Markit Excess Return Credit Indices Guide for price based indices
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1 Marki Excess Reurn Credi Indices Guide for price based indices Sepember 2011
2 Marki Excess Reurn Credi Indices Guide for price based indices Conens Inroducion...3 Index Calculaion Mehodology...4 Semi-annual index roll process...4 Model inpu facors...4 Managemen of defauls in he index...5 Trigger even...5 Procedure...5 Appendix: Marki Excess Reurn Credi Index calculaion mehodology for price based indices...6 Index calculaion...6 Index Rolls...6 Furher informaion...7 Copyrigh 2011, Marki Group Limied. All righs reserved. 2
3 Marki Excess Reurn Credi Indices Guide for price based indices Inroducion This documen explains he echnical calculaion of he Marki CDX Excess Reurn Indices which are based on price based underlying indices: Marki CDX.NA.HY 5-year EXCESS RETURN INDEX Marki CDX.EM 5-year EXCESS RETURN INDEX These indices measure he performance of holding he respecive on-he-run CDX index conracs. The indices reflec a long credi posiion i.e. selling proecion on he CDX defaul swap indices. I herefore replicaes he behavior of a ficiious unfunded porfolio ha buys one CDX index conrac. The porfolio is always invesed in he on-he-run CDX index series ha i racks - each ime a new CDX index series is published, due o he regular index roll (every March and Sepember) or due o a credi even in a consiuen of he curren series, he posiion in he reference porfolio is rolled ino he on-he-run/reduced index posiion. The base index level of Marki CDX.EM 5-year EXCESS RETURN INDEX will be 100 a he launch of Series 7 of he CDX.EM index respecively (i.e., 20 March 2007). The base index level of he Marki CDX.NA.HY 5-year EXCESS RETURN INDEX will be 100 a he launch of Series 8 of he CDX.NA.HY index (i.e., 27 March 2007). Copyrigh 2011, Marki Group Limied. All righs reserved. 3
4 Marki Excess Reurn Credi Indices Guide for price based indices Index Calculaion Mehodology The Excess Reurn Indices measure he performance of holding he respecive on-he-run CDX index conracs. The CDX.NA.HY and CDX.EM indices are price based indices and are quoed in he marke direcly in price erms. The Excess Reurn Indices involve selling proecion on he CDX credi defaul swap indices - he index reurn hen reflecs a long credi posiion. On he firs rading day of he new on-he-run indices on 20 March and 20 Sepember if hese days are business days, if no he nex business day - he posiion in he off-he-run index is unwound and a posiion in he new series is enered ino. The conracs on all price based indices are sold and purchased a he official End-of-Day mid-price index levels of he relevan rading day. The indices reflec a proecion seller s posiion and herefore receive a coupon on a quarerly basis. Any coupons paid are reinvesed immediaely ino he respecive index on he day hey are paid. Semi-annual index roll process During he regular roll process he index reurn should reflec he value of exiing he long risk posiion in he old (i.e. off-he-run) CDX index conrac and simulaneously enering he new (i.e. on-he-run) index conrac a mid a he end of he firs day of rading of he new index. Transacing a mid means ha ransacion coss are no included. Therefore, for he CDX.NA.HY 5-year EXCESS RETURN INDEX a fla roll ransacion cos of 0.15% for he old and new series is applied while for he CDX.EM 5-year EXCESS RETURN INDEX a fla roll ransacion cos of 0.25% for he old and new series is applied. Model inpu facors Credi curve: For simpliciy, a fla credi curve is used. Recovery raes: As agreed amongs he marke makers for every new CDX index series before each index roll. Premium paymens o be incorporaed ino he model: Coupons ha are agreed amongs he marke makers for every new CDX index series before each index roll. Copyrigh 2011, Marki Group Limied. All righs reserved. 4
5 Marki Excess Reurn Credi Indices Guide for price based indices Managemen of defauls in he index When credi evens occur, Marki announces ha a new reduced conrac will replace he curren full conrac as he official one. Marki does no deermine credi evens, bu effecively credi evens are reaed in he Toal Reurn Indices as an early roll ino his new conrac. Trigger even Following a credi even in a consiuen of he Marki CDX.NA.HY or Marki CDX.EM indices, he ISDA Deerminaions Commiee voes o decide if a credi even has occurred for he eniy and if an aucion for he defauled eniy is o be held. If he oucome of his voe is posiive, Marki publishes a new version of he index annex zero weighing he relevan eniy i.e. he reduced index. Procedure For he Excess Reurn Indices, he dae on which he indices are rolled from he full