Reference (apr02)
iBoxx CDX.NA.IG The New US Credit Default Swap Benchmark Index
October 2003
Reference (apr02)
iBoxx CDX.NA.IG The New US Benchmark Index
2
The US Benchmark - Themes
Liquidity
Diversification
Transparency
Innovation
Standardization
Globalization
Flexibility
Efficiency
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iBoxx CDX.NA.IG The New US Benchmark Index
3
Table of Contents
Setting the New Benchmark 4
Portfolio 7
Examples of Trading and Credit Events 15
iBoxx CDX.NA.IG - Portfolio Rules of Construction 19
Contacts 21
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iBoxx CDX.NA.IG The New US Benchmark Index
4
Setting the US Benchmark
The iBoxx CDX.NA.IG is the New US Benchmark for tradable 5yr and 10yr index products Liquidity
– Proven liquidity track record from the market making group
– Multiple market maker platform
Transparency
– A transparent rules-based approach to portfolio construction
Standardization
– Standardized documentation for unfunded contracts
– Standardized documentation for future credit products, e.g. options, tranching
Globalization
– The iBoxx CDX.NA.IG is a key pillar in the iBoxx platform
– The iBoxx CDX.NA.IG will establish the iBoxx platform as the New Global Benchmark
Reference (apr02)
iBoxx CDX.NA.IG The New US Benchmark Index
5
Key Features
Clear rules for portfolio construction*
Pricing via Bloomberg
Standardization and multi-market maker platform to ensure transparency
Active participation of iBoxx Ltd as Administrator
Every six months
One roll mechanism agreed across all market makers
Simple and clear roll mechanism, derived from successful mechanism in Europe
Track record in:
– CDS flow market
– Other credit indexes
– iBoxx Notes in Europe
The largest platform of leading market makers
Inter dealer broker participation
Liquidity & Track Record RollingTransparency
iBoxx CDX.NA.IG to be the New US Benchmark
iBoxx already established as the benchmark in Europe
Unfunded
Tradable sector swaps
Options**
Tranching**
Standardized documentation
5 and 10 year maturities
No fees
Static portfolio of 125 diverse names
Structure Product BreadthGlobalization
* See Portfolio Rules of Construction
** To be released by year end
Reference (apr02)
iBoxx CDX.NA.IG The New US Benchmark Index
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Benchmark Liquidity and Tradability
Market Markers ABN AMRO
Barclays Capital
Bear Stearns
Citigroup
Credit Suisse First Boston
Deutsche Bank
Goldman Sachs
Lehman Brothers
Merrill Lynch
UBS
Brokers iBoxx CDX.NA.IG is
expected to trade in the broker market
Liquidity Ten market makers have already signed on to trade
iBoxx CDX.NA.IG
Indicative bid/offer spreads on sector swaps are expected to be no greater than [5]% of mid level
Transparent pricing screens via Bloomberg
Delivery Flexibility Standardized CDS contracts for unfunded trades
Sector trading
* For the most current series
– Financials
– TMT
– Energy
– Industrials
– Consumer
Reference (apr02)
iBoxx CDX.NA.IG Portfolio
Reference (apr02)
iBoxx CDX.NA.IG The New US Benchmark Index
8
iBoxx CDX.NA.IG
Static portfolio of equally weighted credit default swaps on 125 North American Reference Entities*
Rules based approach to construction
New series of iBoxx CDX.NA.IG issued every 6 months
Suits investors looking for a diversified North American credit portfolio
* See Portfolio Rules of Construction
Relative value trades
Efficient tool for directional trading
Relative value trades
Efficient tool for directional trading
Quick credit exposure
Liquidity Management tool
Asset Managers Bank Prop DesksHedge Funds
