list.Which is a list of issuers with large capital stacksthat are part of the IBO XX cash bond indicesbut have no traded CDS contracts.Expanding a little bit on the supplementary list,this is a mechanism that is part of the iTraxx crossover index rollsand is designed to encourage liquidity creationfor single-name trading.As part of the index roll, S&P DJIA monitorswhether the names chosenfrom the supplementary list attract trading volumes.For this roll in Series 45,all three names, namely Ascendi, Worldline,and Albion Financing, that were added in September last year,so the previous roll, have all picked up liquidityand therefore remain part of the index.Thank you.Coming back to Dmytro.Do you see different roll dynamics between main and crossover this time?Yes, I think the dynamics are somewhat different in iTraxx.Starting with main similar to what we discussed for CDX IG,we have two prominent fallen angels in this roll in main.That results in a relatively flat roll and negative composition impact.That said, the position backdrop in iTraxx is quite different to CDXthis time around.We're seeing a lot of degaussing and hedge addition in the European indicesin particular over the recent months and weeks.The market is going into this roll with a much more bearish tilt.That's likely to push the rolls to trade wider and steeper to fair valuecompared to what we are seeing in CDX.Then in crossover, the surface read is a more standard roll.The composition impact is relatively small in spread terms.But we also have short positioning,so the roll flows are likely to be dominated even moreby accounts needing to roll their protection,which again argues for a steeper roll.I'll probably add that crossovers is going further down the line,is going to be driven by composition more than other indices.We have five name turnovers this time around.That's 7% of the index exposure, so a pretty meaningful chunk.Notably, we have a few new CDS additions.One of them is ION Platforms.It's a relatively wide single B-rated issuer that's used to CDS markets.We may see some volatility around the name as price discovery takes place.How will clients approach senior versus sub-financials around the world?Yes, so in financials there are no considerable changes in both indices,so from composition point of view it's a fairly standard roll.For all itself it doesn't bring major changes to relative value opticsbetween senior and sub, so let's see how dynamics will play out.As usual, we have several offsetting forces that will pull the flowsin opposite directions.Both rolls in senior and sub are likely to trade wide to single names,given again the net short risk positioning in both indices,which is pretty typical for these indices.But we also have negative, I would say, risk-off sentiment in the market.The investors are also focusing on the private credit exposureswithin the banking system and the insurance sectors.That may bring a lot of hedging demand for the two indices.Furthermore, even like zooming out a bit and looking at subordinated financialsspecifically, the index appears quite compressed versus both senior FINS indexand versus the High Sharpe's main corporate index on a historical basis.If you see continued weakness, that could drive demand for sub-protectionand for the rolls to push them steeper.There is important technical work in the other direction, I would say.Index ARB lists have been very active in financial indices recently,and especially in subfins index.Here are the accounts.Sell relatively wide index protection, and they buy relatively cheap single-nameprotection to capture the spread differential between index and NAV.On index level, this dynamic brings sellers of the index roll to the market.That can limit how steep the roll can trade in the financial indices.Then the same question is for CDX.How do you see expectations around the roll level,and how much is due to curve, and how much is due to constituent changes?Yes, for main, the constituent impact is roughly negative two basis points,and curve extension adds around six basis points.Net impact is four basis points of total roll fair value.For crossover, the constituent impact is three basis points,and the curve extension is 19 basis points,so you have 22 basis points total.For financials in senior finance, we see 6.6 basis points,and for subordinate financials, it's about 12 basis pointsin terms of fair value.Excellent, thank you.Now moving on to Asia Pacific and the emerging market indices.In these indices, we continue to see steady growthin cleared activity around CDX EM, iTraxx Asia Japan,and iTraxx Australia indices.Particularly as participants look to manage regional exposuresthrough standardized indices.Subject to reg approval, CDS Clear will soon launch the clearingof CDX EM subindices, the CDX EM investment gradeand the CDX EM high yield.We also have a particularly strong range of cleared single names in APAC.Moving back to Nick,can you walk us through the key constituent changesin CDX Emerging Markets this world, and what's driving them?Yeah, absolutely.To start, it's actually fairly exciting going into the current roll.We are having the most significant revamp of CDX Emerging Marketsthat we've had since we initially launched the index.Over the last few years, we've in a gradual way lookedto expand the composition of the index.At current, it's 22 entities.Based on significant feedback we've been getting from market participants,we actually are expanding the index from 22 to 30 entitiesfor the upcoming series.What we expect