CMBX Indices The New US Commercial Mortgage Backed Credit Default Swap Benchmark Indices March 2006
The New US CMBS Benchmark Index The New US CMBS CDS Benchmark - Themes Standardization Liquidity Flexibility Diversification Efficiency Innovation Transparency 2
The New US CMBS Benchmark Index 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
The New Benchmark CMBX Indices
The New US CMBS Benchmark Index 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
The New US CMBS Benchmark Index 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 6
The New US CMBS Benchmark Index Key Features Liquidity & Track Record Rolling Transparency � Track record in CDS flow market � Clear rules for portfolio � Approximately every six months and other credit indices construction � One roll mechanism agreed � The largest platform of leading � Standardization and multi-market across all market-makers market makers maker platform to ensure � Simple and clear roll mechanism transparency � Inter-dealer broker participation � Active participation of Markit as � Likely to increase trade flow in Administration, Calculation, and structured products Marketing Agent � Potential to impact cash spreads Structure Product Breadth � ISDA Pay-As-You-Go template � Five separate indices at benchmark rating levels (AAA/Aaa, AA/Aa2, A/A2, BBB/Baa2, & BBB-/Baa3) – Fixed Cap Applicable � Unfunded � Standardized documentation � Future Products � No fees – Funded Note Program � Static portfolio – Tranched Series � No physical settlement 7
The New US CMBS Benchmark Index 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 � Relative value � Relative value � Source of credit exposure / hedging trades trades spread data � Liquidity � Directional trading / � Directional trading management tool macro view Correlation Whole Loan Dealers Corporate Treasury Trading Desks Originators � Benchmark for � Quick credit � Suitable for portfolio � Easy access to product innovation exposure / hedging hedging diversified US CMBS exposure � Transparent spread � Easy ramp-up � Flow trading hedging 8
The New US CMBS Benchmark Index 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 largest sector in the US � structured finance markets � Increasing liquidity in the CDS of CMBS market � Valuation analytics publicly available on www.markit.com 9
The New US CMBS Benchmark Index CMBX Indices – Designed for Operational Efficiency � Trades will confirm over DTCC from initial launch date – 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 www.markit.com � Licensed dealers will provide daily closes for the most recent index series and monthly pricing on previously issued outstanding series 10
The New US CMBS Benchmark Index 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
The New US CMBS Benchmark Index 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. Data on page is for example purposes only 12
The New US CMBS Benchmark Index Holders of Commercial and Multifamily Mortgage Loans: Change in Market Share Since 1990 ($ Billions) 1990 2005 3Q Source: CMSA, Commercial Mortgage Alert 13
The New US CMBS Benchmark Index CMBS Issuance in the U.S. Bond Markets since 1990 ($ Billions) S o u r c e : C M S A , C o m m e r c i a l M o r t g a g e A l e r t 14
The New US CMBS Benchmark Index CMBS Review of 2004 & 2005 (Trading Volume in $ Billions) 300 30 250 25 Cumulative Vols. 200 20 Monthly Vols. 150 15 100 10 50 5 0 0 Jan Feb. Mar. Apr. May June July Aug. Sept. Oct. Nov. Dec. Cumulative '04 Cumulative '05 Monthly '04 Monthly '05 Source: CMSA, CRE Direct News 15
The New US CMBS Benchmark Index Commercial Mortgage Securitization 1990 through 2005 Q3 Source: CMSA, Federal Reserve, Flow of Funds 16
Portfolio Rules of Construction
The New US CMBS Benchmark Index 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
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