CMBX Indices The New US Commercial Mortgage Backed Credit Default Swap Benchmark Indices. March 2006

Transcription

1 CMBX Indices The New US Commercial Mortgage Backed Credit Default Swap Benchmark Indices March 2006

2 The New US CMBS CDS Benchmark - Themes Liquidity Standardization Diversification Flexibility Innovation Efficiency Transparency 2

3 Table of Contents The New Benchmark CMBX Indices 4 CMBX.NA Index - Portfolio Rules of Construction 17 Reference Portfolio 20 Trading, Credit Events and Roll Mechanism 22 Contacts 28 3

4 The New Benchmark CMBX Indices

5 CDS IndexCo Introduces Its Newest Series of Indices: CMBX CDS IndexCo Owns and maintains the CMBX, ABX & DJ CDX family of credit default swap (CDS) indices Liquidity commitments on CMBX, ABX & CDX from 14, 15, & 21 dealer institutions, respectively CMBX commences trading on March 7, 2006 DJ CDX NA was formed from a merger of the major CDS indices (iboxx and Trac-X) in April 2004 Between $25 and $50 billion of CDX notional volume traded daily Introduction of second generation product such as index tranches and index options Broad market acceptance and effective management of the indices has resulted in increased: Liquidity Transparency Market consensus (portfolio names, correlation calculations) Standardization 5

6 CDS IndexCo Creates the Benchmark for CDS of CMBS Liquidity Focus on the commercial mortgage backed sector Proven liquidity track record from the market-making group Multiple market-maker platform Transparency Objective, rules-based approach to portfolio construction Markit as administrator Daily prices available on Markit website Standardization Each index will reference a standardized basket of CMBS reference obligations Standardized documentation for contracts will promote operational efficiency Monthly payment amounts calculated and posted by Markit DTCC will offer efficient trade confirmation and settlement The New US CMBS Benchmark Index 6

7 Key Features Liquidity & Track Record Track record in CDS flow market and other credit indices The largest platform of leading market makers Inter-dealer broker participation Likely to increase trade flow in structured products Potential to impact cash spreads Structure Transparency Clear rules for portfolio construction Standardization and multi-market maker platform to ensure transparency Active participation of Markit as Administration, Calculation, and Marketing Agent Rolling Approximately every six months One roll mechanism agreed across all market-makers Simple and clear roll mechanism Product Breadth ISDA Pay-As-You-Go template Fixed Cap Applicable Standardized documentation No fees Static portfolio No physical settlement Five separate indices at benchmark rating levels (AAA/Aaa, AA/Aa2, A/A2, BBB/Baa2, & BBB-/Baa3) Unfunded Future Products Funded Note Program Tranched Series 7

8 CMBX Participants Five indices referencing similarly rated tranches from 25 deals Rules-based approach to construction New series of CMBX indices issued approximately every 6 months Suits a variety of investors looking for diversified CMBS exposure Asset Managers Hedge Funds Prop Trading Desks Research Quick credit exposure / hedging Relative value trades Relative value trades Source of credit spread data Liquidity management tool Directional trading / macro view Directional trading Whole Loan Originators Correlation Trading Desks Corporate Treasury Dealers Quick credit exposure / hedging Transparent spread hedging Suitable for portfolio hedging Easy ramp-up Easy access to diversified US CMBS exposure Benchmark for product innovation Flow trading 8

9 Benchmark Liquidity and Tradability Market-Makers of CMBX Bank of America Goldman Sachs Nomura International Bear Stearns JPMorgan RBS Greenwich Capital Citigroup Lehman Brothers UBS Credit Suisse Merrill Lynch Wachovia Deutsche Bank Morgan Stanley Inter-Dealer Brokers CMBX is expected to trade in the inter-dealer broker market Liquidity Securitizations backed by commercial mortgages are the 2 nd structured finance markets Increasing liquidity in the CDS of CMBS market Valuation analytics publicly available on largest sector in the US 9

