Markit ABX.

PRIME Indices

July 21st, 2009

Disclaimer
The information contained in this presentation is confidential and includes forward-looking
forward looking
statements. While this document has been prepared in good faith, Markit Group Limited does not
warrant or assume any legal liability or responsibility for the completeness, accuracy, or usefulness STRICTLY CONFIDENTIAL
of any information disclosed.
 Table of Contents

ƒ I t d ti to
Introduction t Markit
M kit ABX
ABX.PRIME
PRIME Indices
I di

ƒ Trading Markit ABX.PRIME

ƒ Contacts

2
 Introduction to ABX.PRIME

3
 ABX.PRIME.FRM, ABX.PRIME.ARM, &
ABX PRIME AGG
ABX.PRIME.AGG

ƒ The ABX.PRIME indices allow investors to synthetically gain exposure to Prime RMBS
collateral

– Synthetic long or short exposure to AAA credit initially. Indices specific to subordinated bonds
can be added later depending on market appetite

ƒ Each index will serve as a standardized, diverse, and liquid tool referencing securitized
fixed rate or hybrid ARM loans
– Separating fixed-rate and hybrid ARMs allows investors to trade their risks independently

ƒ Markit will initially launch three series of the index referencing the 2005, 2006, & 2007
vintages, and one aggregate index combining vintages and collateral types.
– Between 10 and 20 deals in each sub-index, satisfying a series of concentration and collateral
tests

– Multiple AAA bonds from each deal aggregated and included in each sub-index

ƒ Aggregate ABX.PRIME index will combine all 6 sub-indices and include all three
vintages and both fixed and hybrid ARM collateral

– Creating an ABX.PRIME aggregate index allows investors to take macro positions on PRIME
RMBS across all vintages and collateral types

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 Markit ABX.PRIME.AGG
ABX PRIME AGG

ƒ In addition to creating sub-indices by vintage and collateral, Markit

will create and administer an aggregate ABX
ABX.PRIME
PRIME index
combining all 6 sub-indices

ƒ ABX.PRIME.AGG will trade via CDS contract and will serve as a

macro indicator for the entire asset class

ƒ Each relative sub-index will be equally weighted in the aggregate,

sub-weighting
sub weighting will be applied in the same manner

5
 Deal and Tranche selection

Outstanding Issues:
ƒ How to define the prime market in both fixed and hybrid
mortgages?

ƒ Ho
How to deal with
ith the m
multiplicity
ltiplicit of AAA bonds in ttypical
pical
prime deals?

6
 Deal Universe Selection
ƒ Deals are selected out of the Bloomberg universe with ABX.PRIME.ARM ABX.PRIME.FRM
data compiled from prospectuses as a function of their Seconds None None
average or aggregate characteristics
Neg-Am None None
– A new index rolls every 12 months, provided there
are enough outstanding deals to perform the Short ARMs None None
selection (Reset < 30
mo)
– Issued within the year of the index vintage
WAvg FICO > 730 > 735
– Minimum deal size at issuance of $250mm
– The average loan characteristics of each deal must WAvg LTV < 73% < 73%
fall within the filters shown in the table
– Deals must pay on the 25th of the month N
Non owner < 15% < 10%
– The deal’s collateral must be loans. Re-remics and
NIMs are therefore excluded, as well RESIF-type Full/Alt Doc > 25% > 40%
synthetic deals
WA Original > 330 months > 330 months
T
Term
ƒ Deals are separated between fixed and hybrids
CLTV If Available If Available
< 85% < 85%
– Collateral filters are different between hybrid and
fixed-rate
fixed rate paper
– Fixed deals must be 100% backed by fixed-rate
collateral
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– Hybrid deals must be 100% backed by hybrid ARMs
 Index Roll Process

ƒ Additional selection criteria applied to universe defined by

d l collateral
deal ll t l
– Must be originally rated AAA by at least two of Fitch, Moody’s or S&P

– At least
l t one off the
th AAA tranches
t h in
i the
th deal
d l mustt be
b registered
i t d
pursuant to the U.S. Securities Act of 1933

– None of the tranches included in the index shall benefit from a financial
guarantee from a third p
g party
y ((though
g loan-level mortgage
g g insurance is
acceptable)

8
 Index Roll Process (cont’d)
(cont d)

ƒ Markit begins roll process

– Markit compiles the list of the largest (by outstanding principal
balance) 25 qualifying deals issued in the relevant year

