Rules for the first tradable ABS index, released Sept. 14 by Markit, which serves as the administrator of the index, will include 20 RMBS issuers and have five sub-indexes consisting of one security from each issuer. The sub-indexes will include an "Aaa Sub-index," an "Aa2 Sub-index," an "A2 Sub-index, a "Baa2 Sub-index" and a "Baa3 Sub-index." As of last week, eight institutions had signed up as market makers, according to Nomura Securities.
The index is expected to be up and running sometime in the fourth quarter, according to industry participants, and a similar index for CMBS is anticipated to follow shortly after.
The index will roll every six months, prior to which each participant in the so-called ABSX will submit a list of 10 to 15 RMBS offerings with settlement dates during the last six months to be included in the index. Among other criteria, the deals must total at least $500 million, have a weighted average FICO score of no more than 660, and no more than three of the offerings can have the same Bloomberg ticker.
Following the selection process, ABSX participants will be notified no later than five business days prior to when the securities making up the composition of the index and sub indexes roll over - the public will be told by 11:00 a.m. four days prior.
The fixed price of the index and each of the sub indexes will be calculated at the end of each business day through a polling process of the participants; each will provide the average dollar amount the respective securities traded throughout the day, and the subsequent fixed price for the particular security will be calculated using the same system used to calculate Libor rates - taking the quotes, discarding the top and bottom quartiles, and then calculating the mean. The documentation will be based on the pay-as-you-go format and have a "fixed cap" feature, effectively eliminating the amount of interest shortfall covered by the seller of protection.
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