CMBX.NA Marketing Presentation (06Mar06) · PDF file · 2011-12-05The New US CMBS Benchmark Index 2 The New US CMBS CDS Benchmark - Themes Liquidity Diversification Innovation...

CMBX Indices The New US Commercial Mortgage Backed Credit Default Swap Benchmark Indices

March 2006

The New US CMBS Benchmark Index

2

The New US CMBS CDS Benchmark - Themes

Liquidity

Diversification

Innovation

Standardization

Flexibility

Efficiency

Transparency


3

Table of Contents

The New Benchmark CMBX Indices 4

CMBX.NA Index - Portfolio Rules of Construction 17

Reference Portfolio 20

Trading, Credit Events and Roll Mechanism 22

Contacts 28

The New Benchmark CMBX Indices


5

CDS IndexCo Introduces Its Newest Series of Indices: CMBX

n CDS IndexCo

– Owns and maintains the CMBX, ABX & DJ CDX family of credit default swap (CDS) indices

– Liquidity commitments on CMBX, ABX & CDX from 14, 15, & 21 dealer institutions, respectively

– CMBX commences trading on March 7, 2006

– DJ CDX NA was formed from a merger of the major CDS indices (iBoxx and Trac-X) in April 2004

– Between $25 and $50 billion of CDX notional volume traded daily

– Introduction of second generation product such as index tranches and index options

n Broad market acceptance and effective management of the indices has resulted in increased:

– Liquidity

– Transparency

– Market consensus (portfolio names, correlation calculations)

– Standardization


6

CDS IndexCo Creates the Benchmark for CDS of CMBS

n Liquidity

– Focus on the commercial mortgage backed sector

– Proven liquidity track record from the market-making group

– Multiple market-maker platform

n Transparency

– Objective, rules-based approach to portfolio construction

– Markit as administrator

– Daily prices available on Markit website

n Standardization

– Each index will reference a standardized basket of CMBS reference obligations

– Standardized documentation for contracts will promote operational efficiency

– Monthly payment amounts calculated and posted by Markit

– DTCC will offer efficient trade confirmation and settlement


7

Key Features

n Clear rules for portfolio construction

n Standardization and multi-market maker platform to ensure transparency

n Active participation of Markit as Administration, Calculation, and Marketing Agent

n Approximately every six months

n One roll mechanism agreed across all market-makers

n Simple and clear roll mechanism

Liquidity & Track Record RollingTransparency

n Five separate indices at benchmark rating levels (AAA/Aaa, AA/Aa2, A/A2, BBB/Baa2, & BBB-/Baa3)

n Unfunded

n Future Products

– Funded Note Program

– Tranched Series

n ISDA Pay-As-You-Go template

– Fixed Cap Applicable

n Standardized documentation

n No fees

n Static portfolio

n No physical settlement

Structure Product Breadth

n Track record in CDS flow market and other credit indices

n The largest platform of leading market makers

n Inter-dealer broker participation

n Likely to increase trade flow in structured products

n Potential to impact cash spreads


8

CMBX Participants

Five indices referencing similarly rated tranches from 25 deals

n Rules-based approach to construction

n New series of CMBX indices issued approximately every 6 months

n Suits a variety of investors looking for diversified CMBS exposure

Research

n Relative value trades

n Directional trading / macro view

n Relative value trades

n Directional trading

n Quick credit exposure / hedging

n Liquidity management tool

Hedge FundsAsset Managers Prop Trading Desks

n Source of credit spread data

n Suitable for portfolio hedging

n Easy ramp-up

n Quick credit exposure / hedging

n Transparent spread hedging

Correlation Trading Desks

Whole Loan Originators

Corporate Treasury

n Benchmark for product innovation

n Flow trading

Dealers

n Easy access to diversified US CMBS exposure


9

Benchmark Liquidity and Tradability

Market-Makers of CMBX

Bank of America Goldman Sachs Nomura International

Bear Stearns JPMorgan RBS Greenwich Capital

Citigroup Lehman Brothers UBS

Credit Suisse Merrill Lynch Wachovia

Deutsche Bank Morgan Stanley

Inter-Dealer Brokers

CMBX is expected to trade in the inter-dealer broker market

Liquidity

n Securitizations backed by commercial mortgages are the 2nd largest sector in the US structured finance markets

n Increasing liquidity in the CDS of CMBS market

n Valuation analytics publicly available on www.markit.com


10

CMBX Indices – Designed for Operational Efficiency

n Trades will confirm over DTCC from initial launch date

– DTCC confirms for all inter-dealer trades and trades with customers who are enabled

