J.P. Morgan Creates Unit to Meet New Bond Trading Patterns

J.P. Morgan Chase & Co., the world’s largest investment bank in fixed income trading by revenue, has set up a new 12-person unit focused solely on trading credit index products such as credit default swap benchmarks and exchange-traded funds.

The bank says the Global Credit Index business, which it claims is the first of its kind at a major investment bank, was established in response to a boom in customer demand for trading indexes instead of individual bonds, where investors and bankers complain that liquidity has been drying up.

The new unit “helps clients deal with some of those questions around credit market liquidity,” Guy America, co-head of credit markets and securitized products at the bank, told MoneyBeat.

Market data show how index products to trade credit markets have seen volumes skyrocket.

Credit ETFs have mushroomed from $58 billion five years ago to $197 billion today, according to J.P. Morgan. Overall, indexes now make up 42% of the entire CDS market compared to 29% back in 2010, according to the Depository Trust and Clearing Corporation, with $100 billion of daily volumes on average in 2014.

Trading CDS indexes is akin to trading a portfolio of bonds. Investors who believe riskier bonds look vulnerable buy protection on a high-yield CDS index by paying a quarterly premium. If there are any defaults in the underlying index or credit spreads widen, the protection buyer stands to benefit. On the other side of the trade, an investor that believes high-yield credit will perform well could sell protection on the index and collect those quarterly premiums. However, he or she is on the hook if there are any defaults in the index.

The rise of indexes has coincided with a world where central bank bond-buying programs have dominated financial markets. Picking the right bond becomes less important when prices across the board are rising thanks to loose monetary policy. Broad-based benchmarks have flourished as a result.

But the popularity of indexes can also be traced to that drop-off in liquidity in bond markets – an area where many banks have pulled back in the face of higher regulatory requirements.

“Clients are trading more index products, in large part as cash management tools and also as an efficient way to get broad returns from the wider credit market,” said Samik Chandarana, a 17-year J.P. Morgan veteran, who will head the new group.

Unlike most individual corporate bonds, index products can be traded in large size and at a moment’s notice, providing an immediate avenue for investors to tweak credit exposures.

Trading indexes can help both active fund managers and ETF providers navigate redemption and investment cycles more smoothly, Mr. Chandarana noted.

J.P. Morgan has not hired or fired any staff as a result of the restructuring. Sanjay Jhamna has been promoted to fill Mr. Chandarana’s previous role of credit trading head in Europe, the Middle East and Africa at the bank. Mr. Jhamna previously ran global credit exotics and hybrids.