Credit index

A credit derivative index is a basket of single name credit default swaps with standardised terms. Unlike other multi-name credit default swaps, such as first-to-default baskets, index swaps provide unleveraged exposure to the names in the basket.

The indices act as a global set of benchmarks, allowing investors to buy and sell a cross-section of the credit market much more efficiently than they could if they were buying and selling individual credits. There are credit default swap indices in Europe, North America, Japan, Australia, non-Japan Asia and emerging markets. Unlike in most equity and cash bond indices, constituents are not selected on the basis of their market size, but by specific rules set out for each index. For the main indices, constituents are chosen by liquidity, for example. They are also (for most indices) equally weighted.

A new credit derivative index is launched every six months, usually in March and September, to reflect the names in the credit derivative market that fit the rules for each index at that time. On these ‘roll' dates, a new basket of credits is created, with constituents selected by an independent index administrator based on input from dealers. Usually, only a handful of names change from one series to the next.

See main credit indices, index roll.