10 CMBX Indices Designed for Operational Efficiency Trades will confirm over DTCC from initial launch date The New US CMBS Benchmark Index DTCC confirms for all inter-dealer trades and trades with customers who are enabled Trades can be input using DTCC s existing corporate index template Trades will be documented using two-page confirms, referencing a standard terms supplement and annex posted on Markit s website Initial factors for underlying reference obligations will be posted on Markit s website Standardized settlement calculation Markit will publish monthly fixed and floating payments for each contract Valuation analytics publicly available on Licensed dealers will provide daily closes for the most recent index series and monthly pricing on previously issued outstanding series 10

11 About Markit Markit is the Administration, Calculation and Marketing Agent for the ABX.HE index program Markit is the Administration and Calculation Agent for the DJ CDX index program Markit Background: Founded in 2001 by a team of credit market professionals to aggregate and provide clean credit data across asset classes on a single platform Asset Classes include: CDS (Corporate, ABS, and CMBS), Bonds (corporate, financial, sovereign, convertible), Asset- and Commercial Mortgage-Backed Securities, Syndicated Loans and Index Products Markit Reference Entity Database (RED) is the market standard for reference entity long legal names, reference entity-reference obligation relationships and pair identifiers The key industry source for accurate, consensus pricing for independent price verification, risk modelling and data back testing The industry source for standardized CDO and 1 st -to-default valuations, OTC derivative valuations as well as corporate dividend payment and equity index constituent information 11

12 Markit CMBX Calculator **Powered by Trepp, the leading provider of CMBS and commercial mortgage information, analytics and technology to the securities and investment management community. 12 Data on page is for example purposes only

13 Holders of Commercial and Multifamily Mortgage Loans: Change in Market Share Since 1990 ($ Billions) Q Source: CMSA, Commercial Mortgage Alert 13

14 CMBS Issuance in the U.S. Bond Markets since 1990 ($ Billions) The New US CMBS Benchmark Index Source: CMSA, Commercial Mortgage Alert 14

15 CMBS Review of 2004 & 2005 (Trading Volume in $ Billions) Cumulative Vols Monthly Vols Jan Feb. Mar. Apr. May June July Aug. Sept. Oct. Nov. Dec. Cumulative '04 Cumulative '05 Monthly '04 Monthly '05 0 Source: CMSA, CRE Direct News 15

16 Commercial Mortgage Securitization 1990 through 2005 Q3 Source: CMSA, Federal Reserve, Flow of Funds 16

17 Portfolio Rules of Construction

18 CMBX.NA Index Program Index Construction Algorithm Reference obligations considered must have the following characteristics prior to the launch/roll date Been issued within the last two years Minimum deal size of USD 700 million Be a debt or pass-through security referencing a pool of fixed rate securities Have a factor of 1.0 Be secured by obligations from at least 50 separate mortgages from at least 10 unaffiliated borrowers No more than 40% of underlying obligations can be from the same state No more than 60% of underlying obligations can be of the same property type Ratings provided by at least two of the following: Moody s, Fitch, and S&P; the lesser of all ratings will apply Five indices based upon the rating of the reference obligations: AAA, AA, A, BBB, and BBB- One bond from each deal will be referenced in each index AAA will be comprised of the most credit enhanced tranche with the longest average life with an initial issuance size of at least $100MM & a weighted average life between 8 & 12 years based on 0% CPY at issuance AAA must be a publicly issued security, whereas other rating classes can be publicly or privately issued Reference obligations equally weighted by initial par amount as of roll date (4.0% each), subsequent weightings may change based on the prepayment and credit experience of the underlying transactions Based on standard ISDA Pay-As-You-Go template Index represents aggregate performance of the basket of credit default swaps Each index will contain this same list of reference obligations until all reference obligations have been fully paid off or have matured 18

