New Synthetic CDS Indices Track Prime Private-Label RMBS
A new set of indices with exposure to senior, triple-A tranches of private-label prime jumbo US residential mortgage-backed securities (RMBS) begins trading today. Analysts are already praising the indices for the transparency they are likely to bring to the prime RMBS sector, as well as the hedging opportunities they present to investors. The PrimeX indices include four baskets of synthetic credit default swaps (CDS) on tranches of prime RMBS originally rated triple-A, according to financial information services firm Markit. The index has four sub-indices composed of 20 deals each, referencing fixed-rate or hybrid ARM non-agency prime loans from 2005-2007. The FRM 1 index provides exposure to fixed-rate RMBS issued from January 2005 through June 2006, while the FRM 2 index is linked to fixed-rate RMBS issued from July 2006 through December 2007. These indices are exposed to relatively lower 60+ day delinquency rates between 6% and 13%: The ARM 1 index provides exposure to adjustable-rate RMBS issued from January 2005 through June 2006, while the ARM 2 index is linked to adjustable-rate RMBS issued from July 2006 through December 2007. These indices are exposed to higher 60+ day delinquency rates between 9% and 18%: "The Markit PrimeX will serve as a standardized, diversified tool referencing securitized fixed-rate or hybrid adjustable rate mortgages that will allow investors to gain exposure to this asset class," Markit said in an e-mailed statement. Laurie Goodman of the Amherst Securities MBS Strategy Group called PrimeX "a very valuable addition to the menu of non-agency RMBS alternatives" in e-mailed commentary Tuesday. The indices are the first vehicle to allow investors to short prime triple-A non-agency RMBS, according to the Amherst MBS Strategy Group. They also provide a vehicle for investors to buy the risk on a diversified group of RMBS with minimal funding. The indices also shed light and transparency on the prime sector of the market. "For each of the indices, participating dealers will be required to provide daily mid-market closing prices for transactions," Goodman writes. "Markit will take the quotes received, discard the top and the bottom quartiles, then take the arithmetic mean of the remaining. "This publicly available data series will result in increased transparency for this sector. It will allow investors to track prices in the aggregate in an objective fashion." Write to Diana Golobay.