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Subprime Mortgage Credit Derivatives by FRANK J. FABOZZI, THOMAS A. ZIMMERMAN, DOUGLAS J. LUCAS, SHUMIN LI, LAURIE S. GOODMAN

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CHAPTER 7

The ABX and TABX Indices

Many market participants who have historically not been active in the U.S. mortgage markets have turned to the ABX indices as a way to express their views on mortgage credit. In this chapter, we take a careful look at the ABX indices, as well as the TABX indices: how they are constructed and their trading mechanics. In Chapter 11, we look at pricing.

BACKGROUND

Trading in the home equity asset-backed credit default benchmark indices, hereafter referred to as ABX indices or ABX.HE indices, commenced January 2006. The trading is offered by CDSIndexCo, a consortium of 16 credit derivative desks.1 All members (except for HSBC) contribute to the ABX indices, which are managed by Markit Group. These two organizations also offer and manage trading of the Dow Jones CDX indices, which are the most actively traded corporate CDS indices.

The ABX.HE indices consist of five separate subindices, one for each of the rating categories: AAA, AA, A, BBB, and BBB–. Appropriately, the names of the five subindices are ABX.HE.AAA, ABX.HE.AA, ABX.HE.A, ABX.HE.BBB, and ABX.HE.BBB–. Each subindex consists of 20 tranches (of the same rating as the rating category for that particular subindex) from the 20 HEQ ABS deals, with each deal represented once in each subindex.

A new set of ABX.HE indices is launched every six months on January 19 and July 19, referred to as roll dates. As of November 2007, four sets of ABX indices are outstanding: ABX 06-1, ABX 06-2, ABX 07-1, ...

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