Death by association

The application of credit technology to diverse underlyings led to the birth of collateralised foreign exchange obligations in 2006. But despite being built from uncorrelated underlyings, their fortunes have proven highly correlated with the wider market. Mark Pengelly reports

Credit's runaway success over the past decade has frequently inspired imitation across other asset classes. Until the collateralised debt obligation (CDO) market imploded spectacularly in the latter half of 2007, the application of attributes such as tranching and ratings to diverse underlyings was a recurring theme among structuring desks.

Since 2003, dealers have produced CDOs referencing equities, commodities, and a mixture of both equity and credit. In late 2006, this idea was also extended