index (wih he defauled name) o he reduced index (wihou he defauled name) is usually done on he business day following he aucion dae, bu will be decided by Marki on he basis of liquidiy. The index prices a which he posiion of he full and he reduced index is valued are deermined in he End-of- Day Fixing performed by Marki Group a 18:30 New York for he Marki CDX.NA.HY and Marki CDX.EM indices. Mid levels are used for boh indices. Transacing a mid means ha ransacion coss are no included. If he End-of- Day fixing level is no available for he full version of he index, Marki will use a model price for roll cos calculaion. The roll ransacion coss o be added up are calculaed according o he following mehodology: 1. For a calculaion o be valid, more han five marke makers mus be available for he full index calculaion who delivers valid bid/offers. If he calculaion is invalid, he maximum roll ransacion coss will be applied. The maximum roll ransacion coss are: 0.6% fla for he each of he old and new series for he Marki CDX.NA.HY index 1% fla for he each of he old and new series for he Marki CDX.EM index 2. If he calculaion is valid, he roll ransacion coss are he average bid/offer price deermined in his index calculaion if his value is lower han he maximum roll ransacion coss (as described in 1.) and higher han he minimum roll ransacion coss (as described in 3.) 3. The minimum roll ransacion coss will be wice he regular roll ransacion coss 0.3% fla for he each of he old and new series for he Marki CDX.NA.HY index 0.5% fla for he each of he old and new series for he Marki CDX.EM index For he calculaion o be valid, he average bid and offer prices should be consisen wih quoaions in he underlying marke a he ime of he fixing. The decision on he validiy of he calculaion will ake ino accoun wheher, in he opinion of he calculaion agen, paricipaing marke makers have aken due care and aenion when publishing boh heir bid and offer prices. Copyrigh 2011, Marki Group Limied. All righs reserved. 5
6 Marki Excess Reurn Credi Indices Guide for price based indices Appendix: Marki Excess Reurn Credi Index calculaion mehodology for price based indices In his appendix, P is he marke price of he curren CDX series a day for all price based indices, i.e., he official CDX price published by Marki Group a each closing of day. Mid prices are used. Index calculaion The base index level is Se a 100 a he launch day of Series 7 of he CDX.EM index (i.e., 20 March 2007) for he Marki CDX.EM 5-year EXCESS RETURN INDEX, and Se a 100 a he launch day of Series 8 of he CDX.NA.HY index (i.e., 27 March 2007) for he Marki CDX.NA.HY 5-year EXCESS RETURN INDEX. The oal reurn index level I on day is calculaed as I (1 = I 1 + R ) where R is he daily reurn on day of he CDX index. R + Coupon = ( P + AC 1) ( P 1 + AC 1 1) where P is he marke price of he curren CDX series a day i.e. 1 P is he clean price for buying proecion on he CDX index. AC is he Accrued Coupon ill day from he las coupon day. Coupon is he coupon paid on day by he curren CDX index, 0 if is no a coupon day When is a roll dae, he reurn is adjused o accoun for he ransacion coss during index roll as described below. Index Rolls In case of he regular semi-annual index rolls and in case of a roll ino a reduced conrac, he porfolio is rolled over and he reurn on he roll dae is calculaed in he usual way, as specified above, and an excess reurn is added o accoun for Bid / Ask rading cos. For prices based indices, he excess reurn is he sum he cos of swiching a from he old series o he new one newseries ExcessR = ( TC + TC where oldseries oldseries TC is he ransacion cos of rolling ou of he old series / version ) newseries TC is he ransacion cos of rolling ino he new series / version Noe ha on he roll dae he R is calculaed using he mark-o-marke value / price of he old CDX series a day -1 and day, and on dae +1 he R + 1 is calculaed using he mark-o-marke value / price of he new CDX series a day and day +1. Copyrigh 2011, Marki Group Limied. All righs reserved. 6
7 Marki Excess Reurn Credi Indices Guide for price based indices Furher informaion Marki Indices Ld. Tel: Fax: Inerne: Licenses and Daa Marki Indices Ld. owns all itraxx, itraxx SovX and CDX daa and indices and he inellecual propery righs herein. A license is required from Marki Indices Ld. o creae and/or disribue any produc ha uses, is based upon or refers o any itraxx, itraxx SovX and CDX index or itraxx, itraxx SovX and CDX daa. Oher index producs Marki Indices Ld. owns, manages, compiles and publishes he iboxx cash bond indices. Copyrigh 2011, Marki Group Limied. All righs reserved. 7
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