Financial Instruments and Markets: A Casebook

27

Morgan Stanley and TRAC-X: The Battle for the CDS Indexes Market

It was April 2004 and Lisa Watkinson faced a strategic challenge. As Executive Director for Credit Default Swaps (CDS) at Morgan Stanley's Fixed Income Division, Watkinson had been instrumental in developing TRAC-X (pronounced tracks), a credit derivatives index made up of individual CDSs, similar to the S&P 500 index for stocks. Launched a year earlier, TRAC-X had grown in trading volume for direct client transactions from about $5 billion to $15–20 billion per week.¹ However, TRAC-X now faced a serious challenger in the form of competing index iBoxx, launched a few months earlier by a rival consortium.

At the time of its launch in April 2003, TRAC-X was praised as an innovative solution to trading credit as a separate asset class. However, dealers soon voiced complaints about what they saw as an arbitrary selection of which corporate credits were included in the index. Furthermore, they took offense to the fact that they had to receive permission from J.P. Morgan and Morgan Stanley, the index's joint owners, if they wanted to tailor new structures based on TRAC-X, a troublesome process by which they potentially had to share proprietary trading information.

A competing CDS index, known as iBoxx, had positioned itself as a response to these concerns. iBoxx let its member banks set rules and allowed full freedom in index-adapted product innovation. iBoxx promised to surpass TRAC-X in transparency, flexibility and ...