ASF 2006 Current Market Views on the Use of Synthetics in CDOs Gus Harris Group Managing Director, Derivatives Monday, January 30, 2006 Gus Harris Group.

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

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Topic1 : ABSCDS

Audience questions

Panelist discussion

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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

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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?

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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?

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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?

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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.

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Topic 2: “Hybrid” Ascots

Audience questions

Panelist discussion

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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)

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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.

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Topic: “Hybrid” Ascots

Question 5 (Ron):

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

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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

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Topic 3: ABS Synthetic Indices

Audience questions

Panel Discussion

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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.

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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

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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?

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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?

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Topic 4: “Form 2”

Panel Discussion

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“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

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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?

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Topic 5: The Next Major Developments in ABS Synthetics

Panel discussion

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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

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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.