ABX.HE, an innovative synthetic ABS index of US home equity asset-backed securities, was rolled into its second series on 19 July 2006.
The roll date was announced by CDS IndexCo LLC, a consortium of 16 investment banks that combined for the creation of tradable synthetic indices, and Markit Group. The new series, ABX.HE 06-2, will reference a new set of underlying deals issued within the past six months.
Unlike the CDX and iTraxx indices where the roll concept is designed as a way for investors to retain exposure to the most liquid series of corporates, and where liquidity tends to be concentrated in the most recent 'on-the-run' series, ABX.HE is designed so that each series provides a unique vintage profile.
Whereas rolling from one series of CDX or iTraxx indices to the next has historically changed one's exposure by only 3-5%, when rolling from ABX.HE 06-01 into ABX.HE 06-2, the new series will consist of a unique set of deals (and underlying loans) that provide participants with vintage exposure to a specific six month period, namely:
- ABX.HE 06-1 represents home equity underwritten in the second half of 2005; while,
- ABX.HE 06-2 represents home equity underwritten in the first half of 2006.
Bradford S Levy, Managing Director, Firmwide eBusiness Group at Goldman Sachs and acting Chairman of CDS IndexCo said: 'We have been very pleased by the reception in the market of the first series of ABX.HE as investors and dealers have found it to be a simple and efficient way to gain or hedge exposure to home equity asset-backed securities.'
'The nature of the securities contained within the ABX.HE Indices means that each series has a unique vintage profile,' stated Kevin Gould, Executive Vice President and Head of Data Products and Analytics at Markit. 'As such, while it is possible that the 'on-the-run' indices will maintain the most liquidity, dealers will continue to mark the most recent 'off-the-run' series to retain its transparency, thereby giving investors a choice to either roll into the new series or remain with the original.'
Market-makers in the ABX.HE Indices include the following: ABN AMRO; Bank of America; Barclays Capital; Bear Stearns; BNP Paribas; Citigroup; Credit Suisse; Deutsche Bank; Goldman Sachs; JPMorgan; Lehman Brothers; Merrill Lynch; Morgan Stanley; RBS Greenwich; UBS; and Wachovia.
Markit is the administration, calculation, and marketing agent for the ABX.HE Indices. This broad remit includes capturing daily price fixings, publishing monthly fixed and floating payments, and supplying a calculator for the analysis and settlement of trades; handling issues around rules, operations, marketing, and analytics; producing marketing materials, negotiating dealer and data licenses, and communicating information to the wider market.
Each series of the ABX.HE Indices 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.HE Indices will roll every six months. The underlying bonds that serve as reference obligations 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.
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 underlying pools.
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.HE 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. Hence all settlements will occur through the Floating Payment mechanism covering interest shortfalls, principal shortfalls and write-downs.