19 CMBX Index Family Construction/Roll of the Index Timeline Markit determines an initial list of 25 CMBS transactions for inclusion in the index & submits to Eligible CMBX Members Markit proposes additional CMBS transactions to replace any initial transactions that received a 75% majority vote for elimination & continues until a final list is compiled & discloses additional names to the public Markit informs all Eligible CMBX Members of the composition of the forthcoming CMBX index & publishes to the public the composition of such index Markit publishes a draft of the Annex for each forthcoming CMBX to each Eligible CMBX Member & the public Markit solicits spreads for each index from each Eligible CMBX Member and will compute the Fixed Rates Markit discloses the Fixed Rate to the public and all Eligible CMBX Members Roll Date less 10 Days Roll Date less 6 Days Roll Date less 4 Days Roll Date less 3 Days Roll Date less 1 Day (1pm) Roll Date less 1 Day (5pm) 19

20 Reference Portfolio

21 Reference Entities for the CMBX (Date of Publication: February 22, 2006) Banc of America Commercial Mortgage Inc., Series Banc of America Commercial Mortgage Inc., Series Banc of America Commercial Mortgage Inc., Series BEAR STEARNS COMMERCIAL MORTGAGE SECURITIES TRUST 2005-PWR10 Bear Stearns Commercial Mortgage Securities Trust 2005-PWR9 BEAR STEARNS COMMERCIAL MORTGAGE SECURITIES TRUST 2005-TOP20 CD 2005-CD1 COMMERCIAL MORTGAGE TRUST COMMERCIAL MORTGAGE PASS-THROUGH CERTIFICATES, SERIES 2005-CD1 COMMERCIAL MORTGAGE TRUST 2005-GG5 CSFB Commercial Mortgage Trust 2005-C5 CSFB Commercial Mortgage Trust 2005-C6 GE Commercial Mortgage Corp. Series 2005-C4 GMAC Commercial Mortgage Securities, Inc. Series 2006-C1 Trust J.P. MORGAN CHASE COMMERCIAL MORTGAGE SECURITIES CORP., SERIES 2005-CIBC13 J.P. MORGAN CHASE COMMERCIAL MORTGAGE SECURITIES CORP., SERIES 2005-LDP4 J.P. MORGAN CHASE COMMERCIAL MORTGAGE SECURITIES CORP., SERIES 2005-LDP5 LB-UBS COMMERCIAL MORTGAGE TRUST 2005-C5 LB-UBS COMMERCIAL MORTGAGE TRUST 2005-C7 LB-UBS COMMERCIAL MORTGAGE TRUST 2006-C1 MORGAN STANLEY CAPITAL I TRUST 2005-HQ7 MORGAN STANLEY CAPITAL I TRUST 2005-IQ10 MORGAN STANLEY CAPITAL I TRUST 2006-TOP21 WACHOVIA BANK COMMERCIAL MORTGAGE TRUST COMMERCIAL MORTGAGE PASS-THROUGH CERTIFICATES SERIES 2005-C21 WACHOVIA BANK COMMERCIAL MORTGAGE TRUST COMMERCIAL MORTGAGE PASS-THROUGH CERTIFICATES SERIES 2005-C22 MERRILL LYNCH MORTGAGE TRUST 2005-LC1 MERRILL LYNCH MORTGAGE TRUST 2005-CKI1 21

22 Trading, Credit Events and Roll Mechanism

23 CMBX: Indicative terms and conditions Indices: Indices Scheduled Termination Fixed Rate Date CMBX.NA.AAA.1 TBD [ ] CMBX.NA.AA.1 TBD [ ] CMBX.NA.A.1 TBD [ ] CMBX.NA.BBB.1 TBD [ ] CMBX.NA.BBB-.1 TBD [ ] Notional: Fixed Rate: Floating Rate Payments: Additional Fixed Payments: Quotations: Physical Settlement: Accruals: Payments: Day Count: Amortization mirrors that of the underlying bonds Established 1-day prior to roll date. Payable monthly based on average balance Interest Shortfall, Writedown, Principal Shortfall Interest Shortfall Reimbursement, Writedown Reimbursement, Principal Shortfall Reimbursement Dealers will quote a current market spread and exchange upfront amounts based on the difference between the current market spread and the Fixed Rate Not Applicable Accrues 25 th to 25 th Payments made on the 25 th of each month Actual/360 23

