In 2005 and 2006, the most recent additions to the growing family of credit derivative indices were the ABX HE and CMBX indices (see page opposite). These indices comprise recently issued residential and commercial mortgage backed securities respectively. They are similar in concept to the earlier corporate credit derivative indices, but trades are documented using a somewhat modified version of the pay-as-you-go confirm, published by Isda in 2005.
One important difference between ABX HE and iTraxx is that all the ABX HE sub- indices reference the same list of 20 ABS issuers (or in fact SPVs). Then, each sub-index references the security from each issue for a particular rating category such as triple A. This is because the different classes of bonds each have distinct characteristics.
A further difference from the corporate indices is that the composition of the asset-backed indices should see a complete change at each six-monthly roll. The composition of the index is designed to reflect the most recent crop of new securitisations, reflecting the origins of the asset-backed credit default swaps market as a means for securitisation arrangers to hedge their pipeline of forthcoming deals.
The ABS indices are expected to generate more interest in the ABCDS market in the same way that the iTraxx and CDX did in single name CDS market. More players are comfortable taking a broad market view via an index rather than betting on single name ABS. In addition, the index also allows traders to put on relative value trades between different parts of the ABS capital structure – trading triple A risk versus triple B risk, for example or between broad asset classes – trading ABX against CMBX, for example.