The meltdown of the subprime mortgage market has been in the eye of the storm this year. This crisis was anticipated by numerous institutions, given the deterioration in mortgage-loan underwriting practices, notably those mortgages originated in late 2005 and in 2006. Many now believe that subprime asset-backed securities (ABS) are ready to undergo significant writedowns in the future, given increasing delinquencies and foreclosures among the underlying mortgage loans. Though anticipated writedowns remain be seen, the ABX index, created by CDS IndexCo, a consortium of major ABS market makers in conjunction with Markit, has been invaluable in giving market participants a vehicle to express their views.
ABX, designed to be a tradable synthetic instrument, has become a key barometer of the subprime market's viability in the broad marketplace. The first set of tradable ABX indices was launched in January 2006, and the index family has been widely traded and referenced since then. The ABX, which rolls every six months, is composed of a static basket of 20 home-equity reference entities selected from the sub-prime ABS universe. Five subindices, determined by rating-namely BBB-, BBB, A, AA and AAA-are created from the selected 20 reference entities. Each index series contains the same 20 constituent reference entities with each reference obligation corresponding to the appropriate subindex rating.