CMBX Indexes

DEFINITION of 'CMBX Indexes'

A group of indexes made up of 25 tranches of commercial mortgage-backed securities (CMBS), each with different credit ratings. The CMBX indexes are the first attempt at letting participants trade risks that closely resemble the current credit health of the commercial mortgage market by investing in credit default swaps, which put specific interest rate spreads on each risk class. The pricing is based on the spreads themselves rather than on a pricing mechanism.

Daily trading involves cash settlements between the two parties to any transaction, and the CMBX indexes are rolled over every six months to bring in new securities and continuously reflect the current health of the commercial mortgage markets. This "pay as you go" settlement process considers three events in the underlying securities as "credit events": principal writedowns, principal shortfalls (failures to pay on an underlying mortgage) and interest shortfalls (when current cash flows pay less than the CMBX coupon).

BREAKING DOWN 'CMBX Indexes'

The introduction of indexes like the CMBX has led to massive growth in the structured finance market, which includes credit default swaps, commercial mortgage-backed securities, collateralized debt obligations and other collateralized securities. Trading in the CMBX tranches is done over the counter, and liquidity is provided by a syndicate of large investment banks.

While the average investor cannot participate in the CMBX indexes directly, they can view current spreads for a given risk class to assess how the market is digesting current market conditions, making it a potentially valuable research tool.

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RELATED FAQS
  1. In what types of financial situations would credit spread risk be applied instead ...

    Find out when credit risk is realized as spread risk and when it is realized as default risk, and learn why market participants ... Read Answer >>
  2. What's the difference between a collateralized debt obligation (CDO) and a collateralized ...

    Find out how a collateralized mortgage obligation (CMO) is similar to a collateralized debt obligation (CDO), as well as ... Read Answer >>
  3. Who bears the risk of bad debts in securitization?

    Bad debts arise when borrowers default on their loans. This is one of the primary risks associated with securitized assets, ... Read Answer >>
  4. What's the difference between a collateralized mortgage obligation (CMO) and a mortgage-backed ...

    Find out more about collateralized mortgage obligations and mortgage-backed securities and the difference between the two ... Read Answer >>
  5. What is a tranche?

    "Tranche" is actually a French word meaning "slice" or "portion". In the world of investing, it is used to describe a security ... Read Answer >>
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