Captures spread direction and performance of the benchmark index
Media
Suitable for portfolio hedging
Easy ramp-up
Suitable for portfolio balancing
Credit diversification tool
Bank Portfolio Managers
Easy access to diversified US risk
Corporate TreasuryCorrelation
Trading Desks Proxy hedge against
senior CDO credit portfolio
Insurance
Reference (apr02)
iBoxx CDX.NA.IG The New US Benchmark Index
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Indicative terms and conditions
Maturity: 20 March 2009 20 March 2014
Fixed Rate: [70] basis points per annum. All swap contracts will trade with a Fixed Rate premium with an upfront payment, equal to the present value of the difference between the then current market rates and the Fixed Rate
Credit Events: Bankruptcy and Failure to Pay (2003 ISDA Credit Derivatives Definitions)
During the lifetime of the swap, for each Reference Entity where a Credit Event is deemed to have occurred, there will be Physical Settlement (except under XXmm
size as specified in confirm) on that Reference Entity in accordance with the standard procedure for credit default swaps
iBoxx CDX.NA.IG
Credit Event Settlement Method:
Reference (apr02)
iBoxx CDX.NA.IG The New US Benchmark Index
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iBoxx CDX.NA.IG - Ratings and Sector Breakdown
* Source: Bloomberg
Moody's Industry Groups WeightInsurance 11%Electronics 9%Telecommunications 8%Utilities 8%Aerospace and Defense 7%Oil and Gas 7%Retail Stores 7%Banking 6%Beverage, Food and Tobacco 6%Broadcasting and Entertainment 5%Finance 5%Leisure, Amusement, Motion Pictures, Entertainment 5%Automobile 4%Building and Real Estate 4%Cargo Transport 4%Chemicals, Plastics, and Rubber 4%Healthcare, Education and Childcare 4%Diversified Natural Resource, Precious Metals, and Minerals 3%Grocery 3%Home and Office Furnishing, Durable Consumer Products 3%Hotels, Motels, Inns and Gaming 2%Machinery (Nonagriculture, Nonconstruction) 2%Mining, Steel, Iron and Nonprecious Metals 2%Diversified/Conglomerate Manufacturing 1%Diversified/Conglomerate Service 1%Farming and Agriculture 1%Personal Transportation 1%Personal, Food and Miscellaneous Services 1%Textiles and Leather 1%
Moody's Rating Breakdown *
0%
5%
10%
15%
20%
25%
30%
Aaa Aa1 Aa2 Aa3 A1 A2 A3 Baa1 Baa2 Baa3
Reference (apr02)
iBoxx CDX.NA.IG The New US Benchmark Index
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iBoxx CDX.NA.IG - Reference Portfolio
Reference Entity Reference Entity Reference Entity Reference Entity1 ACE Limited 32 Cingular Wireless LLC 64 Goodrich Corporation 95 Omnicom Group, Inc.2 AETNA, Inc. 33 CIT Group Inc 65 Halliburton Company 96 Progress Energy, Inc.3 Albertson's, Inc. 34 Citizens Communications Company 66 Harrah's Operating Company, Inc. 97 Pulte Homes, Inc.4 Alcan, Inc. 35 Clear Channel Communications, Inc. 67 Hartford Financial Services Group 98 Raytheon Company5 Alcoa, Inc. 36 Comcast Cable Communications, Inc. 68 Hewlett-Packard Company 99 Rohm and Haas Company6 Allstate Corporation, The 37 Computer Associates International, Inc. 69 Honeywell International, Inc. 100 Safeway, Inc.7 Altria Group, Inc. 38 Computer Sciences Corporation 70 Ingersoll-Rand Company 101 SBC Communications, Inc.8 Amerada Hess Corporation 39 Conagra Foods, Inc. 71 International Business Machines Corporation 102 Sears Roebuck Acceptance Corporation9 American Electric Power Company, Inc. 40 ConocoPhillips 72 International Lease Finance Corporation 103 Sempra Energy
