credit default swap (CDS) index

Mechanics of a CDS Index

A credit default swap (CDS) index is a measure of the performance of a pre-selected group of CDS quotes (or premiums). The index calculation generally follows the same guidelines as other indexes used in the financial markets, such as S&P 500:

 

 

信用違約互換指數（CDS指數）是一種來對沖信用風險的金融衍生產品，或可視作為一籃子信用衍生工具的投資組合。與信用違約掉期不一樣，它是透過櫃檯買賣的產品。為了加強CDS指數的流動性，以及減少買賣價差，CDS指數是完全標準化的證券。相對於買入一組相同效果的CDS，買入一個CDS指數會比前者更節省交易成本。

Credit default swap index

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A credit default swap index is acredit 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 moreliquid 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 byMarkit 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 thecredit spread of the entities in the index. This coupon is set usually to 100bps (1% p.a.) for predominantly Investment Grade indices and 500bps for predominantly speculative grade indices to follow the convention of SNAC. Prior to SNAC (IG3-IG11) the coupons were set to approximate the average weighted spread of the names in that index. Once this has been decided the index constituents and the fixed coupon are published, and the indices can be actively traded.

[edit]e-Trading

Credit indices trade OTC usually. Prior to 2011 the most common form of trading was through voice (phone) or a chat such as on a Bloomberg terminal. In 2011 e-trading screens started to become popular accounting for most than 50% of the index volumes by the end of 2011. By migrating to screens the transparency of trading is greatly enhanced as market volumes per market-maker are available. Market-makers can see the total amount of index trading daily and where they rank against their peer group.

Although single name CDS volumes have been in sharp decline with the fall in activity of the structured credit desks, credit indices have remained popular as liquidity in the on-the-run indices remains good and the indices have moved to trading screens to trade more like equity indices.

[edit]iTraxx Indices

There are different families of iTraxx credit default swap index broken down by geographical region consisting of Europe, Asia and aSterling 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) non-financial names from iTraxx Europe index
		iTraxx Europe Crossover	40	Sub-investment grade names
		iTraxx LEVX	40	European 1st Lien Loan CDS
	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
Asia		iTraxx Asia	50	Asia ex-Japan Investment Grade
		iTraxx Asia HY	20	Asia ex-Japan High Yield
		iTraxx Japan	50	Japan
		iTraxx Australia	25	Australia
Sovereign		iTraxx SOVX West Europe	15	Sovereign West Europe CDS
		iTraxx SOVX CEEMEA	15	Sovereign Central/East Europe, Middle East & Africa
		iTraxx SOVX Asia Pacific	10	Sovereign Asia Pacific
		iTraxx SOVX Latin America	8	Sovereign Latin America
		iTraxx SOVX IG		Sovereign Global Liquid Investment Grade
		iTraxx SOVX G7		Sovereign G7
		iTraxx SOVX BRIC		Sovereign Brazil, Russia, India, China

[edit]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
LCDX	100	NA First Lien Leverage Loans CDSs

[edit]See also

• iTraxx
• Asset-backed securities index - similar to a CDS index, but with asset-backed securities as the underlying