wilmott.com

For the iTraxx or CDX, if one of the credits default, which settlement method are we using? cash or physical?

it cna be either depending on whether you're buying a note or entering into an unfunded transaction. Note pays cash, unfunded delivers ref obligation

For CDX/iTraxx cash settlement is usually used after a voting of the recovey of the underlying defaulted secutity. This is simply due to the liquidity multiple of a securities derivative, which, if forced to physically settle, would artifically inflate the price. For single-name CDS, physical settlement is commonly used by banks hedging for a hold-to-maturity security but cash settlement for prop desks.

Buside accounts have an option whether to cash settle using the auction result (process outlined here for most recent http://www.creditfixings.com/fixings.jsp?id=dana ) by signing up to the relevant ISDA protocal for the default.Or they can continue to use physical delivery with their CP. Most shops would choose the first option, I believe over 500 buyside accounts signed up for the Delphi protocal and accepted the auction result. Reasons in past auctions for funds not signing up would be that they had exposure to equity tranches on the index and were actively hedging the close-to-default entity using single name CDS. In default, they could suffer a recovery basis risk if the auction settled at a different level than they could purchase the bonds.I expect that CDS Index trade documentation will be changed in the future to make the auction process mandatory as soon as the buyside can settle their single name CDS hedges at the same recovery rate.

Hello, Does anyone have a document which describes the itraxx or CDX indices in a wordy kindergarden format. Something you might send to a corporate client. If that can be posted, it would be really helpful. The info on the www.indexco.com site is in powerpoint format, so almost no words.Thanks!

http://www.markit.com/magnoliaPublic/af ... 202005.pdf