When you claim something has “game changing potential” as WAIN Street does in reference to the Business Credit Health Index (BCH Index), there’s always going to be skeptics that have trouble seeing a bold vision. One thing that can really help ease that skepticism is outside validation of the general concept on which your claims are based. The recent press calling credit default swap (CDS) futures the inevitable evolutionary outcome for the CDS market does just that for WAIN Street.
As reported by the Wall Street Journal, exchange-traded futures tied to credit default swaps might become a more common substitute for the actual swap contracts. CDS indices (or CDX’s), like Markit’s CDX North American Investment Grade Index, track CDS performance for a group of specific companies (usually around 100). Taking futures contracts on a CDX can act as a proxy for owning actual CDS’s; the primary benefit being fewer expensive regulatory issues. While they are not as customizable and limited to the companies held in the index, CDX futures still offer a workable solution with some additional advantages such as lower spreads and greater liquidity.
This renewed interest in CDX futures is really vindicating to WAIN Street because it demonstrates the need and feasibility for financial products built around a business credit health index. Because the BCH Index uses extensive data on nearly every company in the country, it offers a broader-based gauge than a basket of CDS’s. Additionally, because the BCH Index can be segmented by region, industry, and business size, it offers more specificity. Just as CDX futures mark an imminent transition in the credit derivatives market, we believe futures based on the broader and more customizable BCH Index will be an evolutionary next step in credit markets. They will power financial products and services that enable more effective insurance, hedging, and investing opportunities that will greatly benefit mid-market and small businesses. WAIN Street knows these game-changing ideas can be realized, but outside examples like this are great for convincing naysayers.