10 American Express Company 41 Constellation Energy Group, Inc. 73 International Paper Company 104 Simon Property Group, L.P.11 American International Group 42 Countrywide Home Loans, Inc. 74 Jones Apparel Group, Inc. 105 Southwest Airlines, Inc.12 Amgen, Inc. 43 Cox Communications, Inc. 75 Kraft Foods, Inc. 106 Sprint Corporation13 Anadarko Petroleum Corporation 44 CSX Corporation 76 Kroger Company, The 107 Sun Microsystems, Inc.14 AOL Time Warner, Inc. 45 Deere & Company 77 Liberty Media Corporation 108 Target Corporation15 Arrow Electronics, Inc. 46 Delphi Corporation 78 Lockheed Martin Corporation 109 Textron Financial Corporation16 AT&T Corporation 47 Devon Energy Corporation 79 Loews Corporation 110 Toys R Us, Inc.17 AT*T Wireless Services, Inc. 48 Dominion Resources, Inc. 80 Marriott International, Inc. 111 Transocean, Inc.18 Baxter International, Inc. 49 Dow Chemical Company, The 81 May Department Stores Company 112 Tyson Foods, Inc.19 Bellsouth Corporation 50 Duke Energy Corporation 82 Maytag Corporation 113 Union Pacific Corporation20 Boeing Capital Corporation 51 Dupont, E.I. De Nemours & Company 83 MBIA Insurance Corporation 114 Valero Energy Corporation21 Bombardier Capital, Inc. 52 Eastman Chemical Company 84 MBNA Corporation 115 Verizon Global Funding Corporation22 Bristol-Myers Squibb Company 53 Eastman Kodak Company 85 McDonald's Corporation 116 Viacom, Inc.23 Burlington Northern Santa Fe Corporation 54 Electronic Data Systems Corporation 86 MeadWestvaco Corporation 117 Visteon Corporation24 Campbell Soup Company 55 EOP Operating Limited Partnership 87 Metlife, Inc. 118 Wal-Mart Stores, Inc.25 Capital One Bank 56 Federal Home Loan Mortgage Corporation 88 Motorola, Inc. 119 Walt Disney Company, The26 Carnival Corporation 57 Federal National Mortgage Assocation 120 Washington Mutual, Inc.27 Caterpillar, Inc. 58 Federated Department Stores, Inc. 121 Wells Fargo & Company28 Cendant Corporation 59 FirstEnergy Corporation 90 Newell Rubbermaid, Inc. 122 Weyerhaeuser Company29 Centex Corporation 60 Ford Motor Credit Company 91 News America, Inc. 123 Whirlpool Corporation30 Chubb Corporation 61 General Electric Capital Corporation 92 Nordstrom, Inc. 124 Wyeth31 Cigna Corporation 62 General Mills, Inc. 93 Norfolk Southern Corporation 125 XL Capital, Inc.
63 General Motors Acceptance Corporation 94 Northrop Grumman Corporation
89National Rural Utilities Cooperative Finance Corporation
Each Reference Entity is equally weighted at 0.8%
Reference (apr02)
iBoxx CDX.NA.IG The New US Benchmark Index
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Key Features *
Static portfolios of credit default swaps derived from the 125 reference entities in the iBoxx CDX.NA.IG providing exposure to the following sectors:
Unfunded / CDS format
Discreet trading for investors
– Investors avoid executing large number of small trades
– Investors avoid revealing trading strategies
Easy access to outright sector trading
Relative value
– Trade one sector against another
– Hedge out sectors against the iBoxx CDX.NA.IG
iBoxx CDX.NA.IG - Unfunded Sector Trading
* See Portfolio Rules of Construction
– Industrials
– Consumer
– Financials
– TMT
– Energy
Reference (apr02)
iBoxx CDX.NA.IG The New US Benchmark Index
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iBoxx CDX.NA.IG - Sector Trading Reference Portfolios (1)
* Weightings are rounded to two decimal places. See Portfolio Rules of Construction