• Trades can be input using DTCC’s existing corporate index template

– Trades will be documented using two-page confirms, referencing a standard terms supplement and annex posted on Markit’s website

– Initial factors for underlying reference obligations will be posted on Markit’s website

n Standardized settlement calculation

– Markit will publish monthly fixed and floating payments for each contract

n Valuation analytics publicly available on www.markit.com

n Licensed dealers will provide daily closes for the most recent index series and monthly pricing on previously issued outstanding series


11

About Markit

n Markit is the Administration, Calculation and Marketing Agent for the ABX.HE index program

n Markit is the Administration and Calculation Agent for the DJ CDX index program

n Markit Background:

– Founded in 2001 by a team of credit market professionals to aggregate and provide clean credit data across asset classes on a single platform

– Asset Classes include: CDS (Corporate, ABS, and CMBS), Bonds (corporate, financial, sovereign, convertible), Asset- and Commercial Mortgage-Backed Securities, Syndicated Loans and Index Products

– Markit Reference Entity Database (RED) is the market standard for reference entity long legal names, reference entity-reference obligation relationships and “pair” identifiers

– The key industry source for accurate, consensus pricing for independent price verification, risk modelling and data back testing

– The industry source for standardized CDO and 1st-to-default valuations, OTC derivative valuations as well as corporate dividend payment and equity index constituent information


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Markit CMBX Calculator

Data on page is for example purposes only

**Powered by Trepp, the leading provider of CMBS and commercial mortgage information, analytics and technology to the securities and investment management community.


13

Holders of Commercial and Multifamily Mortgage Loans:Change in Market Share Since 1990 ($ Billions)

Source: CMSA, Commercial Mortgage Alert

1990 2005 3Q


14

CMBS Issuance in the U.S. Bond Markets since 1990($ Billions)

Source: CMSA, Commercial Mortgage Alert


15

CMBS Review of 2004 & 2005(Trading Volume in $ Billions)

Source: CMSA, CRE Direct News

0

50

100

150

200

250

300

Jan Feb. Mar. Apr. May June July Aug. Sept. Oct. Nov. Dec.

Cu

mu

lativ

e V

ols

.

0

5

10

15

20

25

30

Mo

nth

ly V

ols

.

Cumulative '04 Cumulative '05 Monthly '04 Monthly '05


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Commercial Mortgage Securitization 1990 through 2005 Q3

Source: CMSA, Federal Reserve, Flow of Funds

Portfolio Rules of Construction


18

CMBX.NA Index Program – Index Construction Algorithm

Reference obligations considered must have the following characteristics prior to the launch/roll date

n Been issued within the last two years

n Minimum deal size of USD 700 million

n Be a debt or pass-through security referencing a pool of fixed rate securities

n Have a factor of 1.0

n Be secured by obligations from at least 50 separate mortgages from at least 10 unaffiliated borrowers

n No more than 40% of underlying obligations can be from the same state

n No more than 60% of underlying obligations can be of the same property type

n Ratings provided by at least two of the following: Moody’s, Fitch, and S&P; the lesser of all ratings will applyFive indices based upon the rating of the reference obligations: AAA, AA, A, BBB, and BBB-n One bond from each deal will be referenced in each index

– AAA will be comprised of the most credit enhanced tranche with the longest average life with an initial issuance size of at least $100MM & a weighted average life between 8 & 12 years based on 0% CPY at issuance

– AAA must be a publicly issued security, whereas other rating classes can be publicly or privately issued

n Reference obligations equally weighted by initial par amount as of roll date (4.0% each), subsequent weightings may change based on the prepayment and credit experience of the underlying transactions

n Based on standard ISDA Pay-As-You-Go template

n Index represents aggregate performance of the basket of credit default swaps

n Each index will contain this same list of reference obligations until all reference obligations have been fully paid off or have matured


19

CMBX Index Family – Construction/Roll of the Index Timeline

Roll Date less 1 Day (5pm)

Roll Date less 1 Day (1pm)

