The PrimeX index is scheduled to launch on April 28th, 2010 but it has already begin trading ahead of its official start date, according to analysts at Bank of America Merrill Lynch.
The PrimeX indices will allow investors to synthetically gain exposure to specific collateral types and vintages within the prime RMBS market through 4 indices: PrimeX.FRM.1, PrimeX.ARM.1, PrimeX.FRM.2, and PrimeX.ARM.2. Vintages and collateral types will be separated among these 4 indices.
PrimeX utilizes most of the existing calculation and operation framework for ABX. Protection buyers pay (receive) the amount that the index is below (above) par upfront as well as the running fixed coupon. In return they receive protection payments for any shortfalls or principal writedowns. The protection seller naturally takes the other side of these cashflows.
Each of the PrimeX indices will reference 20 deals satisfying a series of concentration and collateral requirements. The PrimeX will trade on price, consistent with the existing conventions of other CDS of ABS indices, and mirror the existing calculation and operation framework of the ABX.
The 20 deals are equally weighted in each index and the index references an originally rated triple-A senior pass through interest in the largest collateral group of each deal. For deals lacking a passthrough certificate, the fewest number of certificates needed to construct an aggregated passthrough are chosen and weighted within the deal according to their original principal balance.
Analysts said that because the final constituents have been decided and fixed coupons set, PrimeX has already started trading and its high pre-open pricing levels reflect the large fixed coupon, relatively strong fundamental performance, and overall bullish outlook on spread products.
"Although a lower fixed coupon (200- 300 bps) would have made PrimeX a more natural hedge for jumbo cash bonds, the dealer community was biased toward a high coupon, likely to limit shorting pressure and avoid some of the issues that the ABX faced," asid analysts at BofAML. "At these coupon levels there is certainly a long bias in the index. Furthermore, the jumbo sector is performing significantly better than other sectors from a fundamental basis and, despite the lower credit enhancement levels in jumbo deals, the seniors are generally expected to have lower writedowns than in other sectors such as subprime."