24 Trading - XYZ Sells Protection on $100MM CMBX.NA.A.1 The Fixed Rate on CMBX.NA.A.1 Index is [70] basis points per annum, payable monthly Fixed Rate Payer = Protection Buyer = Index Buyer Pays [70] basis points per annum monthly to counterparty on notional amount Notional amount will decline over time based on the reference obligations amortization Receives Floating Payments in the event of a: Interest Shortfall (capped at fixed rate) Principal Shortfall Writedown Makes payment in the event of the following: Interest Shortfall Reimbursement Amount Principal Shortfall Reimbursement Amount Writedown Reimbursement Amount Floating Rate Payer = Protection Seller = Index Seller Receives [70] basis points per annum monthly to counterparty on notional amount Notional amount will decline over time based on the reference obligation s amortization Pays Fixed Rate Payer in the event of a: Interest Shortfall (capped at fixed rate) Principal Shortfall Writedown Receives payment in the event of the following: Interest Shortfall Reimbursement Amount Principal Shortfall Reimbursement Amount Writedown Reimbursement Amount 24

25 Credit Event (Writedown) - XYZ Sells Protection on $100MM CMBX.NA.A.1 Credit Event - Writedown Reference Obligation Original Factor = 1.0; Current Factor = 0.7 A Writedown occurs on a Reference Obligation, for example, in year 3, in the amount of 1% of its current principal balance (Current Factor * Weighting * Loss) = (0.70 *.04 *.01) = = 0.028% Protection Seller pays to Protection Buyer a floating amount (0.028% x 100MM)= $28,000 Index notional amount on which premium is paid reduces by 0.028%, in addition to the principal payments of the month Following the Floating Payment Event, protection seller receives premium of [70] bps on the remaining index notional amount 25

26 CMBX.NA Trading Mechanics Each CMBX Has a Fixed Rate Trade Date Trade Initiation Trade Termination Index quoted higher than Fixed Rate Implies spreads have widened Buyer of protection (Index Buyer) pays the Seller of protection the difference in market value Buyer of protection receives accrued premium from the Seller of protection for the period from the end of the last accrual period until the trade effective date Seller of protection pays the Buyer of protection the difference in market value Seller of protection receives the accrued premium from the end of the last accrual period until the trade effective date from the buyer of protection Index quoted lower than Fixed Rate Implies spreads have tightened Seller of protection (Index Seller) pays Buyer of protection the difference in market value Seller of protection pays Buyer of protection the accrued premium for the period from the end of the last accrual period until the trade effective date Buyer of protection pays the Seller of protection the difference in market value Buyer of protection pays the Seller of protection the accrued premium for the period from the end of the last accrual period until the trade effective date 26

27 Appendix Credit Derivatives Physical Settlement Matrix and Confirmation CMBX Confirmation 27

28 Bank of America Charles Mather (704) Goldman Sachs Josh Birnbaum (212) Nomura International Phillip Evanski (212) Bear Stearns Todd Kushman (212) JPMorgan Andrew Taylor (212) RBS Greenwich Capital Brian Schwartz (203) Citigroup John Caputo (212) Lehman Brothers John Beaman (212) UBS David McNamara (212) Credit Suisse James Hiatt (212) Merrill Lynch Shaun Heelan (212) Wachovia Frank Tippett (704) Deutsche Bank Stephen Schwartz (212) Morgan Stanley Ross Feldman (212) Markit CDS IndexCo Administration Ben Logan Acting Chair Brad Levy Public Relations (212) Teresa Chick Public Relations (212) Jennifer Lee (310)