is a much broader, more diversified basket,and also one that will be focused a little bit more on credit risky namesin terms of those new additions.In terms of the specific changes that we see,Abu Dhabi is coming out of the index.This is due to our determination that the namedoesn't really meet the EM pure play definitionthat the index is looking to capture.If you look at metrics like GDP per capita, for instance.Then in terms of new additions coming in, we see Pakistan, Uruguay, Angola,Costa Rica, Ecuador, El Salvador, Guatemala, Kazakhstan, and Kenya.From an index construction perspective, are there any themesworth calling out this time?Sector shifts, ratings migrations, consideration?Yeah, definitely.On the rating migration front, part of what we did for new additions—well, I guess to start, to make this expansion to the index,we had to add in new cash criteria,much like what Kai mentioned with the supplementary list based on IBO XX.We have something very similar for CDX EM now.Where specifically, we look at the IBO XX USD Emerging MarketsBroad Sovereign and Sub-Sovereign Index.Then within that, we focus on sovereign debt of countries.Further, for selection purposes, only look at countrieswith a triple B rating or below in order to ensurethat there's credit riskiness in the entities that get added.We'll see an expansion of high-yield names in the indexand a lower credit grade profile overall.Also, in terms of some of the new additions,more LATAM exposure.Then finally, in order to accommodate the expansion,we lowered the maximum country weight cap from 9% to 7%.That's going to impact some of the largest countries in the indexlike Brazil, Saudi Arabia, China, South Africa, Turkey,and Mexico.The result is just going to be a better diversified index.Then one last point on the topic of liquidity.There are going to be a number of new single-name CDSthat we hope will get created and become activeas part of these purely cash-based additions.In addition to a more diversified index profile,we're also hoping that there's a strong benefitfor the single-name CDS market for emerging market names as well.Kai, are there any standout changes or themes across the APAC indices this roll?Yes, in iTraxx Australia,we've had six name changes this roll, and all of the six name changesreflect the replacement of an SPV, so a special purpose vehicle entity,with its parent entity.These replacements follow market feedback that CDS tradingshould take place at the level of the parent entityrather than the SPV provided that there exists a qualifying guaranteefrom the parent to the SPV.For iTraxx Japan, there were two name changes.Both were related to market profiling.For those who don't know that, market profile is a mechanismwhereby the country and sector weight of names in iTraxxare compared to those in the IB OX cash bond indices.Any sector deviation above 3.75% leads to names from the most overweight sectorin the most overweight country being removedand names from the most underweight sector in the most underweight countrybeing added.This mechanism is in place to limit the basis between the iTraxx indicesand the cash bond market.In iTraxx Japan, there were no changes for this roll.Excellent, thank you.Finally, a couple of minutes just to briefly mention credit index options.We've seen option volumes continue to growacross the market with CDX and iTraxx index options available at CDS Clear.We've been clearing options since 2017. Questions for Dmytro.Do you see clients looking at volatility relative value trades betweendifferent series in options?Yes, I don't really anticipate a huge amountin terms of relative value trading across series in options.What we tend to see instead is that most accountswill either switch their option exposureto the new on-the-run series or simply stay in the off-the-runseries until options expire.Particularly for shorter-dated option expirieswhere there isn't much incentive to roll.It's more of a binary switchthan an active relative value trade between the two series.Do you expect to see any changes in implied volatilityfor any of the new index series?Not materially. The constituent changes this time around,they don't result in a meaningful shift in the index beta profilesbetween the old and the new series.That applies to pretty much all indices where we have options.There is no fundamental driver why the roll should change.In practice, what the market tends to do in this kind of situation is thatit trades on so-called constant daily breakeven basis.What that means is that the percentage of spread implied volatilityadjusts slower to reflect the fact that the index spread went wideron the new series.But the level of absolute volatility remains broadly unchangedbetween the two series.Effectively, roll migrates across series without any real dislocation.That said, there are probably investors out there who were reluctant to buylong-dated options in the current series, which are going off the run.Once the new indices start trading,a lot of market participants will pull the triggerand push the volatility by hedges in the new series.That's likely to push longer-end option roll in longer expiries higher.Perfect. Thank you.Well, that brings us to the end of the Roll Call.Thank you to S&P Dow Jones Indices and J.P. Morganfor sharing both the index perspective and the real-world trading insights.Thank you to everyone who's joined.If you've got follow-up questions on clearing support around the roll,the CDS Clear team would be very happy to engage.Have a great day, everyone.
