A credit default swap whereby the protection seller pays the protection buyer in case of default by one or more of the reference entities (names) in a specified index. Trading of indices of credit default swaps has grown over last years. Such indices start off with a particular rating type (investment grade, high yield, crossover, etc) for the underlying entities (names). On a periodical basis, typically every six months, a new index will be initiated, coming forth by a new on-the-run “series”. Initially, an index consists of 125 underlying single name CDSs. Those credit default swaps are equally weighted in a specific index.

The protection buyer pays a premium to the protection seller against providing a hedge on the credit risk posed by all the underlying names. When a name defaults, the protection buyer will be poised to receive payment on the defaulted name. Thereafter, that defaulted name will be removed from the basket, with the total notional being reduced by 1/125th. Examples of such indices include the iTraxx family in London, and the CDX family in New York.