27 April 2010
Markit PrimeX Indices
2
Markit PrimeX presented by
3
Table of contents
Markit Overview
Introduction to Markit PrimeX Indices
Trading PrimeX
PrimeX Operations/Settlement
Dealer Contacts
Markit Overview
5
About Markit
Markit is a leading global financial information services company with over 1,500 employees
We provide independent data, valuations and trade processing across all asset classes in order to enhance transparency, reduce risk and improve operational efficiency
Our client base includes the most significant institutional participants in the financial marketplace
6
Index operating model
Index Design Index Administration Pricing/Production Publication
IT Development and Administration
Index rulesMarket researchDocumentationIndex calculation methodologyData procurementPrototyping / TestingProject management
Manage rebalancing processIndex research (previews)Custom index developmentDaily control of constituent listsControl index and analyticsClient servicesReference database control
Receive daily price dataPrice cleaning and controlPrice consolidation
Quality reportingIndex and analytics calculation
Index and data publicationFeedsVendor management
7
Markit public indices
Agency RMBSMarkit IOS
Non-Agency RMBSMarkit PrimeXMarkit ABX.HEMarkit TABX.HE
CMBSMarkit CMBXMarkit TRX.NA
Propery DerivativesNCREIF
Structured FinanceThematic indicesETF constituent filesBespoke Indices
Equities
Real-timeMarkit iBoxx €Markit iBoxx £
End of dayMarkit iBoxx GlobalInflation-linkedMarkit iBoxx $Markit iBoxx AsiaMarkit iBoxx € HYMarkit iBoxx GEMXMarkit iBoxx GlobalSovereign
Liquid Indices
Custom Indices
Bonds
CreditMarkit iTraxx EuropeMarkit iTraxx CrossoverMarkit iTraxx Total ReturnindexMarkit iTraxx, Asia ex-JP,Japan, AustraliaMarkit iTraxx SovXMarkit CDX.IGMarkit CDX.HYMarkit CDX.XOMarkit CDX.EMMarkit MCDX
LoansMarkit iTraxx LevXMarkit LCDX
Bespoke Indices
Credit and Loans
Markit iBoxx US PensionLiabilitiesMarkit iBoxx FXMarkit iBoxx Overnight RateBespoke Indices
Other
8
Markit Structured Finance expertise
ABX.HE, CMBX, TRX.NA, and IOS have brought new levels of transparency to the structured finance markets
– Widely followed indicators of sentiment on market pricing and performance – TRX.NA brought standardization to synthetic TRS contracts referencing amortizing assets– IOS has seen large trading volumes post-launch and has provided an efficient market tool
for hedging prepayment and interest rate risk– Publicly available index closes and analytics
Markit is a leading presence in structured finance– Established leader in European ABS and US CDS of ABS markets– Developing US RMBS Evaluated Pricing Service– Broad suite of offerings to address needs of structured finance market participants
Full Value Proposition– The complete product suite provides a comprehensive spectrum of services for any point in
the pre-trade, trade, and post-trade cycleReference and Performance DataRisk and PricingDeal Structure and AnalysisTrade Support
Detailed analysis and support is provided for both US and European ABS deals at the single security, index and portfolio level
Introduction to PrimeX
10
PrimeX.FRM & PrimeX.ARM
The PrimeX indices allow investors to synthetically gain exposure to non-Agency Prime RMBS collateral
Each index will serve as a standardized, diverse, and liquid tool referencing securitized non-Agency fixed-rate or hybrid ARM loans
Markit will initially launch series of the index referencing the 2005, 2006, & 2007 vintages.
– 20 deals in each sub-index, satisfying a series of concentration and collateral tests
Vintages will be separated by a cutoff date of July 1st, 2006, creating 4 different sub indices.
– PrimeX.FRM.1 (issued between 1/1/2005 & 6/30/2006)– PrimeX.ARM.1 (issued between 1/1/2005 & 6/30/2006)– PrimeX.FRM.2 (issued between 7/1/2006 & 12/31/2007)– PrimeX.ARM.2 (issued between 7/1/2006 & 12/31/2007)
11
PrimeX construction
Additional selection criteria applied to universe defined by deal collateral– Must contain at least one tranche that has been rated AAA by at least two major ratings
agencies (i.e. Fitch, Moody’s or S&P)– At least one of the AAA tranches in the deal must be registered pursuant to the U.S.