Industrials Weight* Energy Weight* Consumer Weight*1 Alcan, Inc. 3.33% 1 Amerada Hess Corporation 6.67% 1 Albertson's, Inc. 3.33%2 Alcoa, Inc. 3.33% 2 Anadarko Petroleum Corporation 6.67% 2 Altria Group, Inc. 3.33%3 Boeing Capital Corporation 3.33% 3 ConocoPhillips 6.67% 3 Amgen, Inc. 3.33%4 Bombardier Capital, Inc. 3.33% 4 Devon Energy Corporation 6.67% 4 Baxter International, Inc. 3.33%5 Burlington Northern Santa Fe Corporation 3.33% 5 Halliburton Company 6.67% 5 Bristol-Myers Squibb Company 3.33%6 Caterpillar, Inc. 3.33% 6 Transocean, Inc. 6.67% 6 Campbell Soup Company 3.33%7 Centex Corporation 3.33% 7 Valero Energy Corporation 6.67% 7 Carnival Corporation 3.33%8 CSX Corporation 3.33% 8 American Electric Power Company, Inc. 6.67% 8 Cendant Corporation 3.33%9 Deere & Company 3.33% 9 Constellation Energy Group, Inc. 6.67% 9 Conagra Foods, Inc. 3.33%
10 Delphi Corporation 3.33% 10 Dominion Resources, Inc. 6.67% 10 Federated Department Stores, Inc. 3.33%11 Dow Chemical Company, The 3.33% 11 Duke Energy Corporation 6.67% 11 General Mills, Inc. 3.33%12 Dupont, E.I. De Nemours & Company 3.33% 12 FirstEnergy Corporation 6.67% 12 Harrah's Operating Company, Inc. 3.33%13 Eastman Chemical Company 3.33% 13 6.67% 13 Jones Apparel Group, Inc. 3.33%14 Ford Motor Credit Company 3.33% 14 Kraft Foods, Inc. 3.33%15 General Motors Acceptance Corporation 3.33% 14 Progress Energy, Inc. 6.67% 15 Kroger Company, The 3.33%16 Goodrich Corporation 3.33% 15 Sempra Energy 6.67% 16 Marriott International, Inc. 3.33%17 Honeywell International, Inc. 3.33% 17 May Department Stores Company 3.33%18 Ingersoll-Rand Company 3.33% 18 Maytag Corporation 3.33%19 International Paper Company 3.33% 19 McDonald's Corporation 3.33%20 Lockheed Martin Corporation 3.33% 20 Newell Rubbermaid, Inc. 3.33%21 MeadWestvaco Corporation 3.33% 21 Nordstrom, Inc. 3.33%22 Norfolk Southern Corporation 3.33% 22 Safeway, Inc. 3.33%23 Northrop Grumman Corporation 3.33% 23 Sears Roebuck Acceptance Corporation 3.33%24 Pulte Homes, Inc. 3.33% 24 Southwest Airlines, Inc. 3.33%25 Raytheon Company 3.33% 25 Target Corporation 3.33%26 Rohm and Haas Company 3.33% 26 Toys R Us, Inc. 3.33%27 Textron Financial Corporation 3.33% 27 Tyson Foods, Inc. 3.33%28 Union Pacific Corporation 3.33% 28 Wal-Mart Stores, Inc. 3.33%29 Visteon Corporation 3.33% 29 Whirlpool Corporation 3.33%30 Weyerhaeuser Company 3.33% 30 Wyeth 3.33%
National Rural Utilities Cooperative Finance Corporation
Reference (apr02)
iBoxx CDX.NA.IG The New US Benchmark Index
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iBoxx CDX.NA.IG - Sector Trading Reference Portfolios (2)
* Weightings are rounded to two decimal places. See Portfolio Rules of Construction
Financials Weight* TMT Weight*1 Capital One Bank 4.17% 1 Arrow Electronics, Inc. 3.85%2 CIT Group Inc 4.17% 2 Computer Associates International, Inc. 3.85%3 Countrywide Home Loans, Inc. 4.17% 3 Computer Sciences Corporation 3.85%4 MBNA Corporation 4.17% 4 Eastman Kodak Company 3.85%5 Washington Mutual, Inc. 4.17% 5 Electronic Data Systems Corporation 3.85%6 Wells Fargo & Company 4.17% 6 Hewlett-Packard Company 3.85%7 EOP Operating Limited Partnership 4.17% 7 International Business Machines Corporation 3.85%8 Simon Property Group, L.P. 4.17% 8 Motorola, Inc. 3.85%9 American Express Company 4.17% 9 Sun Microsystems, Inc. 3.85%
