Attachment points have been set for standardized tranches of the ABX and are set to start trading before the month's end. Traders involved hope standardizing the slices of asset-backed securities will lure in end users that have been skittish about the lack of observable prices for tranches of collateralized debt obligations backed by ABS.
Attachment points have been set for tranches that will reference a combination of the BBB and the BBB minus sub-indices of the second and third ABX series, known as ABX 2 and ABX 3. The BBB part will be sliced into 0-3%, 3-7%, 7-12%, 12-20%, 20-35%, 35-100% tranches. The BBB minus part of the index will be broken down into 0-5%, 5-10%, 10-15%, 15-25%, 25-40%, 40-100% tranches, according to a dealer involved in the project. Officials at Markit Group in New York, the administrator for the indices, did not return calls by press time.
Pricing of ABS correlation is more complex than that of corporate credit because ABS deals are structured with various features which affect the waterfall of payouts and write-downs for investors. Creating observable pricings and daily fixings via standardized tranches is expected to add liquidity.
The timing of the launch, however, comes as worries over the slowing housing market mount. The news last week that a third major subprime lender was closing its doors sent the ABX to its widest levels ever. The BBB minus sub-index hit 450 basis points, compared with a level earlier that week of 400bps.
