Background to iTraxx
The Markit iTraxx indices are a family of European, Asian and emerging market tradable credit default swap indices. Australian iTraxx is the index for Australia and is made up of 5y credit default swaps for the 25 most highly traded investment grade Australian companies*. No more than five banks are included in the Index in order not to skew the index. The constituents of the indices, the companies underpinning it, are changed every six months on 20 March and 20 September in a process known as ‘rolling’ the index. The roll occurs to ensure that the current series tracks the most liquid instruments in the relevant market. The present Australian iTraxx index is Series 23.
iTraxx indices were developed to bring more liquidity and transparency to the credit default swap market. The indices are tradable instruments in their own right, with pre-determined fixed rates and the prices are set by market demand. Australian iTraxx shows investors an average spread for a 5y credit default swap over and above BBSW and serves as a proxy of the perception of risk in the market and helps investors judge the ‘temperature’ of the market and how confident the market is in corporates’ ability to meet their debt obligations.
Official pricing is collected by Markit on a daily basis by polling the trading desks at banks that are licensed market makers. The most liquid indices also have a weekly Tradable Fixing calculated in a similar fashion to the Libor fixings process. The tradable fixing is often used as a reference price for calculating payments of other structured credit instruments. At present trading in iTraxx credit default swap contracts predominantly occurs in the over-the-counter market.