Loan Credit Default Swap Index
The Loan Credit Default Swap Index (Markit LCDX) is a specialized index of loan-only 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 manage it, provide liquidity, and assist in pricing individual credit default swaps. IHS Markit Ltd, headquartered in London, is the index provider.
Loan Default Swap Index (Markit LCDX)
Definition
The Loan Default Swap Index (Markit LCDX) is a specialized index that includes 100 North American companies' unsecured debt traded in the broad secondary market, specifically focusing on loan-only credit default swaps (CDS).
Origin
The Markit LCDX is provided by IHS Markit Ltd, headquartered in London. The index was created to offer investors a tool to measure the credit risk of North American company loans. As the credit default swap market evolved, LCDX became an important reference for liquidity and pricing.
Categories and Characteristics
Key characteristics of LCDX include:
- Component Companies: Includes 100 North American companies traded in the broad secondary market.
- Unsecured Debt: The debts in the index are all unsecured.
- Loan-Only Credit Default Swaps: The index involves credit default swaps that are loan-only.
- Over-the-Counter Trading: LCDX is traded over-the-counter and managed by several large investment banks, providing liquidity and assisting in pricing.
Specific Cases
Case 1: Suppose an investment firm wants to hedge the risk of its portfolio of North American company loans. By purchasing LCDX credit default swaps, the firm can receive compensation in the event of loan defaults, thereby reducing the risk of its investment portfolio.
Case 2: A bank wants to increase the liquidity of its loan portfolio. By participating in the LCDX market, the bank can more easily buy and sell loan credit default swaps, thus enhancing the liquidity and market pricing transparency of its assets.
Common Questions
Question 1: How is the liquidity of LCDX?
Answer: Since LCDX is managed and provided liquidity by several large investment banks, its liquidity is relatively high.
Question 2: How are the credit default swaps in LCDX priced?
Answer: Pricing is assisted and managed by the participating investment banks based on market demand and supply conditions.