Roll Date less 3 Days




Markit discloses the Fixed Rate to the public and all

Eligible CMBX Members

Markit solicits spreads for each index from each Eligible CMBX

Member and will compute the Fixed Rates

Markit publishes a draft of the

Annex for each forthcoming

CMBX to each Eligible CMBX Member & the

public

Markit informs all Eligible CMBX Members of the composition of the forthcoming CMBX index &

publishes to the public the

composition of such index

Markit proposes additional CMBS transactions to

replace any initial

transactions that received a 75%

majority vote for elimination &

continues until a final list is

compiled & discloses

additional names to the public

Markit determines an initial list of 25

CMBS transactions for inclusion in the index & submits to Eligible CMBX

Members

Reference Portfolio


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Reference Entities for the CMBX (Date of Publication: February 22, 2006)

MERRILL LYNCH MORTGAGE TRUST 2005-CKI125MERRILL LYNCH MORTGAGE TRUST 2005-LC124WACHOVIA BANK COMMERCIAL MORTGAGE TRUST COMMERCIAL MORTGAGE PASS-THROUGH CERTIFICATES SERIES 2005-C2223WACHOVIA BANK COMMERCIAL MORTGAGE TRUST COMMERCIAL MORTGAGE PASS-THROUGH CERTIFICATES SERIES 2005-C2122MORGAN STANLEY CAPITAL I TRUST 2006-TOP2121MORGAN STANLEY CAPITAL I TRUST 2005-IQ1020MORGAN STANLEY CAPITAL I TRUST 2005-HQ719LB-UBS COMMERCIAL MORTGAGE TRUST 2006-C118LB-UBS COMMERCIAL MORTGAGE TRUST 2005-C717LB-UBS COMMERCIAL MORTGAGE TRUST 2005-C516J.P. MORGAN CHASE COMMERCIAL MORTGAGE SECURITIES CORP., SERIES 2005-LDP515J.P. MORGAN CHASE COMMERCIAL MORTGAGE SECURITIES CORP., SERIES 2005-LDP414J.P. MORGAN CHASE COMMERCIAL MORTGAGE SECURITIES CORP., SERIES 2005-CIBC1313GMAC Commercial Mortgage Securities, Inc. Series 2006-C1 Trust12GE Commercial Mortgage Corp. Series 2005-C411CSFB Commercial Mortgage Trust 2005-C610CSFB Commercial Mortgage Trust 2005-C59COMMERCIAL MORTGAGE TRUST 2005-GG58CD 2005-CD1 COMMERCIAL MORTGAGE TRUST COMMERCIAL MORTGAGE PASS-THROUGH CERTIFICATES, SERIES 2005-CD17BEAR STEARNS COMMERCIAL MORTGAGE SECURITIES TRUST 2005-TOP206Bear Stearns Commercial Mortgage Securities Trust 2005-PWR95BEAR STEARNS COMMERCIAL MORTGAGE SECURITIES TRUST 2005-PWR104Banc of America Commercial Mortgage Inc., Series 2005-63Banc of America Commercial Mortgage Inc., Series 2005-52Banc of America Commercial Mortgage Inc., Series 2005-41

Trading, Credit Events and Roll Mechanism


23

CMBX: Indicative terms and conditions

n Indices:

n Notional: Amortization mirrors that of the underlying bonds

n Fixed Rate: Established 1-day prior to roll date. Payable monthly based on average balance

n Floating Rate Payments: Interest Shortfall, Writedown, Principal Shortfall

n Additional Fixed Payments: Interest Shortfall Reimbursement, Writedown Reimbursement, Principal Shortfall

Reimbursement

n Quotations: Dealers will quote a current market spread and exchange upfront amounts based on the difference between the current market spread and the Fixed Rate

n Physical Settlement: Not Applicable

n Accruals: Accrues 25th to 25th

n Payments: Payments made on the 25th of each month

n Day Count: Actual/360

IndicesScheduled

Termination Date

Fixed Rate

CMBX.NA.AAA.1 TBD [ ]CMBX.NA.AA.1 [ ]CMBX.NA.A.1 [ ]CMBX.NA.BBB.1 [ ]CMBX.NA.BBB-.1 [ ]

TBDTBDTBDTBD


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Trading - XYZ Sells Protection on $100MM CMBX.NA.A.1

