CDS IndexCo LLC, and Markit Group are to launch ABX.HE, a synthetic ABS index of US home equity asset-backed securities.
Market-makers in the index at launch include ABN AMRO, Bank of America, Barclays Capital, Bear Stearns, BNP Paribas, Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, HSBC, JPMorgan; Lehman Brothers, Merrill Lynch, Morgan Stanley, RBS Greenwich, UBS; and Wachovia.
Markit will be the administration, calculation, and marketing agent for ABX with a broad remit including capturing daily price fixings, publishing monthly fixed and floating payments, and supplying a calculator for the settlement of trades, handling issues around rules, operations, marketing, and analytics, and producing marketing materials, negotiating dealer and data licenses, and communicating information to the wider market.
The index is a family of five sub-indices, each of which consists of a basket of 20 credit default swaps referencing US sub-prime home equity securities. As with the Dow Jones CDX and iTraxx families of credit derivative indices, the ABX index will roll every six months.
The bonds are selected through a polling process of the ABX dealer group by Markit, in order to select the most liquid securities backed by home equity loans.
'The CDS of ABS market has grown at a rapid pace over the past six months, and we have seen increasing appetite among clients for a way to take a synthetic view on ABS,' says Bradford S Levy, Managing Director, Firmwide eBusiness Group at Goldman Sachs and acting Chairman of CDS IndexCo. 'ABX is a direct response to that demand, and gives clients an efficient, standardized tool with which to quickly gain exposure to this asset class.'
In order to qualify for index selection, an issuer must have rated bonds for each of the AAA, AA, A, BBB, and BBB- categories. One bond from each deal will be referenced in each sub-index, and bonds must be rated by Moody's and S&P, with the lesser of the two ratings applying. The five sub-indices are based on the rating of the reference obligations which are equally weighted at index launch. Subsequent weightings may change based on the performance of loans in the
'We expect ABX to build liquidity and transparency in the synthetic asset-backed market, attracting global investors that seek exposure to this asset class, both on the buy-side and sell- side,' says Kevin Gould, Executive Vice President and Head of Data Products and Analytics at Markit.
The minimum deal size is USD 500 million, and each tranche referenced must have a weighted average life of between four and six years (except for the AAA tranche, which must have a weighted average life greater than five years). No more than four deals can be selected from the same originator, and no more than six deals can be selected with the same master servicer.
Unlike the corporate CDS indices, the ABX contract component trades are reference obligation-specific, rather than entity-specific. Also, unlike corporate bonds which are bullet maturity, ABS bonds amortize at variable rates over the life of the instrument. An ISDA Pay-As-You-Go (PAUG) template, the standard for US residential mortgage-backed securities, references each bond.
Traditional credit events, as they apply to the PAUG contract, do not form part of the index contract, meaning all settlements will occur through the Floating Payment mechanism covering interest shortfalls, principal shortfalls and write-downs.
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