Asset managers and others buy and sell an index that bundles many reference entities when they want to hedge the credit risk of corporate bonds and loans in one step.

A trade bundling multiple reference entities

A CDS index bundles credit default swaps (CDS) on multiple reference entities under set rules, and the index itself is bought and sold as a single trade1. Instead of entering into dozens of CDS one name at a time, you can buy or sell the credit risk of all the bundled reference entities together2. How a CDS on a single reference entity works is covered in Credit Default Swaps (CDS).

Consider a hypothetical example in which Company O, an investor, buys protection on an index of 50 equally weighted companies. The notional amount is 10 billion yen, the term is 5 years, and the coupon is 100bp (1% a year). Each company has a weight of 1/50 (2%).

This trade has an effect close to buying a CDS with a notional amount of 200 million yen on each of the 50 companies. The protection buyer, Company O, pays the coupon on the full index notional amount of 10 billion yen. If any one company suffers a credit event, the buyer receives the loss on that one company from the seller13. The protection buyer is in a position close to having sold (shorted) the credit risk component of a portfolio of bonds, and the protection seller is in the opposite position4.

Main indices and how constituents are chosen

The main CDS indices are iTraxx, covering Europe and Asia-Pacific, and CDX, covering North America and emerging markets5. Both were created in 2004, when the earlier TRAC-X and iBoxx indices merged2. The IHS Markit document (November 2021) lists the following main indices6.

Index Coverage Number of constituents Coupon (bp) Currency Quotation
iTraxx Europe European investment grade companies 125 100 Euro Spread
iTraxx Crossover European non-investment grade companies 75 500 Euro Spread
iTraxx Japan Japanese investment grade companies 40 100 Yen Spread
CDX.NA.IG North American investment grade companies 125 100 US dollar Spread
CDX.NA.HY North American non-investment grade companies 100 500 US dollar Price
CDX.EM Emerging market countries (sovereigns) 18 100 US dollar Price

Each index selects its constituents under its own rules, based on how actively their CDS trade (liquidity), sector, and region2. For example, the constituents of iTraxx Japan are chosen from companies based in Japan that are reference entities of heavily traded CDS. The trading volume comes from the CDS trading volume reports published by DTCC (Depository Trust & Clearing Corporation)1. The scope of credit events also differs by index. According to the document (November 2021), iTraxx treats bankruptcy, failure to pay, and restructuring (changes to the terms of debt; Modified Restructuring in the document) as credit events, while CDX treats bankruptcy and failure to pay as credit events5.

A bond or equity index is a value calculated from the prices of its constituents. A CDS index, by contrast, is itself traded, and that trading sets its spread. As a result, the index spread does not match the theoretical value calculated from the CDS spreads of its constituents1.

Coupons and quotation by index

In index trading, each index has a single fixed coupon rate (see the table above)4. Payment dates (the 20th of March, June, September, and December), the exchange of accrued coupon, and upfront payments follow the same standard conventions as single-name CDS78. In the opening example (notional amount of 10 billion yen, coupon of 1% a year), if you ignore the day count convention and treat each period as a quarter of a year, one coupon payment is 10 billion yen × 1% ÷ 4 = 25 million yen9.

How an index is quoted depends on the index. As the table above shows, CDX.NA.IG and the iTraxx indices are quoted as a spread, while CDX.NA.HY and CDX.EM are quoted as a price. The convention follows the bond markets, where some bonds are quoted by yield and others by price10. The price here is a value based on 100, and 100 minus the price gives the upfront payment as a percentage of the notional amount4. This percentage corresponds to the points upfront (PUF). The wider the spread, the lower the price10.

Buyers who hold protection on the same series all pay the same coupon per unit of notional on the same payment dates, whatever their trade dates. Because the accrued coupon up to the trade date is settled at the time of the trade, the payments of many buyers can be aligned to one date, which simplifies operations11.

Series and rolls

Every six months, the index administrator reviews the constituents and creates a new series with the new constituents12. For iTraxx Japan, a new series is published on March 20 and September 201. For example, the iTraxx Japan spread posted by Japan Securities Clearing Corporation (JSCC) as of September 25, 2026 is the value for 5-year trades in Series 4613.

The newest series is called "on-the-run," and older series are called "off-the-run"1. Older series continue to trade after a new series is created1. However, many investors move their positions when a new series is created, so trading concentrates in the latest series. Moving a position into the new series is called a roll14. Several maturities, from 1 year to 10 years, are available, but trading concentrates most in the 5-year maturity12. Each series has a fixed maturity date, so if you keep holding the same series, its remaining term gets shorter. Rolling into the new series lets you roughly keep the term of the position, such as 5 years8.

