Itraxx
Encyclopedia
iTraxx is the brand name for the family of credit default swap index
products covering regions of Europe, Australia, Japan and non-Japan Asia. They form a large sector of the overall credit derivative
market. The indices are constructed on a set of rules with the overriding criterion being that of liquidity of the underlying Credit Default Swaps
(CDS). The iTraxx suite of indices are owned, managed, compiled and published by International Index Company (IIC), who also license market makers.
Credit Default Swap indices allow an investor to transfer credit risk in a more efficient manner than using groups of single CDSs. They are standardised contracts and reference a fixed number of obligors with shared characteristics. Investors can be long or short the index which is equivalent to being protection sellers or buyers.
The most widely traded of the indices is the iTraxx Europe index composed of the most liquid 125 CDS referencing European investment grade credits, subject to certain sector rules as determined by the IIC and also as determined by the SEC. There is also significant volume, in nominal values, of trading in the HiVol and Crossover (also referred to as Xover) indices. HiVol is a subset of the main Europe index consisting of what are seen as the most risky 30 constituents at the time the index is constructed. Crossover is constructed in a similar way but is composed of 40 sub-investment grade credits. Also traded are iTraxx Sector indices: NonFin (non-financials), SenFin (senior-financials) and SubFin (sub-financials).
The constituents of the indices are changed every six months, a process known as "rolling" the index. The roll dates are March 20 and September 20 each year. For example, Series 13 was launched on March 20, 2010, with a maturity of June 20, 2015 for the 5 year contract. Other maturities for Europe, HiVol and Crossover are 3 year, 7 year and the 10 year, whilst the NonFin, SenFin and SubFin only trade at maturities of 5 and 10 years.
These indices are tradable instruments in their own right, with pre-determined fixed rates, and the prices set by market demand. Official pricing is collected on-behalf of IIC by Markit Group Limited
on a daily basis by polling the trading desks at banks that are licensed market makers. The most liquid indices also have a weekly Tradable Fixing calculated in a similar fashion to the Libor fixings process. The tradable fixing is often used as a reference price for calculating payments of other structured credit instruments.
At present trading in iTraxx CDS contracts is limited to the over-the-counter
(OTC) market. Eurex
the futures exchange launched exchange-traded futures (not CDS) contracts based upon the iTraxx Europe Main, HiVol and Crossover 5 year indices in 2007, but these products achieved minimal volume at launch and do not currently trade.
NYSE Euronext made iTraxx CDS contracts available for processing and clearing on its Bclear platform on 22 December 2008.
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...
products covering regions of Europe, Australia, Japan and non-Japan Asia. They form a large sector of the overall credit derivative
Credit derivative
In finance, a credit derivative is a securitized derivative whose value is derived from the credit risk on an underlying bond, loan or any other financial asset. In this way, the credit risk is on an entity other than the counterparties to the transaction itself...
market. The indices are constructed on a set of rules with the overriding criterion being that of liquidity of the underlying Credit Default Swaps
Credit default swap
A credit default swap is similar to a traditional insurance policy, in as much as it obliges the seller of the CDS to compensate the buyer in the event of loan default...
(CDS). The iTraxx suite of indices are owned, managed, compiled and published by International Index Company (IIC), who also license market makers.
Credit Default Swap indices allow an investor to transfer credit risk in a more efficient manner than using groups of single CDSs. They are standardised contracts and reference a fixed number of obligors with shared characteristics. Investors can be long or short the index which is equivalent to being protection sellers or buyers.
The most widely traded of the indices is the iTraxx Europe index composed of the most liquid 125 CDS referencing European investment grade credits, subject to certain sector rules as determined by the IIC and also as determined by the SEC. There is also significant volume, in nominal values, of trading in the HiVol and Crossover (also referred to as Xover) indices. HiVol is a subset of the main Europe index consisting of what are seen as the most risky 30 constituents at the time the index is constructed. Crossover is constructed in a similar way but is composed of 40 sub-investment grade credits. Also traded are iTraxx Sector indices: NonFin (non-financials), SenFin (senior-financials) and SubFin (sub-financials).
The constituents of the indices are changed every six months, a process known as "rolling" the index. The roll dates are March 20 and September 20 each year. For example, Series 13 was launched on March 20, 2010, with a maturity of June 20, 2015 for the 5 year contract. Other maturities for Europe, HiVol and Crossover are 3 year, 7 year and the 10 year, whilst the NonFin, SenFin and SubFin only trade at maturities of 5 and 10 years.
These indices are tradable instruments in their own right, with pre-determined fixed rates, and the prices set by market demand. Official pricing is collected on-behalf of IIC by Markit Group Limited
Markit Group Limited
Markit Group Limited. is a global financial information services company with over 2,300 employees. The company provides independent data, valuations and trade processing across all asset classes in order to enhance transparency, reduce risk and improve operational efficiency...
on a daily basis by polling the trading desks at banks that are licensed market makers. The most liquid indices also have a weekly Tradable Fixing calculated in a similar fashion to the Libor fixings process. The tradable fixing is often used as a reference price for calculating payments of other structured credit instruments.
At present trading in iTraxx CDS contracts is limited to the over-the-counter
Over-the-counter (finance)
Within the derivatives markets, many products are traded through exchanges. An exchange has the benefit of facilitating liquidity and also mitigates all credit risk concerning the default of a member of the exchange. Products traded on the exchange must be well standardised to transparent trading....
(OTC) market. Eurex
Eurex
Eurex is one of the world's leading derivatives exchanges, providing European benchmark derivatives featuring open and low-cost electronic access globally...
the futures exchange launched exchange-traded futures (not CDS) contracts based upon the iTraxx Europe Main, HiVol and Crossover 5 year indices in 2007, but these products achieved minimal volume at launch and do not currently trade.
NYSE Euronext made iTraxx CDS contracts available for processing and clearing on its Bclear platform on 22 December 2008.