ITraxx® is created after the merger of iBoxx and Trac-x into the Dow Jones iTraxx index in 2004. Similar to the way a share index is put together as a portfolio of shares, the iTraxx® indices are pools of single-name CDS. They provide investors (as sellers of protection) with diversified, market-wide credit exposure.
The main indices are consolidated into DJ CDX (North America and emerging markets) and DJ iTraxx (Europe and Asia) and managed by a newly created company called International Index Company. IIC’s presentation material is available on its website.
Counterparties who wish to enter into iTraxx® master transaction execute iTraxx® master credit derivatives confirmation agreement.
The master confirmation agreement sets out the general provisions (e.g. incorporation of the
2003 Credit Derivatives Definitions and
the confirmation process) and is supplemented by:
- Schedules which set out the relevant iTraxx® indices which the parties may trade (put together by Markit)
- the general terms confirmation which sets out the standard terms agreed by the parties
- the transaction supplement which sets out the specific trade term of a iTraxx® master transaction
By entering into a iTraxx® master transaction, the parties are deemed to enter into a separate and independent Credit Derivatives Transaction in respect of each reference entity constituting the relevant index (a “component transaction”).
The effective date of the component transaction will be the “Roll Date” set out in the Schedule e.g. in respect of iTraxx® CJ Series Number 3, the Roll Date is 21 March 2005. The scheduled termination date, again using iTraxx® CJ Series 3, is either 20 June 2010 or 20 June 2015.
The buyer of protection pays the same premium (the “Fixed Rate” set out in the Schedule) on all the names in the index and the Fixed Rate Payer Payment Dates are quarterly and fixed, e.g. in the case of iTraxx® CJ Series Number 3, 20 March, June September and December.
The transaction is physically settled and the Deliverable Obligation Category is, again using iTraxx® CJ Series 3, “Bond or Loan” and the Deliverable Obligation Characteristics are “Not Subordinated”, “Specified Currency – Standard Specified Currencies”, “Not Contingent”, “Assignable Loan”, “Consent Required Loan”, “Transferable” “Maximum Maturity (30 Years)” and “Not Bearer”.
Details/elections that need to be set out in the transaction supplement are:
- Trade Date
- Scheduled Termination Date
- Original Notional Amount
- Floating Rate Payer
- Fixed Rate Payer
- Additional Amount and Additional Amount Payer
- Excluded Reference Entity
- Excluded Deliverable Obligations
Market standard documentation is also being developed in relation to iTraxx® swaption transaction and iTraxx® single tranche transaction.
iTraxx documentation is available here.
Last updated 19 June 2006^
The above notes are intended to provide only general outlines and should be read in conjunction with, and are qualified in their entirety by, the full provisions of the relevant ISDA provisions and definitions. They should never be used in place of professional advice. We accept no responsibility for any loss arising from any action taken or not taken by anyone using this material or using this material in conjunction with any ISDA documentation in reliance thereof.
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