Fixed Rate Payer = Protection Buyer = Index Buyer

n Pays [70] basis points per annum monthly to counterparty on notional amount

– Notional amount will decline over time based on the reference obligations amortization

n Receives Floating Payments in the event of a:

– Interest Shortfall (capped at fixed rate)

– Principal Shortfall

– Writedown

n Makes payment in the event of the following:

– Interest Shortfall Reimbursement Amount

– Principal Shortfall Reimbursement Amount

– Writedown Reimbursement Amount

n The Fixed Rate on CMBX.NA.A.1 Index is [70] basis points per annum, payable monthly

Floating Rate Payer = Protection Seller = Index Seller

n Receives [70] basis points per annum monthly to counterparty on notional amount

– Notional amount will decline over time based on the reference obligation’s amortization

n Pays Fixed Rate Payer in the event of a:

– Interest Shortfall (capped at fixed rate)

– Principal Shortfall

– Writedown

n Receives payment in the event of the following:

– Interest Shortfall Reimbursement Amount

– Principal Shortfall Reimbursement Amount

– Writedown Reimbursement Amount


25

Credit Event (Writedown) - XYZ Sells Protection on $100MM CMBX.NA.A.1

Credit Event - Writedown

n Reference Obligation Original Factor = 1.0; Current Factor = 0.7

n A Writedown occurs on a Reference Obligation, for example, in year 3, in the amount of 1% of its current principal balance

– (Current Factor * Weighting * Loss) = (0.70 * .04 * .01) = .00028 = 0.028%

n Protection Seller pays to Protection Buyer a floating amount (0.028% x 100MM)= $28,000

n Index notional amount on which premium is paid reduces by 0.028%, in addition to the principal payments of the month

n Following the Floating Payment Event, protection seller receives premium of [70] bps on the remaining index notional amount


26

CMBX.NA Trading Mechanics

• Seller of protection (Index Seller) pays Buyer of protection the difference in market value

• Seller of protection pays Buyer of protection the accrued premium for the period from the end of the last accrual period until the trade effective date

• Buyer of protection (Index Buyer) pays the Seller of protection the difference in market value

• Buyer of protection receives accrued premium from the Seller of protection for the period from the end of the last accrual period until the trade effective date

Trade Initiation

Index quoted lower than Fixed Rate• Implies spreads have tightened

Index quoted higher than Fixed Rate• Implies spreads have widened

Trade Date

Each CMBX Has a Fixed Rate

• Buyer of protection pays the Seller of protection the difference in market value

• Buyer of protection pays the Seller of protection the accrued premium for the period from the end of the last accrual period until the trade effective date

• Seller of protection pays the Buyer of protection the difference in market value

• Seller of protection receives the accrued premium from the end of the last accrual period until the trade effective date from the buyer of protection

Trade Termination


27

Appendix

n Credit Derivatives Physical Settlement Matrix and Confirmation

– www.isda.org

n CMBX Confirmation

– www.markit.com


28

MarkitAdministration Ben Logan

(212) 931-4925Public Relations Teresa Chick

011 44 207 890 5094

CitigroupJohn Caputo(212) 723-6156

Credit SuisseJames Hiatt(212) 325-4240

Morgan StanleyRoss Feldman(212) 761-2012

Merrill LynchShaun Heelan(212) 449-3860

JPMorganAndrew Taylor(212) 834-3813

Goldman SachsJosh Birnbaum(212) 902-5553

Deutsche BankStephen Schwartz(212) 250-5149

Lehman BrothersJohn Beaman(212) 526-0001

WachoviaFrank Tippett(704) 383-6778

UBSDavid McNamara(212) 713-6189

Bank of AmericaCharles Mather(704) 388-1597

RBS Greenwich CapitalBrian Schwartz(203) 625-2900

CDS IndexCoActing Chair Brad Levy

(212) 902-6590Public Relations Jennifer Lee

(310) 785-0810

Bear StearnsTodd Kushman(212) 272-4879

Nomura InternationalPhillip Evanski(212) 667-2485

CMBX.NA Marketing Presentation (06Mar06) · PDF file · 2011-12-05The New US CMBS Benchmark Index 2 The New US CMBS CDS Benchmark - Themes Liquidity Diversification Innovation...

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