2011-12-28

CDS index




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 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.

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.

CDX Indices

See also

External links


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