ABX Index

The ABX Index is an index created by Markit that represents 20 subprime residential mortgage-backed securities (RMBS). The Index is used as a financial benchmark measuring the overall value and performance of the subprime residential mortgage market.

The ABX Index utilizes credit default swaps in its construction to provide an index that is representative of the subprime RMBS market. Values have ranged from 50 to approximately 100 with daily pricing only available for market subscribers. The Index may also be known as the Markit ABX Home Equity Index, the ABX.HE Index or the asset-backed securities index.

The ABX Index uses credit default swaps on the 20 largest subprime residential mortgage-backed securities selected for the Index. The Index has six sub-indexes which represent varying levels of credit quality among various RMBS tranches. It seeks to provide a representative comparison of a range of subprime credit in the market. Top issuers regularly represented in the Index include Goldman Sachs, JPMorgan, Deutsche Bank, Barclays Capital, Bank of America, BNP Paribas, Citigroup, Credit Suisse, Merrill Lynch, UBS and Wachovia.

The Index is reconstituted semi-annually on two roll dates, January 19 and July 19 or the next business day following each date. Markit serves as the administrator of the Index and reviews all market issuance of subprime residential mortgage-backed securities in the prior six months for inclusion in the next roll date. Markit then identifies the corresponding credit default swaps traded on fourth market exchanges for inclusion in the Index.

Values for the ABX Index are calculated daily and provided to Index subscribers. In 2007 just prior to the height of the financial crisis the Index was reported at 55. Its value has gained steadily since then ranging up to approximately 100.

Increases in the level of the ABX Index indicate a well performing RMBS market. Significant decreases in the Index and lower Index values are a warning sign for high risk. Since the ABX Index is one of only a few leading market indicators in the subprime RMBS market it is used broadly by institutional investors and traders as a gauge for risk and value levels of subprime RMBS. The details of the Index are not disclosed publicly, requiring trading groups to license the Index data from Markit in order to use it as a steady resource for determining market trades. (See also: How did the ABX index behave during the 2008 subprime mortgage crisis?)