iTraxx: Definition, Functionality, and Market Significance

iTraxx, or Markit iTraxx indices, represents a collection of indexes designed for the credit default swap market, spanning Europe, Australia, and Asia. These indexes play a crucial role in providing liquidity and enabling market participants to manage risk effectively.

The iTraxx indices were developed to address the need for standardized tools in the credit default swap market, aiming to enhance liquidity, transparency, and market acceptance. Market makers, including major financial institutions and ETF providers, utilize these indices to hedge risks and execute trades efficiently.

The origins of iTraxx trace back to the early 2000s when market participants sought standardized instruments to hedge and leverage credit market exposure globally. J.P. Morgan and Morgan Stanley were instrumental in creating indices for the burgeoning credit derivative market, which eventually evolved into the iTraxx indices managed by the International Index Company (IIC).

In 2007, Markit Group acquired IIC and CDS IndexCo, consolidating the management of credit derivative indices. Markit iTraxx and CDX, covering North American and emerging markets, became pivotal in providing transparency and facilitating standardized transactions in the credit default swap market.

iTraxx and other credit derivative indices play a vital role in enhancing the tradability of credit default swaps by increasing market transparency and standardizing transactions. They enable market participants to manage risk effectively while serving as essential indicators of overall economic performance.

iTraxx indices are calculated based on liquidity data from market makers, which include large investment banks, asset managers, hedge funds, and ETF providers. These market makers provide data on the most liquid traded entities, which is used to compute the indices.

iTraxx indices play a crucial role in providing liquidity, transparency, and standardization to the credit default swap market. They enable market participants to hedge risks, execute trades efficiently, and serve as indicators of overall economic performance.