ITraxx

ITraxx

iTraxx is the brand-name for the family of credit default swap index products covering regions of Europe, Japan and non-Japan Asia. They form a large sector of the overall credit derivative market. The indices are constructed on a set of rules with the overriding criterion being that of liquidity of the underlying Credit Default Swaps (CDS). The iTraxx suite of indices are owned, managed, compiled and published by International Index Company (IIC), who also license market makers.

Credit Default Swap indices allow an investor to transfer credit risk in a more efficient manner than using groups of single CDSs. They are standardised contracts and reference a fixed number of obligors with shared characteristics. Investors can be long or short the index which is equivalent to being protection sellers or buyers.

The most widely traded of the indices is the iTraxx Europe index composed of the most liquid 125 CDS referencing European investment grade credits, subject to certain sector rules as determined by the IIC and also as determined by the SEC. There is also significant volume, in nominal values, of trading in the HiVol and Crossover indices. HiVol is a subset of the main index consisting of what are seen as the most risky 30 constituents at the time the index is constructed. Crossover is constructed in a similar way but is composed of 50 sub-investment grade credits.

The constituents of the indices are changed every six months, a process known as "rolling" the index. The roll dates are March 20th and September 20th each year. The latest series is S10 which matures on June 20, 2013 for the 5 year contract. Series 10 will be launched on March 24th 2008. Other maturities for Europe and HiVol are 3 year, 7 year and the 10 year, whilst the Crossover only trades at maturities of 5 and 10 years.

These indices are tradable instruments in their own right, with pre-determined fixed rates, and the prices set by market demand. Official pricing is collected on-behalf of IIC by Markit Group Limited on a daily basis by polling the trading desks at banks that are licensed market makers. The most liquid indices also have a weekly Tradable Fixing calculated in a similar fashion to the Libor fixings process. The tradable fixing is often used as a reference price for calculating payments of other structured credit instruments.

Whilst at present trading in iTraxx indices is limited to the Over-the-counter (OTC) market, Eurex the futures exchange has launched exchange-traded futures contracts based upon the iTraxx Europe, HiVol and Crossover 5 year indices. These products do not currently trade.

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