Credit Default Swap Index
Encyclopedia
A credit default swap
index is a credit derivative
used to hedge credit risk or to take a position on a basket
of credit entities. Unlike a credit default swap, which is an over the counter
credit derivative, a credit default swap index is a completely standardised credit security and may therefore be more liquid
and trade at a smaller bid-offer spread
. This means that it can be cheaper to hedge a portfolio of credit default swaps or bonds with a CDS index than it would be to buy many single name CDS to achieve a similar effect. Credit-default swap indexes are benchmarks for protecting investors owning bonds against default, and traders use them to speculate on changes in credit quality.
There are currently two main families of CDS indices: CDX and iTraxx
. CDX indices contain North American and Emerging Market companies and are administered by CDS Index Company (CDSIndexCo) and marketed by Markit Group Limited
, and iTraxx contain companies from the rest of the world and are managed by the International Index Company (IIC), also owned by Markit.
A new series of CDS indices is issued every six months by Markit and IIC. Running up to the announcement of each series a group of investment banks is polled to determine the credit entities that will form the constituents of the new issue. This process is intended to ensure that the index does not become "cluttered" with instruments that no longer exist, or which trade extremely illiquidly. On the day of issue a fixed coupon is decided for the whole index based on the credit spread
of the entities in the index. Once this has been decided the index constituents and the fixed coupon are published, and the indices can be actively traded.
denominated index.
Credit default swap
A credit default swap is similar to a traditional insurance policy, in as much as it obliges the seller of the CDS to compensate the buyer in the event of loan default...
index is a credit derivative
Credit derivative
In finance, a credit derivative is a securitized derivative whose value is derived from the credit risk on an underlying bond, loan or any other financial asset. In this way, the credit risk is on an entity other than the counterparties to the transaction itself...
used to hedge credit risk or to take a position on a basket
Basket (finance)
A basket is an economic term for a group of several securities created for the purpose of simultaneous buying or selling. Baskets are frequently used for program trading.Certain specific products can be seen as specialized "baskets"....
of credit entities. Unlike a credit default swap, which is an over the counter
Over-the-counter (finance)
Within the derivatives markets, many products are traded through exchanges. An exchange has the benefit of facilitating liquidity and also mitigates all credit risk concerning the default of a member of the exchange. Products traded on the exchange must be well standardised to transparent trading....
credit derivative, a credit default swap index is a completely standardised credit security and may therefore be more liquid
Market liquidity
In business, economics or investment, market liquidity is an asset's ability to be sold without causing a significant movement in the price and with minimum loss of value...
and trade at a smaller bid-offer spread
Bid-offer spread
The bid–offer spread for securities is the difference between the prices quoted for an immediate sale and an immediate purchase...
. This means that it can be cheaper to hedge a portfolio of credit default swaps or bonds with a CDS index than it would be to buy many single name CDS to achieve a similar effect. Credit-default swap indexes are benchmarks for protecting investors owning bonds against default, and traders use them to speculate on changes in credit quality.
There are currently two main families of CDS indices: CDX and iTraxx
Itraxx
iTraxx is the brand name for the family of credit default swap index products covering regions of Europe, Australia, Japan and non-Japan Asia. They form a large sector of the overall credit derivative market. The indices are constructed on a set of rules with the overriding criterion being that of...
. CDX indices contain North American and Emerging Market companies and are administered by CDS Index Company (CDSIndexCo) and marketed by Markit Group Limited
Markit Group Limited
Markit Group Limited. is a global financial information services company with over 2,300 employees. The company provides independent data, valuations and trade processing across all asset classes in order to enhance transparency, reduce risk and improve operational efficiency...
, and iTraxx contain companies from the rest of the world and are managed by the International Index Company (IIC), also owned by Markit.
A new series of CDS indices is issued every six months by Markit and IIC. Running up to the announcement of each series a group of investment banks is polled to determine the credit entities that will form the constituents of the new issue. This process is intended to ensure that the index does not become "cluttered" with instruments that no longer exist, or which trade extremely illiquidly. On the day of issue a fixed coupon is decided for the whole index based on the credit spread
Credit spread (bond)
The financial term, credit spread is the yield spread, or difference in yield between different securities, due to different credit quality. The credit spread reflects the additional net yield an investor can earn from a security with more credit risk relative to one with less credit risk...
of the entities in the index. Once this has been decided the index constituents and the fixed coupon are published, and the indices can be actively traded.
iTraxx Indices
There are different families of iTraxx credit default swap index broken down by geographical region consisting of Europe, Asia and a SterlingPound sterling
The pound sterling , commonly called the pound, is the official currency of the United Kingdom, its Crown Dependencies and the British Overseas Territories of South Georgia and the South Sandwich Islands, British Antarctic Territory and Tristan da Cunha. It is subdivided into 100 pence...
denominated index.
| Family | Type | Index Name | Number of entities | Description |
|---|---|---|---|---|
| Europe | Benchmark Indices | iTraxx Europe | 125 | Most actively traded names in the six months prior to the index roll |
| iTraxx Europe HiVol | 30 | Highest spread (riskiest) names from iTraxx Europe index | ||
| iTraxx Europe Crossover | 40 | Sub-investment grade names | ||
| Sector Indices | iTraxx Non-Financials | 100 | Non-financial names | |
| iTraxx Financials Senior | 25 | Senior subordination financial names | ||
| iTraxx Financials Sub | 25 | Junior subordination financial names | ||
| iTraxx TMT | 20 | Telecommunications, media and technology | ||
| iTraxx Industrials | 20 | Industrial names | ||
| iTraxx Energy | 20 | Energy industry names | ||
| iTraxx Consumers | 30 | Manufacturers of consumer products | ||
| iTraxx Autos | 10 | Automobile industry names |
CDX Indices
| Index Name | Number of entities | Description |
|---|---|---|
| CDX.NA.IG | 125 | Investment grade CDSs |
| CDX.NA.IG.HVOL | 30 | High Volatility investment grade CDSs |
| CDX.NA.HY | 100 | High Yield CDSs |
| CDX.NA.HY.BB | 37 | Index of high yield CDSs with a BB rating |
| CDX.NA.HY.B | 46 | Index of high yield CDSs with a B rating |
| CDX.NA.XO | 35 | CDSs that are at the crossover point between investment grade and junk |
| CDX.EM | 14 | Emerging market CDSs |
| CDX.EM Diversified | 40 | Emerging market CDSs |
See also
- iTraxxItraxxiTraxx is the brand name for the family of credit default swap index products covering regions of Europe, Australia, Japan and non-Japan Asia. They form a large sector of the overall credit derivative market. The indices are constructed on a set of rules with the overriding criterion being that of...
- Asset-backed securities indexAsset-backed securities indexThe ABX is a credit derivative swap contract that pools lists of exposures to mortgage backed securities.In January 2006, CDS Indexco and Markit launched ABX.HE, a subprime mortgage backed credit derivative index, with plans to extend the index to underlying asset types other than home equity loans...
- similar to a CDS index, but with asset-backed securities as the underlying