Credit events and new versions

When a constituent suffers a credit event, the protection seller pays the buyer the loss on that name's weight3. The amount is determined by the same procedure as a single-name CDS on that reference entity with the notional amount scaled down to the name's weight116. The recovery rate is the one set in the CDS auction for that reference entity16. How credit events are determined and how auctions work are covered in Credit Events and Settlement.

After a credit event, the index administrator publishes a new version in which that name's weight is set to 0. Trading from then on takes place in the new version, and the notional amount of each trade falls by that name's weight31.

Go back to the example from the first section. To keep things simple, suppose that the event determination date of a credit event in one constituent falls on the second payment date, that the auction finishes before the third payment date, and that the auction sets the recovery rate at 30%17. The seller pays 10 billion yen × 2% × (1 − 30%) = 140 million yen. The notional amount falls from 10 billion yen to 9.8 billion yen, and the coupon from the next payment date is 9.8 billion yen × 1% ÷ 4 = 24.5 million yen.

↑ Receive　↓ PayPayments seen by the protection buyer (million yen)Payment date 1Payment date 2After auctionPayment date 3Payment date 4−25Coupon−25Coupon+140Loss on name−24.5Coupon−24.5Coupon
Figure 1Payments when one constituent suffers a credit event
Figure description

Payments seen by the protection buyer on an index of 50 equally weighted companies, with a notional amount of 10 billion yen and a coupon of 1% a year. The buyer pays a coupon of 25 million yen on each of the first and second payment dates. When one constituent suffers a credit event and the auction sets the recovery rate at 30%, the buyer then receives 140 million yen from the seller. Because the notional amount falls to 9.8 billion yen, the coupon the buyer pays on each of the third and fourth payment dates is 24.5 million yen. The length of each arrow is a rough guide to the size of the amount.

The new version starts trading on the day after the auction for that name. Between the event determination date and the auction, trading continues in the original version, which still includes the name3. Restructuring credit events are handled differently: the new version starts trading on the day after the event determination date. The name is then spun out of the index, and investors hold the new version of the index plus a single-name CDS on that name3.

How spreads move and how indices are used

From the protection buyer's side, the market value of the trade rises when the index spread widens and falls when it tightens4. The seller is in the opposite position, gaining when the spread tightens and losing when it widens. Even without a credit event, if views on the creditworthiness of the constituents change and the spread moves, the trade shows a mark-to-market gain or loss.

One use is hedging the credit risk of bonds and loans18. For example, an investor with large holdings of corporate bonds might buy protection on an index. If corporate creditworthiness broadly deteriorates and the spread widens, the market value gain on the protection offsets the loss on the credit risk component of the bonds. If creditworthiness improves and the spread tightens instead, the investor gains on the credit risk component of the bonds but has a market value loss on the protection, and keeps paying the coupon.

Beyond hedging, indices are used to take a view on the credit market as a whole in one trade, to buy one of the investment grade and non-investment grade indices and sell the other, and to trade the difference between an index and the CDS of its constituents. Tranches, which split the losses on an index into layers that are bought and sold separately, and options on indices also trade19.

Indices are traded by dealers, asset managers, hedge funds, insurance companies, pension funds, and others, who act as both protection buyers and protection sellers5.

Risks: counterparty, liquidity, and hedge mismatch

Besides mark-to-market gains and losses from spread moves, there is the risk that the counterparty fails to pay as agreed. In cleared trades, a central counterparty becomes the counterparty to every trade and exchanges collateral on a pooled basis, which reduces this risk20. In uncleared bilateral trades, you bear this risk against each counterparty.

Trading concentrates in the latest series, so if you keep holding an off-the-run series without rolling, you end up with a thinly traded (less liquid) position8.

When you hedge with an index, a mismatch remains against the bonds or loans you want to hedge. If the issuer of a corporate bond you hold is not a constituent, you receive no payment from the index even if that issuer suffers a credit event31. Even if it is a constituent, you receive only the loss on that name's weight16.

Clearing and trading practice

CDS index trades are OTC derivative trades that do not go through an exchange, and most are cleared through a central counterparty10. In Japan, JSCC clears index CDS trades on iTraxx Japan. As of September 2026, JSCC lists Version 1 of each of iTraxx Japan Series 36 through Series 46 as eligible for clearing21.

In the United States, in November 2012 the Commodity Futures Trading Commission (CFTC) made index CDS on five indices subject to mandatory clearing (effective February 2013). They are CDX.NA.IG, CDX.NA.HY, iTraxx Europe, iTraxx Europe Crossover, and iTraxx Europe HiVol22. The requirement covers untranched index trades, and for each index it sets the range of maturities and series22.

