What are CMBX Indices?

CMBX Indexes are a group of indexes that track the commercial mortgage-backed securities (CMBS) market. The indexes represent 25 tranches of CMBS, each with a different a credit rating. These indexes enable investors to gauge the market and take long or short positions via 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.

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.

Understanding CMBX Indexes

The indexes are reconstituted every six months to bring in new securities and thereby continuously reflect the current health of the CMBS market. Daily trading involves cash settlements between the two parties to any transaction.

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).

Special Considerations

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.