Securities Act of 1933– None of the tranches included in the index shall benefit from a financial guarantee from a
third party (though loan-level mortgage insurance is acceptable)
Specific deal and tranche selection process– Markit compiled the list of the largest (by original principal balance) 20 qualifying deals
issued during a designated period– List of selected bonds for each deal that represented a pass-through interest in the largest
loan group of the deal– Deal and tranche list was circulated to dealers for final approval
12
Deal universe selection
Deals are separated into fixed and hybrids– Collateral filters are different between hybrid and
fixed-rate paper– Fixed deals must be 100% backed by fixed-rate
collateral– Hybrid deals must be 100% backed by hybrid ARMs
Deals are selected with data compiled from prospectuses as a function of their average or aggregate characteristics
– Issued within the designated period of the sub-index– Minimum deal size at issuance of $250mm– Deals must pay on the 25th of the month– The deal’s collateral must be loans. Re-Remics and
NIMs are therefore excluded, as well as synthetic deals
– The average loan characteristics of each deal must fall within the filters shown in the table
NoneNoneShort ARMs(Reset < 30 mo)
NoneNoneNeg-Am
NoneNoneSeconds
> 330 months> 330 monthsWA Original Term
> 40%> 25%Full/Alt Doc
< 10%< 15%Non owner
If Available < 85%If Available < 85%CLTV
< 73%< 73%WAvg LTV
> 735> 730WAvg FICO
PrimeX.FRMPrimeX.ARM
13
Individual security selection
Appropriate bonds are selected from each qualifying deal– Markit will select originally AAA rated certificates that reference the largest loan group(s) in
the dealLargest loan group is determined by the original principal balance of loans
– Aggregated certificates will represent a “Pass-Through Interest” in selected loan group
For both the PrimeX.FRM and PrimeX.ARM– Each deal will be equally weighted with other deals in the index– Within each deal, each bond selected will be weighted according to its original principal
balance relative to the aggregate of the certificates selected from that deal– The bonds selected will consist of the fewest number of certificates possible in order to
create the pass-through tranche
Once the reference obligations are in the index, they do not drop out, but amortize as a function of prepayments and write-downs
Trading Markit PrimeX
15
Markit PrimeX: indicative terms and conditions
T+5 from the Period End Date. T+5 only applies only to the exchange of payments.Payment Dates
25th day of each month using a following business day conventionPeriod End Date
No Cap ApplicableInterest Short-Fall
Writedowns, Principal ShortFalls, Interest ShortFallsFloating Amounts
Reimbursements associated with Writedowns, Principal ShortFalls, Interest ShortFallsAdditional Fixed Amounts
Premium paid by Fixed-Rate PayerFixed Rate
Long position on the Index. Seller of Protection.Floating Rate Payer
Short position on the Index. Buyer of Protection.Fixed Rate Payer
Original Principal Amount * Factor * Applicable PercentageReference Obligation Notional Amount (RONA)
Indices
September 25th, 20377B57AKAB9PrimeX.FRM.2
July 25th, 20367B57AKAA1PrimeX.FRM.1
December 25th, 20377B579YAB1PrimeX.ARM.2
June 25th, 20367B579YAA3PrimeX.ARM.1
TERMINATION DATEREDIDINDEX ID
16
PrimeX - CDS indices
PrimeX.FRM and PrimeX.ARM– Each index references component bonds from 20 deals based on collateral characteristics
(different criteria for each index)– FRM deals reference only fixed-rate prime collateral– ARM deals reference only hybrid ARM prime collateral
CDS trading convention:– Long position pays applicable percentage of Interest & Principal Shortfalls as well as
writedowns on swap notional– Running fixed coupon paid by short position:
Set by the dealers during the roll process prior to launch date
– Upfront PV exchange of the observed market value of risk
17
Payment structure
PrimeX Indices
Fixed Coupon & Additional Fixed Payments
Principal & Interest Shortfalls / Principal Writedowns
Protection Buyer Protection Seller
18
PrimeX counterparties
“Buyer” of the Index
If price is above par, pays the Present Value of the contract upfront–Index Buyer receives a fixed coupon throughout the life of the contract
Pays Fixed Rate Payer in the following events:–Interest Shortfall (Not Capped)–Principal Shortfall–Principal Writedown
Receives payment from Fixed Rate Payer in the event of the following:
–Interest Shortfall Reimbursement–Principal Shortfall Reimbursement–Writedown Reimbursement
“Seller” of the Index
If price is below par, pays the Present Value of the contract upfront–PV of implied risk over the fixed coupon will be paid upfront–PV of index contract incorporates buyer’s assumption of amortization via voluntary & involuntary prepayments–Index Seller pays a fixed coupon throughout the life of the contract
Receives payment from Floating Rate Payer in the following events:
–Interest Shortfall (Not Capped)–Principal Shortfall–Principal Writedown
–Pays Floating Rate Payer in the event of the following:–Principal Shortfall Reimbursement–Interest Shortfall Reimbursement–Writedown Reimbursement
Floating Rate Payer (Protection Seller)Fixed Rate Payer (Protection Buyer)
19
PrimeX.FRM.1 trade examples
Clean PV + accrued interest=[Notional * ((Price/100) - 1) * Factor] + [Coupon * Notional *Daycount * Factor]=(10,000,000 * ((96.5/100) – 1) * 0.656700725)+(0.0442 * 10,000,000 * (7/360) * 0.656700725)=$(-229,845)+$5,643.98=$(-224,201.02)
There is a negative PV using a positive notional, meaningthe short position needs to compensate the long positionfor the added risk implied by the price below par. Accrued interest is positive with positive notional.
