Loan Credit Default Swap Index (Markit LCDX)

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Loan Credit Default Swap Index (Markit LCDX)

Overview

The Markit LCDX is a loan-only credit default swap (CDS) index covering 100 North American companies with unsecured debt that trades in broad secondary markets. IHS Markit publishes the index, which is traded over the counter (OTC) and supported by a consortium of large investment banks that provide liquidity and help with pricing.

How it works

  • The index begins with a fixed coupon (initially 225 basis points). Trading moves the index price and therefore changes its implied yield, similar to a bond.
  • The LCDX rolls to a new series every six months; each series references 100 constituent credits.
  • Buyers of the index pay the coupon and purchase protection against credit events; sellers receive the coupon and sell protection.
  • A “credit event” (for example, default or bankruptcy) for a constituent triggers either physical delivery of the debt or a cash settlement. The affected company is removed and replaced to restore the index to 100 members.

Pricing and risk

  • CDS pricing reflects the perceived default risk of each issuer. Higher-rated companies command lower premiums; lower-rated issuers result in higher protection costs (expressed as a percentage of notional).
  • Trading liquidity and dealer facilitation help with marking and transacting the index, but OTC execution typically requires institutional relationships.

Market participants and uses

  • Minimum transaction sizes can run into millions of dollars, so participants are generally institutional: asset managers, banks, hedge funds, and insurance companies.
  • Common uses:
  • Hedging exposure to loan/default risk across a diversified basket of issuers.
  • Speculative positions on credit conditions or spreads at the portfolio level.
  • The LCDX offers a cost-efficient way to obtain diversified exposure to loan-credit risk versus trading many single-name loan CDS individually.

Key points

  • LCDX = loan-only CDS index of 100 North American issuers.
  • Published by IHS Markit and traded OTC with dealer liquidity.
  • Fixed coupon structure, semiannual rolls, and buyer/seller protection mechanics.
  • Primarily an institutional instrument used for hedging or speculation; pricing varies with issuer credit quality.