Push-out rules could make trading crossover names hard, notes Barcap

The way the so-called Lincoln amendment to the new Dodd-Frank act has been worded could make it difficult for banks to handle credits that are downgraded from investment grade to high yield, notes Barclays Capital in a report published on Friday. The swap push-out provisions mean that most banks cannot trade high yield credit default swaps from the same entity as investment grade names.

This should not present a practical problem in most cases, and a single trader could continue to trade both investment grade and high yield names, notes the bank in its US Credit Alpha report. However, the current wording of the bill gives no practical way for a bank to deal with a credit downgraded to high yield. In addition, it remains unclear whether the bank entity will be allowed to trade off-the-run versions of the CDX NA IG index which contain high yield names.

The authors say that these points are likely to be clarified during the rule-writing stage and they hope that regulators will make the implementation as practical as possible.