ABX Index

What Is the ABX Index?

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

Key Takeaways

  • The ABX Index tracks a basket of the 20 largest residential MBS.
  • It is used as a barometer for market health within the subprime residential real-estate sector.
  • The Index is updated twice per year.
  • Although demonstrative of its collection of subprime mortgage-backed securities, the Index should not be the only indicator for overall market conditions.

How the ABX Index Works

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 is 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 (CDS) on the 20 largest subprime residential mortgage-backed securities (MBS) selected for the Index. The Index has six sub-indexes that 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.

Special Considerations: Indicators

Values for the ABX Index are calculated daily and provided to Index subscribers. In 2007, just before 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 to use it as a steady resource for determining market trades.