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Derivatives

Tranched ABX Approaches Green Light

Dealers are close to finalizing details of how the ABX asset-backed securities index will be tranched.

Dealers are close to finalizing details of how the ABX asset-backed securities index will be tranched. Market participants spent part of last week hashing out various possibilities and now most of the major firms are on the same page, according to a dealer involved in the discussions.

If ABX 3 rolls with 20 names, the majority of dealers want to see a bundle of ABX 2 and 3 referencing the BBB slice and the same bundle with BBB minus. If ABX 3 has 40 names, which most market participants now think it will, there will be tranches version of this index. The tranches will be priced daily by an administrator, with most pointing to Markit Group.

One point of contention that remains is whether or not to include interest shortfall provisions. There is some concern the inclusion of shortfall provisions could make the index more complex. At press time, two major dealers had yet to finalize their responses, and some said that the views of those two players may tip the scale one way or the other on the issue.

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