Credit default swap index
A credit default swap index is a credit derivative used to hedge credit risk or to take a position on a basket of credit entities. Unlike a credit default swap, which is an over the counter credit derivative, a credit default swap index is completely standardised credit security and is therefore highly liquid and trades at a very small bid-offer spread. This means that it is cheaper to hedge a portfolio of credit default swaps or bonds with a CDS index than it is to buy many CDS to achieve a similar effect. There are two main families of index: CDX and iTraxx. CDX indices contain North American companies and are managed by Markit Partners, and iTraxx contain companies from the rest of the world and are managed by the International Index Company (IIC).
A new series of CDS indices are issued every six months by Markit and IIC. Running up to the announcement of each series a group of investment banks is polled to determine the credit entities that will form the constituents of the new issue. On the day of issue a fixed coupon is decided for the whole index based on the credit spread of the entities in the index. Once this has been decided the index constituents and the fixed coupon are published, and the indices can be actively traded.