10 Federal Home Loan Mortgage Corporation 4.17% 10 AOL Time Warner, Inc. 3.85%11 Federal National Mortgage Assocation 4.17% 11 Liberty Media Corporation 3.85%12 General Electric Capital Corporation 4.17% 12 Viacom, Inc. 3.85%13 International Lease Finance Corporation 4.17% 13 Walt Disney Company, The 3.85%14 ACE Limited 4.17% 14 AT&T Corporation 3.85%15 AETNA, Inc. 4.17% 15 AT*T Wireless Services, Inc. 3.85%16 Allstate Corporation, The 4.17% 16 Bellsouth Corporation 3.85%17 American International Group 4.17% 17 Cingular Wireless LLC 3.85%18 Chubb Corporation 4.17% 18 Citizens Communications Company 3.85%19 Cigna Corporation 4.17% 19 SBC Communications, Inc. 3.85%20 Hartford Financial Services Group 4.17% 20 Sprint Corporation 3.85%21 Loews Corporation 4.17% 21 Verizon Global Funding Corporation 3.85%22 MBIA Insurance Corporation 4.17% 22 Clear Channel Communications, Inc. 3.85%23 Metlife, Inc. 4.17% 23 Comcast Cable Communications, Inc. 3.85%24 XL Capital, Inc. 4.17% 24 Cox Communications, Inc. 3.85%
25 News America, Inc. 3.85%26 Omnicom Group, Inc. 3.85%
Reference (apr02)
Examples of Trading andCredit Events
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iBoxx CDX.NA.IG The New US Benchmark Index
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Trading - Counterparty buys $100m iBoxx CDX.NA.IG Exposure in Unfunded / CDS Form The fixed rate of the iBoxx CDX.NA.IG is [70] basis points per annum quarterly
After two months, the then current market rate of the iBoxx CDX.NA.IG is [55] bps and counterparty wants to buy $100m iBoxx CDX.NA.IG Exposure
CDS is executed at the fixed rate. Market maker pays 70 basis points per annum quarterly to counterparty on notional amount of $100m
Present value of difference between fixed rate and current market rate of the iBoxx CDX.NA.IG is settled through an upfront payment on T + [3] days
Counterparty pays the present value of [15] basis points per annum on a notional of $100m to market maker
Reference (apr02)
iBoxx CDX.NA.IG The New US Benchmark Index
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Credit Event - Counterparty buys $100m iBoxx CDX.NA.IG Exposure in Unfunded / CDS Form
No Credit Event The fixed rate of the iBoxx CDX.NA.IG is [70]
basis points per annum quarterly
Market maker pays to counterparty [70] bps per annum quarterly on notional amount of $100m
With no Credit Events, the counterparty will continue to receive premium on original notional amount until maturity
Credit Event The fixed rate of the iBoxx CDX.NA.IG is [70]
basis points per annum quarterly
Market maker pays to counterparty [70] bps per annum quarterly on notional amount of $100m
A Credit Event occurs on Reference Entity, for example, in year 3
Reference Entity weighting is 0.8%
Counterparty pays to market maker (0.008 x 100,000,000)= $800,000, and market maker delivers to counterparty $800,000 principal amount of Deliverable Obligations of the Reference Entity
Notional amount on which premium is paid reduces by 0.8% to $99,200,000
Post Credit Event, counterparty receives premium of [70] bps on $99.2m until maturity
Reference (apr02)
iBoxx CDX.NA.IGPortfolio Rules of Construction
Reference (apr02)
iBoxx CDX.NA.IG The New US Benchmark Index
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iBoxx CDX.NA.IG - Construction of the First Index Each market maker submitted a list of 150 entities,
based on the following criteria:
(i) investment grade entities
(ii) entities with liquid outstanding debt
(iii) entities with active trading in CDS
Affiliates of an entity included in the Index that are already guaranteed by that entity are eliminated
Non-guaranteed wholly-owned subsidiaries of an entity are eligible
Those entities receiving the greatest number of votes are included in the Index until the Index totals 125 entities
– If on the final iteration there are, for example, 2 places to fill in the portfolio but 15 possible entities (with the same number of votes) to choose from, each market maker will give an order of preference for that list of entities to be included in the new Index.