Notes

  1. Japan Securities Clearing Corporation, "Markit iTraxx Japanについて" (About Markit iTraxx Japan, in Japanese; page dated October 31, 2017), "Markit iTraxx Japanについて" (About Markit iTraxx Japan) and "通常のインデックスと異なる点" (How it differs from ordinary indices). ↩ ↩2 ↩3 ↩4 ↩5 ↩6 ↩7 ↩8 ↩9 ↩10

  2. IHS Markit, "CDS Indices Primer" (November 2021), page 15, "What is a CDS index?", "Benefits", and "Brief history". ↩ ↩2 ↩3

  3. IHS Markit, "CDS Indices Primer" (November 2021), page 22, "Credit events". ↩ ↩2 ↩3 ↩4 ↩5 ↩6

  4. IHS Markit, "CDS Indices Primer" (November 2021), page 20, "How do I trade?". ↩ ↩2 ↩3 ↩4 ↩5

  5. IHS Markit, "CDS Indices Primer" (November 2021), page 16, "Participants" and "Differences between iTraxx and CDX". ↩ ↩2 ↩3

  6. IHS Markit, "CDS Indices Primer" (November 2021), page 33, "Product descriptions". The "Coverage" column is based on pages 16–17 and the chart on page 33 of the same document, page 74290 of the CFTC, "Clearing Requirement Determination Under Section 2(h) of the CEA", and JSCC, "Markit iTraxx Japan 本日のスプレッド" (Markit iTraxx Japan spreads today, in Japanese). ↩

  7. IHS Markit, "CDS Indices Primer" (November 2021), page 9, "Fixed coupons, upfront amounts and quoted spreads" and "Standard maturities, coupon dates and rolls - taking a cue from the CDS indices". ↩

  8. IHS Markit, "CDS Indices Primer" (November 2021), page 17, "Coupon Payments" and "Index documentation". ↩ ↩2 ↩3

  9. In practice, the coupon is calculated by dividing the number of days by 360 (Actual/360). This example ignores the day count for simplicity. ↩

  10. IHS Markit, "CDS Indices Primer" (November 2021), page 19, "Trading Conventions" and "Where can I trade?". ↩ ↩2 ↩3

  11. IHS Markit, "CDS Indices Primer" (November 2021), page 21, "Accrued Interest received by investor A". ↩

  12. Commodity Futures Trading Commission, "Clearing Requirement Determination Under Section 2(h) of the CEA" (Federal Register Vol. 77, No. 240, December 13, 2012), page 74290, footnote 58. ↩ ↩2 ↩3

  13. Japan Securities Clearing Corporation, "Markit iTraxx Japan 本日のスプレッド" (Markit iTraxx Japan spreads today, in Japanese; updated September 25, 2026), the table, "Markit REDコード" (Markit RED code), and "期間" (Term). ↩ ↩2 ↩3

  14. Commodity Futures Trading Commission, "Clearing Requirement Determination Under Section 2(h) of the CEA" (Federal Register Vol. 77, No. 240, December 13, 2012), page 74294, footnotes 72 and 73. ↩

  15. IHS Markit, "CDS Indices Primer" (November 2021), page 11, "RED codes". ↩

  16. IHS Markit, "CDS Indices Primer" (November 2021), page 23, "Mechanics" and "Payout to protection buyer" in "Index reversion example". ↩ ↩2 ↩3 ↩4 ↩5

  17. Because the event determination date falls on a payment date, the coupon returned to the seller, described in the box "Coupon adjustment after a credit event" below, is 0. ↩

  18. IHS Markit, "CDS Indices Primer" (November 2021), pages 12–13, "Isolating & Hedging Credit Risk" in "Use cases". ↩

  19. IHS Markit, "CDS Indices Primer" (November 2021), page 13, "Use cases". ↩

  20. IHS Markit, "CDS Indices Primer" (November 2021), pages 10–11, "Clearing" in "Market Structure". ↩

  21. Japan Securities Clearing Corporation, "清算対象取引" (Transactions eligible for clearing, in Japanese), "インデックスＣＤＳ取引" (Index CDS transactions) and the conditions for CDS trades whose obligations JSCC assumes. Checked on September 25, 2026. ↩ ↩2

  22. CFTC, "Clearing Requirement Determination Under Section 2(h) of the CEA", Table 1 on page 74291, "DATES" on page 74284 (effective February 11, 2013), and page 74338 (November 29, 2012). ↩ ↩2