Loan Credit Default Swap Index (Markit LCDX)

What Is the Loan Credit Default Swap Index (Markit LCDX)?

The Loan Credit Default Swap Index (Markit LCDX) is a particular index of loan-just credit default swaps (CDS) covering 100 North American companies with unsecured debt trading in broad secondary markets. The LCDX is traded over-the-counter, and several large investment banks oversee it, give liquidity, and help with pricing individual credit default swaps. IHS Markit Ltd, settled in London, is the index provider.

Understanding the Loan Credit Default Swap Index (Markit LCDX)

The index starts with a fixed coupon rate (225 basis points); trading moves the price and changes the yield, similar as a standard bond. The index moves at regular intervals. Purchasers of the index pay the coupon rate (and purchase the protection against credit events), while sellers receive the coupon and sell the protection. What is being protected in this example is a "credit event" at a specific company in the index, like its defaulting on a loan or bowing out of all financial obligations.

On the off chance that such a credit event happens in one of the underlying companies, the protection is paid out by means of physical delivery of the debt, or through a cash settlement between the two gatherings. The underlying company is then taken out from the index, and another one is subbed to return the index to an even 100 individuals.

Credit default swaps basically put a price on the risk that a specific debt issuer could default. Companies with strong credit ratings have low-risk premiums, so protection can be purchased for an insignificant fee, assessed as a percentage of the notional (dollar) value of the underlying debt. Companies with low credit ratings cost more to safeguard against, so the credit default swaps covering them might cost several extra percentage points of the notional amount.

Least purchase amounts for the LCDX can run into a huge number of dollars, so most investors are large institutional firms, for example, asset managers, banks, hedge funds, and insurance companies, which invest as either a hedge or as a speculative play. The advantage of the LCDX to these investors is that they can gain access to a diversified group of companies for significantly less than it would cost them to purchase the credit default swaps individually.

Features

• The LCDX starts with a fixed coupon rate (225 basis points); trading moves the price and changes the yield, similar as a standard bond.
• IHS Markit Ltd, settled in London, gives the index.
• The Loan Credit Default Swap Index (Markit LCDX) is a specific index of loan-just credit default swaps (CDS) that cover 100 individual North American companies with unsecured debt trading in the broad secondary markets.
• Least purchase amounts for the LCDX can run into a huge number of dollars, so most investors are large institutional firms, for example, asset managers, banks, hedge funds, and insurance companies.
• LCDX is traded over the counter and is managed by a consortium of large investment banks, which give liquidity and help with pricing the individual credit default swaps.