Credit default swap index

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 standardized 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.

Issuance
There are currently two main families of corporate CDS indices: CDX and iTraxx. CDX indices contain
North American and Emerging Market companies[1] and are administered by CDS Index Company
(CDSIndexCo) and marketed by Markit Group Limited, and iTraxx indices contain companies from the
rest of the world[2] 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.[3] 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 are illiquid. 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.[4] 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 Standard North American Corporates (SNAC).[5] Prior to SNAC
(i.e. CDX.NA.IG Series 3 through 11) 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.

Quotation and cashflows

Most indices will be quoted at a theoretical traded spread in basis points. This represents the fraction of the
protected notional that would be paid yearly. The standardization of indices means that instead of paying
the theoretical spread, the fixed (or running) spread (as defined in the index documentation) is paid. It also
means that coupon payments are not at fixed intervals starting from the trade date - payment dates are fixed
on the 20th of March, June, September, and December. This means that the first coupon period may be a
different length to the others. To offset the difference between traded spread and running spread, and the
accrual from the first coupon period, an upfront fee is paid.

CDX.NA.HY and CDX.EM indices are generally quoted slightly differently. In the same manner as high
yield single name CDSs, they are quoted as a price - i.e. the percentage of the notional that is paid as an
upfront fee.[6]

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 more 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. From
October 2013, certain trades under the USA's jurisdiction are mandated to be traded on a particular type of
e-trading platform called a Swaps Execution Facility (SEF).[7]

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.

Credit events
Upon the declaration of a credit event by the ISDA Determinations Committee, the index will be
reversioned, and trading in the new index version will commence. The initial issuance is version 1 (e.g.
iTraxx Europe Series 19 Version 1), and the version is incremented for each name in the index that has
defaulted.[4]: 1 2 

In the event of a "Failure to Pay", or a "Bankruptcy" credit event, the protection seller makes a payment to
the protection buyer on the credit event settlement date. The size of the payment is equal to that which
would be paid if protection had been bought on a single name CDS with a notional scaled down by the
constituent's weighting in the index.

In the event of a "Restructuring" credit event, the index is still reversioned. Instead of simply being settled,
however, a single name CDS is spun off which can then undergo the usual single name optional triggering
process.[8]

Clearing
Historically, CDS indices have always been traded as a bilateral contracts directly between parties. This
brings with it the additional risk of counterparty default - where one party to a trade fails to meet its
obligations under the trade. To mitigate this risk, clearing through Central CounterParties (CCPs) was
introduced. In this model, both parties to the trade face the CCP, and all members of the CCP pay into a
fund to cover costs in the event that one member defaults.

Indices are currently cleared through several CCPs, with ICE Clear Credit[9] (formerly ICE Trust) and ICE
Clear Europe,[10] and Chicago Merchantile Exchange (CME)[11] launching in 2009, and LCH.Clearnet[12]
in 2012.

From March 2013, certain indices under the USA's CFTC's jurisdiction became mandated to clear on trade
date.[13]

iTraxx indices
There are different families of iTraxx credit default swap index broken down by geographical region
consisting of Europe, Asia and a Sterling denominated index.
 Number of
Family Type Index name Description
entities

Most actively traded names in the six

iTraxx Europe 125
months prior to the index roll

iTraxx Europe Highest spread (riskiest) non-financial

Benchmark 30
HiVol names from iTraxx Europe index
Indices
iTraxx Europe
75 Sub-investment grade names
Crossover

iTraxx LEVX 40 European 1st Lien Loan CDS

iTraxx Non-
100 Non-financial names
Financials

Europe iTraxx Financials

25 Senior subordination financial names
Senior

iTraxx Financials
25 Junior subordination financial names
Sub
Sector Indices Telecommunications, media and
iTraxx TMT 20
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

iTraxx Asia 50 Asia ex-Japan Investment Grade

iTraxx Asia HY 20 Asia ex-Japan High Yield

Asia
iTraxx Japan 50 Japan

iTraxx Australia 25 Australia

iTraxx SOVX West
15 Sovereign West Europe CDS
Europe

iTraxx SOVX Sovereign Central/East Europe, Middle

15
CEEMEA East & Africa

iTraxx SOVX Asia

10 Sovereign Asia Pacific
Pacific
Sovereign
iTraxx SOVX Latin
8 Sovereign Latin America
America

iTraxx SOVX IG Sovereign Global Liquid Investment Grade

iTraxx SOVX G7 Sovereign G7

iTraxx SOVX BRIC Sovereign Brazil, Russia, India, China

CDX indices
Number of
Index Name Description
entities

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

CDSs that are at the crossover point between investment grade and
CDX.NA.XO 35
junk
CDX.EM 14 Emerging market CDSs

