Wall Street is banking on mass credit default swaps by creating a new investment index that would help investors bet against managers of private credit funds, according to a report.
The CDX Financials tool includes insurers, regional banks, and credit card companies. Private credit fund managers, such as Apollo Global Management and Blackstone, make up approximately 12% of the index.
The product’s purpose is to allow investors to hedge or short credit risk in the private credit industry, which is now worth more than $3 trillion.
Bank of America, Barclays, Deutsche Bank, and Goldman Sachs are the first large banking firms planning to distribute the product. More banks are expected to follow, the Wall Street Journal reported on Friday.
The banks are working with S&P Global, which maintains the Dow Jones Industrial Average and other well-known stock market indices, to launch CDX Financials.
Banks want to use the index to trade and to protect themselves from losses when they loan billions of dollars to private credit fund managers. As of last June, about $300 billion in bank loans were given to private credit providers.
OPINION — DITCH THE RED TAPE: LET PRIVATE CREDIT FUEL AMERICA’S FUTURE
Credit default swaps are on the rise years after their disastrous role in worsening the 2008 financial crisis. Credit default swap index trading hit a record $38 trillion last year, according to S&P.
CDX Financials marks the first credit default swap index linked to private credit.
