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Rookie_Quant


Total Posts: 757
Joined: Jun 2004
 
Posted: 2019-01-03 19:16
Practically, if one wanted to trade corporate CDO/CLO tranches, how would she go about it?

What I have in mind is taking the other side of a mezz or senior tranche of US corporate deals, but I've never actually tried to trade these securities before. Is there even a market for them?

The last time I looked at markets like this was when the ABX/CMBX/LCDX were much more popular. Does the LCDX still offer tranched securities where someone could buy or sell protection on the 30-100 tranche, for example?

Also, does this market still use BWIC for secondary trades or are they done in a different way? Is a prime brokerage relationship sufficient for getting access to secondary trades?

Sorry for all the uninformed questions.

"These metaphors and similes aint similar to them, not at all." -Eminem

Rookie_Quant


Total Posts: 757
Joined: Jun 2004
 
Posted: 2019-01-03 19:19
as an addendum, is it possible/feasible to select a collateral pool of corporate/muni bonds and tranche it out and buy protection?

"These metaphors and similes aint similar to them, not at all." -Eminem

day1pnl


Total Posts: 53
Joined: Jun 2017
 
Posted: 2019-01-03 20:45
LCDX doesnt trade. No banks are making markets. Standard index tranches in 5y point. People trade super senior in iTraxx main+xo, and cdx ig+hy - and three other tranche pieces in each of them. Super senior are tranched as follows (in terms of original portfolio): main 12-100, xo 35-100, ig 15-100, and hy 35-100. In main exists 7y and 3y outside of the standard 5y contract. Other indices have indicative 3y tenors from the “vanilla dealers” - bespoke correlation desks make markets in non-standard stuff. Which is in general not the biggest banks. Is traded on an OTC line i think (ISDA bridge) or in funded format as credit linkes note. Not sure, but Hope this helps a bit...

Rookie_Quant


Total Posts: 757
Joined: Jun 2004
 
Posted: 2019-01-03 21:39
Extremely helpful. I’ll digest and may have more questions but this helps me get started.

"These metaphors and similes aint similar to them, not at all." -Eminem

Rookie_Quant


Total Posts: 757
Joined: Jun 2004
 
Posted: 2019-01-07 15:43
A few follow-ups:

Is it possible to purchase protection or sell protection on certain cash deals or bespoke tranches that are already in the market?

Is it possible to put together a basket and structure some kind of protection on it in a customized way? (Related, do nth to default or similar structures even trade?)

"These metaphors and similes aint similar to them, not at all." -Eminem

Cheng


Total Posts: 2864
Joined: Feb 2005
 
Posted: 2019-01-08 08:30
Is it possible to put together a basket and structure some kind of protection on it in a customized way?

Abacus... Wink

"He's man, he's a kid / Wanna bang with you / Headbanging man" (Grave Digger, Headbanging Man)

Rookie_Quant


Total Posts: 757
Joined: Jun 2004
 
Posted: 2019-01-08 12:30
Yes. Abacus was a fun deal. I’m thinking along similar lines but a little less blatant. We have a basket of names we want to be short ideally and I thought the highest-leverage way might be to put together a cdo and take out projection on the super-senior.

"These metaphors and similes aint similar to them, not at all." -Eminem

Cheng


Total Posts: 2864
Joined: Feb 2005
 
Posted: 2019-01-08 16:31
If you want to hedge systemic risk go for the super senior (but then I would ponder whether CDX super senior wouldn't do the job as well). If you want to hedge single name risk go for junior mezz (here a bespoke portfolio makes sense).

From your questions I gather that you have a new position...

"He's man, he's a kid / Wanna bang with you / Headbanging man" (Grave Digger, Headbanging Man)

day1pnl


Total Posts: 53
Joined: Jun 2017
 
Posted: 2019-01-08 17:32
@RQ Also please define leverage?

Highest marginal jump-to-default? Highest delta? Lowest tranche spread per unit of delta? Max upside?

Rookie_Quant


Total Posts: 757
Joined: Jun 2004
 
Posted: 2019-01-08 22:04
@day1pnl

Closest to what we are thinking is lowest tranche spread per unit of delta.

"These metaphors and similes aint similar to them, not at all." -Eminem

Rookie_Quant


Total Posts: 757
Joined: Jun 2004
 
Posted: 2019-01-08 22:05
@Cheng

I'd call it an advisory role that is not entirely orthogonal to my research agenda :)

"These metaphors and similes aint similar to them, not at all." -Eminem

day1pnl


Total Posts: 53
Joined: Jun 2017
 
Posted: 2019-03-09 12:06
@RQ did you get any closer to a solution to your problem and have you decided on the CDO vs CLO question?

@RQ+Cheng: On synthetics side we are using fairly well known models for both tranches and CDS and there is tradeable markets for both correlation, index and single names. In that sense synthetics are quite simple especially the pure CDSindex based tranches. I have renewed interest in understanding this CLOs / cash CDOs as a lot of ppl are active in the space. but find them to be somewhere between relatively extremely difficult to impossible to model and mark-to-market. CLO waterfalls have “hard” path dependcies, in addition to callability and unobservable single name markets. How do people get away with the modeling on sell-side? Is anything modeled there at all or are new tranches simply “priced” statistically off a tranche spread vs ratings curve in 2ndry mkts?


Cheng


Total Posts: 2864
Joined: Feb 2005
 
Posted: 2019-03-12 10:49
Trying to mark-to-market CLOs and generally structured cash stuff based on waterfall, single name spreads and - heaven forbid! - correlations is the highway to hell, fast lane. Best is to leave it alone.

Pricing is based on where the secondary market trades, based on ratings and structure (i.e. you build a pricing gird from US CLOs across ratings and tenors for example and interpolate or match your transaction). In the primary is it more or less what you can get away with imo.

"He's man, he's a kid / Wanna bang with you / Headbanging man" (Grave Digger, Headbanging Man)
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