Credit-default swap indexes are benchmarks for protecting investors owning bonds against default, and traders use them to speculate on changes in credit quality.
[3] Running up to the announcement of each series a group of investment banks is polled to determine the credit entities that will form the constituents of the new issue.
This process is intended to ensure that the index does not become "cluttered" with instruments that no longer exist, or which are illiquid.
[5] Prior to SNAC (i.e. CDX.NA.IG Series 3 through 11) the coupons were set to approximate the average weighted spread of the names in that index.
Once this has been decided the index constituents and the fixed coupon are published, and the indices can be actively traded.
In the same manner as high yield single name CDSs, they are quoted as a price - i.e. the percentage of the notional that is paid as an upfront fee.
Market-makers can see the total amount of index trading daily and where they rank against their peer group.
The size of the payment is equal to that which would be paid if protection had been bought on a single name CDS with a notional scaled down by the constituent's weighting in the index.