– Those entities preferred by the greatest number of market makers are added to the Index until the new Index totals 125
This composition will be the same for the five year and ten year Indexes
On the day of the launch, each market maker will submit to the Administrator the fixed rate for the five and ten year Index. The average of these spreads rounded up to the nearest 5 basis points will be the fixed rate
Reference (apr02)
iBoxx CDX.NA.IG The New US Benchmark Index
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iBoxx CDX.NA.IG - Subsequent Index Composition One week prior to the roll-date, each market maker will
submit to the Administrator a list of entities from the current Index which in their judgement should no longer be included, based on the following criteria:
(ii) entities downgraded below investment grade by either S&P or Moody’s
(ii) entities for which a merger or corporate action has occurred, rendering it no longer suitable
(iii) entities whose Credit Derivative Swaps has become materially less liquid.
The Administrator will eliminate
– all entities submitted with respect to (i)
– all entities submitted with respect to (ii) which receive a majority of votes from the group of market makers
– all entities submitted with respect to (iii) which receive a majority of votes from the group of market makers
Each market maker will then submit to the Administrator a list of entities which in their judgement should be added to the new Index. This list shall include twice the number of entities required
Affiliates of entities guaranteed by entities already in the index are ineligible. Non-guaranteed affiliates are eligible
The Administrator will add to the new Index those entities receiving the greatest number of votes until the new Index totals 125 entities
– If on the final iteration there are, for example, 2 places to fill in the portfolio but 15 possible entities (with the same number of votes) to choose from, the Administrator will request each market maker’s order of preference for that list of entities to be included in the new Index.
– The Administrator will add those entities preferred by the greatest number of market makers to the Index until the new Index totals 125
Three business days prior to the roll-date, the Administrator will publicise the composition of the new Index
This composition will be the same for the five year and ten year Indexes
Promptly after publication, each market maker will submit to the Administrator the fixed rate for the five and ten year Index. The average of these spreads rounded up to the nearest 5 basis points will be the fixed rate.
Reference (apr02)
iBoxx CDX.NA.IG The New US Benchmark Index
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ABN AMROTrading Arthur Leiz
+1 212 409 7421Marketing Joe Duncan
+1 212 409 5358
Deutsche BankTrading Brad Poprik
+1 212 250 2726Marketing John Lovisolo
+1 212 250 5672
CitigroupTrading xxx
+1Marketing xxx
+1
Goldman SachsTrading Alan Gerstein
+1 212 902 0400Marketing xxx
+1
Barclays CapitalTrading James Parascandola
+1 212 412 2993Marketing xxx
+1
Lehman BrothersTrading xxx
+1Marketing xxx
+1
Bear StearnsTrading xxx
+1Marketing xxx
+1
Merrill LynchTrading Philippe Hatstadt
+1 212 449 2410Marketing Doug Mallach
+1 212 449 6190
Credit Suisse First BostonTrading xxx
+1Marketing xxx
+1
UBSTrading xxx
+1Marketing xxx
+1