The return of credit products

Synthetic CDO’s are back say these pieces (here and here). Some of you may recall the BISTRO template, where the cash flows from selling CDS are packaged into tranches and sold to investors. This time, it appears that these are more of the “bespoke” variety, where the products are customized for presumably savvy investors and do not go through a ratings process where senior tranches used to get AAA ratings in years past. Regardless, Citi apparently sold $2 billion last year and has already done $1 billion this year alone.

Somewhat more ominous is this plan by ProShares to create and market ETF’s that are based on CDS. The thinking behind this is that in a post Dodd-Frank world, CDS trading is moving to exchanges, is becoming more transparent, so retail investors can participate in these products.

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