CDS Indexco and Markit Announce Roll of the ABX.HE Indices

Unlike the CDX and iTraxx indices where the roll concept is designed as a way for investors to retain exposure to the most liquid series of credits, and where liquidity tends to be concentrated in the most recent “on-the-run” series, ABX.HE is designed so that each series provides a unique vintage profile.

Whereas rolling from one series of CDX or iTraxx indices to the next has historically changed one’s exposure by only 3-5%, when rolling from ABX.HE 06-02 into ABX.HE 07-1, the new series will consist of a unique set of deals that provide participants with vintage exposure to a specific six month period, namely:

• ABX.HE 06-1 represents home equity underwritten in the second half of 2005;
• ABX.HE 06-2 represents home equity underwritten in the first half of 2006; while,
• ABX.HE 07-1 represents home equity underwritten in the second half of 2006.

 Additional details and considerations concerning the roll of the ABX.HE indices, as well as a complete list of reference obligations, coupons and index RED codes can be viewed at: www.markit.com.

Market-makers in the ABX.HE indices include the following: ABN AMRO; Bank of America; Barclays Capital; Bear Stearns; BNP Paribas; Citigroup; Credit Suisse; Deutsche Bank; Goldman Sachs; JPMorgan; Lehman Brothers; Merrill Lynch; Morgan Stanley; RBS Greenwich; UBS; and Wachovia.

Markit is the administration, calculation, and marketing agent for the ABX.HE indices.  This broad remit includes capturing daily price fixings, publishing monthly fixed and floating payments, and supplying a calculator for the analysis and settlement of trades; handling rules, operations, marketing, and analytics; negotiating dealer and data licenses, and communicating information to the wider market.

Each series of the ABX.HE indices is a family of five sub-indices, each of which consists of a basket of 20 credit default swaps referencing U.S. sub-prime home equity securities.  As with the CDX and iTraxx families of credit derivative indices, the ABX.HE indices will roll every six months.  The underlying bonds that serve as reference obligations are selected through a polling process of the ABX dealer group by Markit, in order to select the most liquid securities backed by home equity loans.

In order to qualify for index selection, an issuer must have rated bonds for each of the AAA, AA, A, BBB, and BBB- categories.  One bond from each deal will be referenced in each sub-index, and bonds must be rated by Moody’s and S&P, with the lesser of the two ratings applying.  The five sub-indices are based on the rating of the reference obligations which are equally weighted at index launch.  Subsequent weightings may change based on the performance of loans in the underlying pools. 

The minimum deal size is $500 million, and each tranche referenced must have a weighted average life of between four and six years, except for the AAA tranche, which must have a weighted average life greater than five years.  No more than four deals can be selected from the same originator, and no more than six deals can be selected with the same master servicer.

Unlike the corporate CDS indices, the ABX.HE contract component trades are reference obligation-specific, rather than entity-specific.  Also, unlike corporate bonds which are bullet maturity, ABS bonds amortize at variable rates over the life of the instrument.  An ISDA Pay-As-You-Go (PAYG) template, the standard for U.S. residential mortgage-backed securities, references each bond.  Traditional credit events, as they apply to the PAYG contract, do not form part of the index contract therefore all settlements will occur through the Floating Payment mechanism covering interest shortfalls, principal shortfalls and writedowns. 

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 For further information on ABX.HE: see www.markit.com or contact Ben Logan, Managing Director, Product Development at Markit on +212 931 4925, or any of the participating ABX dealers listed below:

ABN AMRO - Patrick Phalon, Corporate Communications, (212) 409-6473

Bank of America - Louise Hennessy, GCIB Communications, (212) 847-5403

Barclays Capital - Kristin Friel, Corporate Communications, (212) 412-7521

Bear Stearns - Renu Aldrich, Associate Director, (212) 272-2097

BNP Paribas - Edwina Frawley, (212) 841-3719

Citigroup - Danielle Romero-Apsilos, Corporate and Investment Banking Group Communications, (212) 816-2264

Credit Suisse - Pen Pendleton, Corporate Communications, (212) 325-2590

Deutsche Bank - Michele Allison, Press Office, (212) 250-4864

Goldman Sachs - Michael Duvally, VP, Media Relations, (212) 902-2605

JPMorgan - Brooke Harlow, Corporate Communications, (212) 270-7381

Lehman Brothers - Kerrie Cohen, Corporate Communications, (212) 526-4092

Merrill Lynch - Kristin Celauro, Media Relations, (212) 449-2004

Morgan Stanley - Mark Lake, Media Relations, (212) 761-0814

RBS Greenwich Capital - Peter Ward, Corporate Communications Director, (203) 618 6783

UBS - Kris Kagel, UBS Corporate Communications, (212) 713-8703

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About CDS IndexCo

CDS IndexCo is a consortium of 16 investment banks which are licensed as market makers in the ABX, CMBX and CDX indices.  The market makers include:  ABN AMRO, Bank of America, Barclays Capital, Bear Stearns, BNP Paribas, Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, HSBC, JPMorgan, Lehman Brothers, Merrill Lynch, Morgan Stanley, UBS, and Wachovia.

About Markit

Markit Group Limited is the leading provider of independent data, portfolio valuations and OTC derivatives trade processing to the global financial and commodities markets.  The company receives daily data contributions from over 70 dealing firms, and its services are used by almost 1,000 institutions to enhance trading operations, reduce risk and manage compliance. 

Markit’s position in the derivatives markets has been acknowledged by the industry with numerous awards.  In 2006, the company won Operations Management’s Vendor of the Year award (Trade Processing); Financial News’ Best Derivatives Data Solution and Best New Vendor Solution (Portfolio Valuations); Credit’s Best Operational Support Services Provider; Inside Market Data’s Reference Data Provider of the Year, and Company to Watch; Risk’s Trading Initiative of the Year (Credit Event Fixings); and Structured Finance International’s Editor’s Award for Advancing Structured Finance.  In 2005, Markit received International Securitisation Report’s Editor’s Award for Innovation; International Financing Review’s Innovation of the Year (Credit Event Fixings); Financial News’ Best Derivatives Data Provider; and Operations Management’s Vendor of the Year award.

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