Notional Amount: $10,000,000Trade Date: May 5th, 2010Initial Payment Date: May 10th, 2010 (T+3 exchange
for upfront)Traded Price: 96.5Index Factor: 0.656700725
(Published on Apr 27th)Coupon: 442 bpsDays Accrued: 7 (since April 28th launch)
Initial (Upfront) PaymentExample 1 Trade Details (“Index Buyer”Perspective)
20
PrimeX.FRM.1 trade examples
Clean PV + accrued interest=[Notional * ((Price/100) - 1) * Factor] + [Coupon * Notional * Daycount * Factor]=((-10,000,000) * ((88.75/100) – 1) * 0.656700725)+(0.0442 * (-10,000,000) * (21/360) * 0.656700725)=$738,788.32 + $(-16,931.93)=$721,856.39
There is a positive PV using a negative notional, so again the short position needs to compensate the long position for the added risk implied by the price below par. Accrued interest is negative because of the negative notional.
Notional Amount: $(10,000,000) – Negative NotionalTrade Date: May 19th, 2010Initial Payment Date: May 24th, 2010
(T+3 exchange for upfront)Traded Price: 88.75Index Factor: 0.656700725
(Published on Apr 27th)Coupon: 442 bpsDays Accrued 21 (since April 28th launch)
Initial (Upfront) PaymentExample 2 Trade Details (“Index Seller”Perspective)
21
PrimeX.FRM.1 trade examples
Clean PV + accrued interest=[Notional * ((Price/100) - 1) * Factor] + [Coupon * Notional *Daycount * Factor]=((-10,000,000) * ((102.45/100) – 1) * 0.656700725)+(0.0442 * (-10,000,000) * (21/360) * 0.656700725)=$(-160,891.68) + $(-16,931.93)=$(-177,823.61)
There is a negative PV using a negative notional, meaning the long position needs to compensate the short position for the decreased risk implied by the price above par. Accrued Interest is negative with negative notional.
Notional Amount: $(10,000,000) – Negative NotionalTrade Date: May 19th, 2010Initial Payment Date: May 24th, 2010
(T+3 exchange for upfront)Traded Price: 102.45Index Factor: 0.656700725
(Published on Apr 27th)Coupon: 442 bpsDays Accrued: 21 (since April 28th launch)
Initial (Upfront) PaymentExample 3 Trade Details (“Index Seller”Perspective)
22
PrimeX.FRM.1 monthly settlement example
On June 2nd, 2010, the Index Buyer (long position) will have to pay the Index Seller (short position) the following on behalf of the constituentISF: $211.75Writedown: $20,977.25
The Index Seller (short position) will have to pay the Index Buyer (long position) the following Fixed Payment on behalf of the constituent=Notional * Factor * Daycount * Coupon=$329,009.22 * 0.537015168 * (27/360) * .0442=$585.70
Period End Date May 25th (adjusted for business days)Payment Date: June 2nd (T+5 from Period End Date)Coupon: 442 bpsIndex Notional: $10,000,000
First Settlement PaymentMonthly Settlement
Index Weighting: 3.29%Index Notional Represented: (Initial Face) $329,009.22Actual $ Exposure $176,682.94Applicable Percentage 0.104886228%
Interest Short-Fall (ISF)=(Expected Interest – Paid Interest) * Applicable Percentage=(701,833.30 – 500,000) * 0.00104886228=$211.75
Writedown=Bond Writedown * Applicable Percentage=20,000,000 * 0.00104886228=$20,977.25
Constituent: Bond XPass-Through Rate: 5%Original Principal Balance: $313,682,000April Factor: 0.537015168May Factor: 0.473256329May Writedown Amount: $20,000,000May Expected Interest: $678,487.19May Paid Interest: $500,000.00
Constituent Index CalculationsConstituent Performance
Settlement timeline & operations
24
Sample PrimeX trade settlement & payment timeline
Upfront Value Agreed on.Trade effective on this date.