– Li
Listt off selected
l t db bonds
d ffor each
hddeall will
ill b
be provided
id d d
during
i ththe
roll

– Majority dealer vote can eliminate any of the 25 deals from the
list

– Originator, Servicer, and Shelf concentration limits are applied

and final list of a maximum 20 deals (with constituent bonds) is
created
ƒ No more than 4 deals from the same shelf
ƒ No more than 8 deals with the same originator
ƒ No more than 8 deals with the same servicer

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 ABX PRIME Bonds
ABX.PRIME

ƒ Appropriate bonds are selected from each qualifying deal

– Markit will select originally AAA rated certificates that reference

the largest loan group(s) in the deal

ƒL
Largest lloan group iis d
determined
i db by the
h outstanding
di principal
i i l
balance of loans

– Aggregated certificates will represent a “Pass-Through Interest”

in selected bonds

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 ABX PRIME Construction
ABX.PRIME

ƒ For both the ABX.PRIME.FRM and ABX.PRIME.ARM

– Initially, each deal will be equally weighted with other deals in the index

– Within each deal, each bond selected will initially be weighted according to
its original principal balance

– The bonds selected will consist of the fewest number of certificates possible
in order to create the pass-through tranche

ƒF
For the
th ABX.PRIME.AGG,
ABX PRIME AGG each
h sub-index
b i d will
ill b
be equally
ll weighted
i ht d within
ithi
the index

ƒ Once the reference obligations are in the index, they do not drop out, but
amortize
ti as a ffunction
ti off prepayments t andd actual
t l or iimplied
li d write-downs
it d

ƒ Interest shortfall payments are not subject to a cap

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 Trading Markit ABX.PRIME

12
 Credit Indices
ƒ ABX.PRIME.FRM.CDS and ABX.PRIME.ARM.CDS
– Each index references multiple component bonds from 10-20 deals based on
collateral characteristics and concentration tests (different criteria for each index)

– FRM deals reference only fixed rate prime collateral

– ARM deals reference only hybrid ARM prime collateral

ƒ ABX.PRIME.AGG
– Index combines all sub-indices, encompasses both FRM and hybrid ARM
collateral

– Running fixed coupon

ƒ CDS trading convention:

– Seller pays applicable percentage of Interest & Principal Shortfalls as well as
writedowns and implied writedowns on swap notional
– Running fixed coupon:
ƒ Set by the dealers during the roll process prior to launch date

– Upfront PV exchange of the observed market value of risk

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 Payment Structure

ABX.PRIME Indices

Fixed Coupon & Additional

Fixed Payments

Protection Buyer Protection Seller

Principal & Interest Shortfalls /

Principal Writedowns

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 Firm ABC buys protection on $100mm of
ABX PRIME FRM Series 1
ABX.PRIME.FRM
Fixed Rate Payer (Protection Buyer) Floating Rate Payer (Protection Seller)
ƒ Pays
P the
th Present
P t Value
V l off the
th contract
t t upfront
f t ƒ Receives the Present Value of the contract upfront
– PV of implied risk over the fixed coupon will be paid upfront - Seller is compensated for the PV of the risk over the fixed
– PV of index contract incorporates buyer’s assumption of coupon upfront
amortization via voluntary & involuntary prepayments - Seller receives a fixed coupon throughout the life of the
– Buyer pays a fixed coupon throughout the life of the contract contract

ƒ Receives payment from Floating Rate Payer in the
following events:
– Interest Shortfall (Not Capped)
– Principal Shortfall
– Principal Writedown (Actual or Implied)
ƒ Pays Floating Rate Payer in the event of the following:
– Interest Shortfall Reimbursement
– Principal Shortfall Reimbursement
– Writedown Reimbursement (Actual or Implied)
ƒ Pays Fixed Rate Payer in the following events:
- Interest Shortfall (Not Capped)
- Principal Shortfall
- Principal Writedown (Actual or Implied)
ƒ Receives payment from Fixed Rate Payer in the
event of the following:
- Interest Shortfall Reimbursement
- Principal Shortfall Reimbursement
- Writedown Reimbursement (Actual or Implied)

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 Markit Contacts

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 Markit Contacts

Ben Logan
B L
Ben.Logan@markit.com
@ kit
212-931-4925

Ned Lipes
Ned.Lipes@markit.com
212-863-9490

Julie Holzer
Julie.Holzer@markit.com
917-441-6350

Will Weinstein
Will.Weinstein@markit.com
212-205-1763

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