What Is iTraxx?
iTraxx is a group of international credit derivative indices that investors can use to gain or hedge exposure to the credit markets underlying the credit derivatives. The credit derivatives market that iTraxx provides allows parties to transfer the risk and return of underlying assets from one party to another without actually transferring the assets. iTraxx indices cover credit derivatives markets in Europe, Japan, non-Japan Asia and Australia. The iTraxx indices are also commonly referred to as Markit iTraxx indices.
- iTraxx is a collection of indexes for the credit default swap market in Europe, Australia, and Asia.
- These indexes allow market makers and active participants in the swaps market to take the other side of trades for a short period and provide liquidity in these markets.
- The index is based on liquidity data from market makers.
The iTraxx indices were developed to bring greater liquidity, transparency and acceptance to the credit default swap market. These indexes are used by various licensed market makers, which include large investment banks, asset managers, hedge funds and ETF providers. Trading based on these indexes allows them to hedge risk when they take on the role of counterparty in a trade—thus allowing them to execute trades more quickly and more frequently with participants in the market for swaps.
History of iTraxx
The credit default swap market has grown enormously over time. In the 2000s, market participants were looking for standardized tools to hedge and leverage for overall credit market exposure across global markets. J.P. Morgan and Morgan Stanley were among some of those creating indices of the growing credit derivative market. These indices merged over time, eventually ending with the International Index Company (IIC) which ran the iTraxx indices. IIC established a rules-based approach where it computed a liquidity ranking using submitted data from market makers. This list of the most liquid traded entities was updated every six months, creating a new series of credit derivative indices on rolling basis.
Markit iTraxx and CDX
In November of 2007, Markit Group, a financial services and information firm, acquired IIC and CDS IndexCo which played the same function as iTraxx for North American and emerging markets. Markit has continued the six-month indices roll for all the credit derivative indices it acquired.
It now acts as the calculation agent for the indices, decides exclusion and inclusion, assigns the reference entities and has worked with the International Swaps and Derivatives Association in standardizing legal documentation for derivatives that often span global jurisdictions. Together, Markit iTraxx and Markit CDX make up almost half of the market in credit derivatives indices. Markit also publicly publishes its rules, constituents, coupons and daily prices as part of its commitment to market transparency.
Role of iTraxx in the Market
iTraxx and other credit derivative indices ultimately help increase the tradability of credit default swaps. They do this by increasing the transparency of the market and standardizing transactions, two factors that have driven up the liquidity and operational efficiency of the market as a whole. In additional to helping the major players of the market apportion risk according to appetite, the iTraxx indices have also become a carefully watched market signal. Traders compare the performance of the iTraxx indices with other indices from the same market, such as the Nikkei stock index, to spot or confirm trends in overall economic performance.