New subprime hedge tool to zero in on layered risks

By Nancy Leinfuss

NEW YORK, Feb 13 (Reuters) - A new version of a derivatives index that lets investors hedge U.S. subprime mortgage exposure on specific layers of risk is slated to hit the U.S. asset-backed securities market on Wednesday.

The so-called TABX index will reference the 40 underlying names within the ABX.HE 06-2 and ABX.HE 07-1 credit default swap indices, which each contain 20 home equity securities originated in 2006's first and second halves.

"The index may bring in some additional participants that may not have participated in the past," said Patrick Tadie, managing director at Bank of New York. "This will allow investors to correlate risks to their specific levels of interest."

Markit Group Limited, the administrator for TABX, said the index gives market participants a new way to express views on the extent of losses on specific layers of risk by buying or selling protection on the underlying names in the "BBB" and "BBB-" ABX sub-indices.

Until now, investors have been able to buy, or sell, this insurance on individual securities in the single-name credit default swaps market or via the ABX series of indices.

Some investors doubt whether the latest index will become a popular hedge tool for investors, given the sharp slide to new lows in the ABX 06-2 and 07-1 series.

"I don't know if this thing will ever get off the ground. You've got two of the worst-performing indexes and you're going to create another product off of that? I just don't know if that's going to fly," said Mike Kagawa, portfolio manager at Payden & Rygel.

Higher interest rates, declining home prices and rising subprime loan defaults have triggered a sharp sell-off in the ABX indexes in the new year. That has raised the cost of insuring securities backed by subprime loans.

"If you look at where the bid-to-offer spreads are on the underlying (ABX) issues, you have to ask yourself, 'What's the bid-to-offer spread going to be on this new product?'" Kagawa said.