Next Accrual Period Starts, New factor becomes
effective. End date is adjusted by US business/holiday convention
Counterparties tear up or novate trade.Termination or assignment fees
exchanged between counterparties.
Occurs T+3 from Trade Date. Counterparties exchange PV net of
Accrued interest
Monthly payment occurs T+5 fromPeriod End Date. Counterparties exchangeFixed and Floating payments from recent
accrual period
Trade Date
Initial Payment Date
First Period End Date Counterparties exit trade
First Payment Date
5/5/2010 5/10/2010 5/25/2010 6/2/2010 6/6/2010
25
Licensed dealer contributions
Dealers will contribute prices every business day for each available index– Contributions are made between 3pm and 4pm each day
Per the Index Rules, if a dealer fails to comply with minimum submission threshold, that firm will lose index voting privileges
Markit uses top & tail process, which eliminates top and bottom quartiles of submissions and calculates average to generate composite
Markit will publish aggregate composites daily at www.markit.com no later than 5pm
Expect 12 dealers contributing to the index at inception
26
Markit PrimeX analytic
Markit will provide a tool for market participants to calculate PV, price, and spread based on defined prepayment & default scenarios
Analytic will utilize in-house Markit cashflows, which allows users to specify– Prepayment scenarios (CPR, PSA, vector)– Default scenarios (CDR, vector)– Delinquencies (60+, vector)– Loss severity
Calculator will utilize model which generates PV directly from projected swap cashflow assumptions
Markit calculator will provide participants with the ability to calculate upfront payment amounts
PrimeX Calculator can be requested by visiting: http://www.markit.com/en/products/data/indices/calculators/primex-calculator.page
27
Markit PrimeX – Usage & Licenses
PrimeX standard terms require one counterparty to each trade to be a licensed dealer of the index
– Licensed dealers as of the launch date may be found in this presentation and on www.markit.com
– PrimeX licenses may be obtained by contacting [email protected]
PrimeX Trademark and Data Usage– Usage of the PrimeX index trademark or published prices require either written consent or
license agreement from Markit – PrimeX data available on Markit’s public website may be available for limited purposes
subject to the terms of use at www.markit.com
PrimeX data feeds are available each US business day– Markit provides a daily feed to clients that includes composite prices for each index and an
updated list of constituents– Subscription including the licensing of the full historical PrimeX dataset may be obtained by
contacting [email protected]
Dealer Contacts
29
Dealer trading contacts
UBS
John Fernandez212-713-4002
Royal Bank of ScotlandDavid Dietche203-897-6160
Nomura
James Whitticom212-667-2408
Morgan Stanley
Michael DePietro212-761-1988
J.P. Morgan
Raphael Gonzalez212-834-4622
Goldman Sachs
Eric Siegel212-902-5090
Deutsche Bank
Jashin Patel212-250-7730
Credit Suisse
Ted Moran212-325-2747
Citibank
Taylor Leahy212-723-6325
Barclays Capital
Will Zak212-412-2449
Bank of America
Mark Michael646-855-6404
Amherst Securities
Joe Vaccaro212-593-6030
Markit
Administrators: Samir Bhatt212-205-1741
Ned Lipes212-863-9490
Press: Mike Gormley212-205-1310
30
DisclaimerOpinions, estimates and projections in this report constitute the current judgment of the author(s) at the timeof writing. They do not necessarily reflect the opinions of Markit Group Limited. Markit Group Limited has noobligation to update, modify or amend this report or to otherwise notify a reader thereof in the event that anymatter stated herein, or any opinion, projection, forecast or estimate set forth herein, changes or subsequentlybecomes inaccurate.
The content, information and any materials (“data”) provided by Markit in this presentation is on an “as is”basis. Markit Group makes no warranty, expressed or implied, as to its accuracy, completeness or timeliness, or as to the results to be obtained by recipients, and shall not in any way be liable to any recipient for any inaccuracies, errors or omissions herein. Without limiting the foregoing, Markit Group shall have no liability whatsoever to a recipient of this report, whether in contract (including under an indemnity), in tort (including negligence), under a warranty, under statute or otherwise, in respect of any loss or damage suffered by such recipient as a result of or in connection with any opinions, recommendations, forecasts, judgments, or any other conclusions, or any course of action determined, by it or any third party, whether or not based on the content, information or materials contained herein.
Copyright © 2010, Markit Group Limited. All rights reserved. Any unauthorized use, disclosure, reproduction or dissemination, in full or in part, in any media or by any means, without the prior written permission of Markit Group Limited is strictly prohibited.
Top Related