Traders shun ABX prime index

Recently revived plans to launch a synthetic index of prime US RMBS appear to have met fresh setbacks due to the pronounced shift away from non-agency mortgage issuance.

Last month Markit reopened discussions with a dealer working group on implementing ABX.Prime, an index of triple-A deals that was put on hold in December last year following the sustained credit market downturn. However, sources say that latest feedback on the index, including from potential buy-side users, has been less than encouraging, since new US mortgage issuance is currently only coming through agencies such as Fannie Mae, Freddie Mac and Ginnie Mae.

“There is no open interest and there is only legacy trading in non-agency RMBS,” says one official. “Therefore products like this and the other ABX indices have a limited shelf life. Legacy positions could last for a few years of course, but they are finite. Only agency mortgages are being issued and it looks as though agency CMOs are the future of the business.”

A Markit presentation seen by Creditflux suggests the launch of three series of the index referencing the 2005, 2006 and 2007 vintages, as well as one aggregate index combining vintages. Initially it was thought there would be between 10 and 20 deals in each index, satisfying a series of concentration and collateral tests. However, subsequent reports indicated that each vintage would reference 20-25 deals originated in those years.

It was envisioned the ABX.Prime aggregated index would trade via CDS contract, serving as a macro indicator for the entire asset class.

Sources say that participants in the ABS space are currently looking for new trading avenues into which they can diversify.

“There is now a clear shift in the market’s focus towards consumer ABS, such as credit cards, autos and student loans. We are seeing plenty of bwics of consumer debt, thanks to the Public-Private Investment Programme for legacy assets. These things tend to trade at +50bp or +100bp so traditionally haven’t been as attractive to hedge funds as they are to money managers. But consumer credit also has a short average life, so now non-traditional players like hedge funds are starting to get involved.”