A credit index is a list of credit instruments or exposures designed to be representative of some part of the credit market as a whole.
Indices such as the corporate component of the Lehman Brothers US Aggregate index have long been used as a benchmark for managers investing in US corporate bonds. However, a new type of index, usually referred to as a tradeable credit derivative index, or simply a credit derivative index or credit index, became popular from around 2002 and have become the most liquid type of credit derivative. These indices are made up of reference credits that are judged by a poll of dealers to be the most liquid entities in the single name credit default swap market.
Credit indices are traded using credit default swaps with standardised terms including a fixed spread and standard maturity dates. An index credit default swap references all the names in the index, and if there is a default, the credit event is settled based on that name’s weight in the index. The composition of the indices changes periodically – usually every six months – and for most indices, each name has an equal weight in the index.