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ASF 2006Current Market Views on the Use of Synthetics in CDOs
Gus Harris
Group Managing Director, Derivatives
Monday, January 30, 2006
Gus Harris
Group Managing Director, Derivatives
Monday, January 30, 2006
2
Agenda
Introductions
Topic 1: ABSCDS
Topic 2: Hybrid Ascots
Topic 3: ABS Synthetic Indices
Topic 4: “Form 2”
Topic 5: What’s Next
3
Topic1 : ABSCDS
Audience questions
Panelist discussion
4
ABSCDS
“…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
5
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.
6
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?
7
Topic: ABSCDS
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?
8
Topic: ABSCDS
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?
9
Topic: ABSCDS
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.
10
Topic 2: “Hybrid” Ascots
Audience questions
Panelist discussion
11
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)
12
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.
13
Topic: “Hybrid” Ascots
Question 5 (Ron):
Please describe the “Hybrid” ABSCDO. What are some of the challenges of managing a “Hybrid” ABS CDO?
14
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
The Basis (Synthetic vs. Cash)
-80
-60-40
-200
20
4060
80
10/13
10/20
10/27
11/3
11/10
11/17
11/24
12/1
12/8
12/15
12/22
12/29
1/5
1/12
Time
Ba
sis "Baa2"
"Baa3"
Source: Program, ABCDS Market Update, 1/13/06
15
Topic 3: ABS Synthetic Indices
Audience questions
Panel Discussion
16
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.
17
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
18
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?
19
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?
20
Topic 4: “Form 2”
Panel Discussion
21
“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
22
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?
23
Topic 5: The Next Major Developments in ABS Synthetics
Panel discussion
24
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
25
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.