ABX.HE

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The ABX.HE (usually abbreviated as ABX ) is a family of financial indices (similar to a stock market index ) that is intended to reflect the market development of the ABS market for subprime mortgage securities . The ABX is used as the base value for Index CDS .

The ABX is a product by Markit and has existed since 2006. It received increased interest in the wake of the subprime crisis .

construction

The index family consists of 6 individual indices, each on subprime RMBS the rating levels refer AAA, AA, A, BBB and BBB-. In an index are credit default swap (CDS) 20 subprime RMBS with a corresponding emission rating summarized, which within a half-year emits were. Six new index series relating to the RMBS issued in the previous half-year will be launched approximately every six months. The first index series, designated 06-01, was launched in January 2006 and referred to RMBS from the second half of 2005.

A number of criteria have been defined for the RMBS on which the indices are based. Exactly which RMBS are taken into account in the index series is determined by a survey of the ABX market makers . The tendency will be for papers with a comparatively liquid CDS market.

The construction of the CDS summarized in the index has some special features (compare the construction of a normal CDS ):

  • The premium to be paid by the protection buyer is fixed. If the credit rating of the underlying asset changes, the premium remains the same; instead, a compensation payment is made when the contract is concluded, which compensates for the difference between the current risk premium and the premium specified in the CDS contractual conditions. As a result, the ABX indices are not listed as a risk premium (such as the iTraxx ), but on a price basis. The deviation of the index from 100 (“ par ”) corresponds to the compensation payment.
  • If a payment default occurs with one of the underlying RMBS, the CDS is not terminated. A compensation payment is made to the protection buyer and the CDS continues to run.

Use and market

The ABX offers market participants the opportunity to hedge positions in the subprime market or to invest in the market or to speculate there . The index enables market participants to take long or short positions without buying the actual securities or selling them short . The ABX also facilitates more complex speculations, such as betting on the different performance of different rating segments of the subprime market (so-called relative value arbitrage).

Since there are market makers for the index, it tends to be more liquid than many RMBS or CDS on RMBS. The extensive standardization of documentation and business processing via the DTCC clearing house simplifies business compared to less standardized CDS.

Since the ABX is based on a standardized basket of RMBS, an investor will rarely be able to precisely hedge their own position in RMBS. In most cases, however, the portfolio to be hedged will have a different composition than the index, so that a basis risk remains.

As the liquidity of the markets for ABS with subprime reference has fallen sharply as a result of the subprime crisis, the ABX is an important price indicator for such products. However, concerns were also expressed by market participants that the sharp fall in the price of the ABX during the crisis would exaggerate the actual default risks.

The TABX

The ABX-derived TABX was issued as an index for CDOs based on subprime RMBS. The TABX is based on the ABX indices for the rating levels BBB and BBB- and the first and second half of 2006 (index series 06-02 and 07-01). It reflects the value of the tranches of a theoretical CDO based on the subprime RMBS of the ABX series mentioned.

Surname

The addition ".HE" stands for "Home Equity" and is intended to distinguish the index family from other index families planned by Markit that are intended to refer to other types of ABS (".AU" for "Auto Loans", ".CC" for " Credit Cards "," .SL "for" Student Loans "," .XX "for" Others ")

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Individual evidence

  1. ^ Reserve Bank of Australia; Handelsblatt: The new crisis barometer