The roll of the Asian credit derivative indices last month has put an end to weeks of heated discussion about the composition of the iTraxx Asia ex-Japan portfolio. The new version of this index, series 4, includes 50 names compared to the previous 30. It started trading at around 54 basis points on 20 September, compared to the mid-40s where the series 3 had been trading.

Credit derivative traders in the region admit that the old index had barely traded at all, and most dealers felt that the portfolio was too small and too skewed towards the Philippines.

Some traders were also keen to see a more diverse portfolio to encourage the development of an active market in tranches on the index. Correlation traders say the Asia-ex index has seen far less tranche trading than even the iTraxx CJ Japan, which has itself traded much less in tranched form than the European and North American indices.

Traders in the region say they expect tranches of Asia-ex to take off within the next few weeks. "We are still in a price-discovery process," said one correlation trader in Hong Kong after the first day of trading in the new index. However, the unfamiliarity of some of the names in the index is making it difficult for dealers to work out how to price these tranches. "Everyone is trying to get their models correct for these additional names," says another source.

The roll saw one bank name, Taiwan's Fubon Financial, dropped from the index, and the addition of 21 mostly corporate names. Additions include several Indian credits (Tata Motors, Tata Power and State Bank of India), as well as Chinese borrowers (China Mobile, CNOOC and Exim Bank of China).

However, some dealers had pushed for a much higher yielding portfolio. And there has even been talk of launching a separate high-yield index for the region, although this idea seems to have been rejected as premature. "The Asian high-yield market is deep enough to support more high-yield names in the index," says a flow trader in Hong Kong. "There are bonds with decent issue size and long enough maturities. The index could kick-start trading in high-yield credit default swaps in Asia."

While some traders pushed strongly for the Asia-ex index to be pepped up with a good sprinkling of junk names, other dealers were worried that the lack of liquidity in these high-yield entities in the single name market would make it difficult for them to price and hedge index trades.

Deutsche Bank and Morgan Stanley are thought to be two of the banks in the high-yield camp, while Bear Stearns and SG are understood to have been among those pushing for a higher-grade index.

Now, all eyes are on volumes in the first few weeks of trading. "It is pretty important it works this time," says one market participant in Singapore. "If it doesn't, we will have to wait until next March to try again to get it right."

Michael Peterson