Dry market forces ABX roll delay

The ABX.HE is a synthetic index of US home equity asset-backed securities (ABS), launched in January 2006 by Markit and CDS IndexCo, and is normally rolled every six months. But, according to Markit, in the last six months only five residential mortgage-backed securities have been launched that fit the criteria for inclusion.

Issuance of US home equity ABS has dropped sharply this year - in the third quarter, only $14.2 billion worth was issued, compared with $87.1 billion in the second quarter, according to the US Securities Industry and Financial Markets Association. Figures for the fourth quarter are not yet available.

Instead, the current ABX.HE series, the ABX.HE 07-2, will remain active.

The ABX.HE is composed of five sub-indexes, made up of tranches rated AAA, AA, A, BBB and BBB-. Component RMBS transactions must be at least $500 million in size, and tranches must have weighted average lives of at least four years (five in the case of the AAA tranche).

Though 25 ABSs were issued in the third quarter of the year alone, only three met these criteria, according to an October research paper from Wachovia - and only two in the fourth quarter. Ben Logan, a New York-based managing director with Markit, said: "the largest points of failure were the weighted average life criteria, deal size, and not having the properly rated bonds".

Logan added that the company had considered relaxing the criteria to allow an 08-1 index to be created, but "dealers wanted to see if the character of the index could be preserved as-is if we waited a few more months to roll".

But the future of the ABX index itself is now in doubt. One ABS investor pointed out that the US mortgage market is now shifting towards 30-year fixed-rate mortgages, rather than the floating-rate products that the ABX uses, and added that this raised the question of whether the ABX would ever roll again.

See also: New ABX index under threat
Markit buys IIC and CDS IndexCo
The untenable robustness of hedging
Markit and CDS IndexCo launch synthetic ABS index