CDX.EM
40 Emerging market CDSs
Diversified

LCDX 100 NA First Lien Leverage Loans CDSs

On 14 November 2007, Markit acquired International Index Company and agreed to acquire CDS
IndexCo.[14]

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

External links
Markit web site (http://www.markit.com/)

References
1. "CDX" (https://www.markit.com/product/cdx). markit.com.
2. "iTraxx" (https://www.markit.com/product/itraxx). markit.com.
3. Whittall, Christopher (September 17, 2014). "New CDS indices roll-out delayed" (https://ww
w.reuters.com/article/credit-markit-idUSL6N0RI3JG20140917). Reuters. Retrieved
March 30, 2015.
4. [1] (http://content.markitcdn.com/corporate/Company/Files/DownloadFiles?CMSID=577e364
482314b31b158ae2c2cecc89d) Markit Credit Indices A Primer July 2014
5. "Understanding the new standard North American credit default swap: evolving
documentation and market practice" (http://www.lexology.com/library/detail.aspx?g=134356
7f-810d-478e-9c38-0869fcfb0986). lexology.com.
6. Pollack, Lisa (January 27, 2012). "How to read CDS prices, featuring Portugal" (http://ftalpha
ville.ft.com/2012/01/27/853041/how-to-read-cds-prices-featuring-portugal/). ft.com. Retrieved
March 30, 2015.
7. "Derivatives trading: Not with a bang - The Economist" (https://www.economist.com/news/fin
ance-and-economics/21587231-chaotic-launch-set-electronic-trading-platforms-not-bang).
The Economist. October 5, 2013. Retrieved March 30, 2015.
8. "Small Bang Protocol: Credit Operations Best Practices" (https://web.archive.org/web/20160
304130517/http://www.isda.org/c_and_a/pdf/credit-ops-best-practice-restructuring.pdf)
(PDF). isda.org. December 18, 2009. Archived from the original (http://www.isda.org/c_and_
a/pdf/credit-ops-best-practice-restructuring.pdf) (PDF) on March 4, 2016. Retrieved
March 30, 2015.
9. "ICE Clear Credit" (https://www.theice.com/clear_credit.jhtml). theice.com.
10. "ICE Clear Europe: European CDS Clearing" (https://web.archive.org/web/2013110906561
6/https://www.theice.com/clear_europe_cds.jhtml). Archived from the original (https://www.th
eice.com/clear_europe_cds.jhtml) on 2013-11-09. Retrieved 2013-10-10.
11. "CME Group Launches Credit Default Swaps Initiative; Begins Clearing Trades - CME
Investor Relations" (http://investor.cmegroup.com/investor-relations/releasedetail.cfm?Relea
seID=430362). cmegroup.com.
12. "LCH.Clearnet Group - Media Centre - Press Releases - 2012-05-15 LCH.Clearnet
launches CDSClear Internationally" (https://web.archive.org/web/20131016210039/http://ww
w.lchclearnet.com/media_centre/press_releases/2012-05-15.asp). Archived from the original
(http://www.lchclearnet.com/media_centre/press_releases/2012-05-15.asp) on 2013-10-16.
Retrieved 2013-10-10.
13. "CFTC Issues Clearing Determination for Certain Credit Default Swaps and Interest Rate
Swaps" (https://www.cftc.gov/PressRoom/PressReleases/pr6429-12). cftc.gov.
14. "Markit Acquires International Index Company and Agrees to Acquire CDS IndexCo" (http://w
ww.mark-it.com/Company/Media-Centre). Markit. 14 November 2007. Retrieved 30 March
2015.

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