Brian BollenCitigroup has added a lookalike fear gauge to its investor toolbox, offering a credit equivalent of Chicago Board Options Exchange's VIX volatility index. This is intended to provide an accurate metric for risk aversion in the credit asset class.
It's too quiet
The original fell to its lowest level in 23 years last week, perplexing many industry professionals. If this were a western, John Wayne would be looking over the ramparts of a cavalry fort saying 'I don't like it, it's too quiet,' said one veteran.
“Does the lack of fear reflect an exhausted tired market that believes zero volatility is normal, or is it an example of enormous complacency?” said Bill Blain, head of alternative assets at Mint Partners in London.
Mirroring CBOE
Reuters explains that Citi's "credit VIX" mirrors the CBOE's VIX methodology, using a weighted average of option prices on credit default swap indices across a range of strikes.
The new index tracks implied volatility across investment-grade and high-yield credit default swap indices in the US and Europe. It was developed in response to rising interest in the VIX as it plummetted.
Aritra Banerjee, a credit analyst at Citigroup, is widely quoted as saying that Citi thinks its new gauge captures a lot more information contained within option markets.
This allows it to serve as a more accurate metric for broad risk aversion, and Citi thinks investors should track it. He was invited to comment on the remarks attributed to him but declined to make himself available.
Following in JP Morgan Chase footsteps
One other major bank has gone down this route before. JP Morgan Chase filed a trademark application on 16 October 2016 for the name VTRAC-X. It says the goods and services involved relate to providing financial data on benchmarks for market volatility.
VTRAC-X unveiled
Earlier that month, on 15 October, VTRAC-X was presented to the world as the new family of JP Morgan volatility trackers for the global suite of CDS indices. VTRAC-X reflects the market’s expectation of future volatility.
It plays the analogous role of VIX and VSTOXX for credit markets; a single level that reflects all quoted CDS option prices.
VTRAC-X represents a transparent, model-independent tracker of expected credit volatility and its term structure, said JP Morgan at the time. “We expect VTRAC-X to become a market standard and a variety of future products to be developed on the back of it.
“VTRAC-X Swaps allow investors to accurately trade credit volatility through a simple product. To date, trading a pure view on credit volatility has been difficult and inaccurate.
Approaches like delta-hedging straddles suffer from imprecision, inconvenience and do not take the typically rich skew of the volatility surface into account. For the first time, VTRAC-X Swaps will allow investors to trade pure credit variance through a single trade.
Updating and differentiating
“When we developed the VTRAC-X index and swap we looked at various ways of construction and came to the conclusion that a simple application of the VIX formula to CDS options, while possible, did not accurately reflect the actual level of market implied volatility from CDS options,” confided the team today, updating the market and differentiating their product from Citi's.
“One of the main issues being that credit options, despite being quoted as options on spread, are actually options on price.”
Continued use
“The VTRAC-X index has continued to be used by a number of market participants (accessed on either Bloomberg or Dataquery) and while there has not been much volume traded on the swap itself, there has generally been a lot of interest in products that give investors access to credit volatility.”
Atak to head Citi TTS Dublin Lab
Separately, Citi announced the appointment of Gulru Atak as Treasury and Trade Solutions (TTS) Dublin Lab and Innovation Head.
Reporting to Ebru Pakcan, EMEA head TTS, she will head up the Innovation Lab in Dublin, as well as leading and growing the innovation programme for Citi's TTS business.
Citi says the Innovation Lab opened in 2009 and was the first established across Citi globally. It is one of two, the second being based in Singapore.
Atak joined Citi Turkey in 2002 and has 15 years of experience in banking. She was previously TTS Head for Turkey and Non-Presence Countries in Central Asia and the Caucasus in April 2014.