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ASF 2006 Current Market Views on the Use of Synthetics in CDOs. Gus Harris Group Managing Director, Derivatives Monday, January 30, 2006. Agenda. Introductions Topic 1: ABSCDS Topic 2: Hybrid Ascots Topic 3: ABS Synthetic Indices Topic 4: “Form 2” Topic 5: What’s Next. Topic1 : ABSCDS.

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asf 2006 current market views on the use of synthetics in cdos

ASF 2006Current Market Views on the Use of Synthetics in CDOs

Gus Harris

Group Managing Director, Derivatives

Monday, January 30, 2006

  • Introductions
  • Topic 1: ABSCDS
  • Topic 2: Hybrid Ascots
  • Topic 3: ABS Synthetic Indices
  • Topic 4: “Form 2”
  • Topic 5: What’s Next
topic1 abscds
Topic1 : ABSCDS
  • Audience questions
  • Panelist discussion

“…the trading of the single-name Asset-Backed CDS has increased from a negligible amount in 2003 to almost $75-$100bln through November 2005.”…”This has been driven primarily by consistency in contract documentation, difficulty in sourcing collateral by cash CDO managers and the interest of market players like hedge funds in exploiting any pricing inefficiencies in the ABS market.”

Bear Stearns, ABS Research, Introduction to Asset-Backed CDS, 12/8/05

audience questions 1 and 2 true or false
Audience Questions 1 and 2True or False
  • Q1: My organization is actively involved in the ABSCDS market.
  • Q2: If not actively involved, my organization intends to be actively involved within the next 12 months.
topic abscds

Question 1 (Steve):

What is an ABSCDS? Who are the major payers in this market and how do they use the ABSCDS market? How has it impacted the monoclines?

topic abscds1

Question 2 (Jonathan):

Why has the ABSCDS market begun to grow at such as a rapid rate? Could you share some information of this growth.

Looking into the future, how do you see the market developing in terms of reference assets, liquidity, reliable pricing, volume, and investors. How will it impact primary issuance of cash ABS and the secondary market of cash ABS?

topic abscds2

Question 3 (Ron):

As an investor in ABSCDS, what are the top 3 risks that you assess? What advice do you have for someone who is just now beginning to enter in ABSCDS market?

topic abscds3

Question 4 (Paul):

We have been hearing much about the back office risk related to CDS. Could you please describe the risk and how bad do you think it really is. Could you please walk us through a “worst case” scenario.

topic 2 hybrid ascots
Topic 2: “Hybrid” Ascots
  • Audience questions
  • Panelist discussion
hybrid ascots cash synthetics volatility
Hybrid Ascots; Cash/Synthetics Volatility

“The emergence of Hybrid cash/synthetic structures presents investors another vehicle to take advantage of potential relative value opportunities between cash and synthetic assets.” (CSFB, The CDO Strategist, 1/25/06)

“By buying protection, these investors pushed CDS premiums wider… This incanted SF CDO managers to forego the purchase of cash collateral and instead sell protection in the CDS market. Thus there has been a boom in hybrid and fully synthetic mezzo SF Cods.” (UBS, CDO Insight, 12/13/05)

audience questions 3 and 4 true or false
Audience Questions 3 and 4True or False
  • Q3: I believe that the “Hybrid” ABSCDO structure will eventually completely replace the pure cash flow ABSCDO.
  • Q4: The “Hybrid” ABSCDO itself will eventually be replaced by 100% synthetic deals.
topic hybrid ascots
Topic: “Hybrid” Ascots

Question 5 (Ron):

Please describe the “Hybrid” ABSCDO. What are some of the challenges of managing a “Hybrid” ABS CDO?

topic hybrid ascots1
Topic: “Hybrid” Ascots

Question 6 (Jonathan):

How does the “Hybrid” ABSCDO impact volatility in the cash market? Please describe what the graph is telling us

Source: Program, ABCDS Market Update, 1/13/06

topic 3 abs synthetic indices
Topic 3: ABS Synthetic Indices
  • Audience questions
  • Panel Discussion
audience questions 5 7 true or false
Audience Questions 5-7True or False
  • Q5: My organization is, or intends to be within the next 12 months, an active user of the ABS synthetic indices.
  • Q6: My organization most likely will be actively involved in the ABS index trance market, when it develops.
  • Q7: Activity in the US ABS index trance market will eventually (say, 5 years) dwarf that of the US corporate indices.
abs synthetic indices
ABS Synthetic Indices

“The inauguration of the ABX indices marks the next step in the development of the ABCDS market. The initial indices of ABX.HE 2006-1 will commence trading on January 19, 2006…”

Program, ABCDS Market Update, 1/13/06

topic abs synthetic indices
Topic: ABS Synthetic Indices

Question 7 (Jonathan)

Please describe the current set of ABS indices. What have we seen in the first week of trading in terms of liquidity, “investors” and trading levels. How can I find out all this information?

When will the indices be trenched?

topic abs synthetic indices1
Topic: ABS Synthetic Indices

Question 8 (Ron/Steve):

(A) Ron, How do you foresee market participants using the indices. How will you use the indices?

(B) Steve, How will the CDS Index market impact the wrappers’ involvement in the synthetics market?

topic 4 form 2
Topic 4: “Form 2”
  • Panel Discussion
form 2
“Form 2”

“Monoclines balk at ISDA docs”

“Monocline insurers were not happy with the pay-as-you-go template and have presented ISDA with a draft third template.”

Structured Finance International, September/October 2005

topic form 2
Topic: Form 2

Question 9 (Paul/Steve/Jonathan):

(A) Paul, briefly describe the major differences between the “Dealer” Form and “Form 2” CDS confirm.

(B) Steve, any comments on the new “Form”?

( C) Jonathan: What is the potential basis between the different forms? How could one profit from this relationship?

major developments in the pipeline
Major Developments in the Pipeline

“Every year or so in the fast-changing world of credit derivatives, some innovation comes along that takes the market in an entirely new direction.”...

”One of the most frequently discussed ideas in the credit derivatives market is the creation of an exchange-traded credit futures contract.”…

“The range of exotic credit derivatives is as great as the imagination of the bankers that dream them up.”

Source: Inside Guide to next-generation credit derivatives, Credit flux, May 2005

topic the next major developments in abs synthetics
Topic: The Next Major Developments in ABS Synthetics

Question 10 (all):

Briefly describe the most relevant ABS Synthetics “products” that you see in the near future.