FSA’s Huertas hits out at CPDOs

Speaking at Standard and Poor’s (S&P) Global Banking Conference in London, Huertas said “Gibson Greeting Cards and Bankers Trust come to mind” when discussing CPDOs. His comments appear to refer to a lawsuit filed by Gibson Greetings in 1994 where it claimed that Bankers Trust, now a part of Deutsche Bank, misrepresented the risks associated with the derivatives instruments it sold to the company that subsequently caused it to suffer large losses.

The action by Gibson Greetings, along with other companies around that time, led to a chorus of calls for the regulation of the over-the-counter derivatives business.

The CPDO structure was developed by ABN Amro, which road-showed its ‘Surf’ product in July this year. CPDOs use dynamic leveraging adapted from constant proportion portfolio insurance techniques but maintain debt obligation characteristics, notably fixed-income bullet cashflows.

The Dutch dealer has worked with both S&P and Moody’s to obtain ratings for its CPDO structures. It’s first Surf deal achieved a AAA rating paying 200 basis points above Libor using a leverage of 15 times. The underlying credit portfolio is actively linked to the on-the-run investment grade iTraxx and DJ CDX indexes.

The transaction has been widely replicated by rival dealers. But a number of parties are concerned that investors do not understand the real risks associated with CPDO structures.

Only users who have a paid subscription or are part of a corporate subscription are able to print or copy content.

To access these options, along with all other subscription benefits, please contact info@risk.net or view our subscription options here: http://subscriptions.risk.net/subscribe

You are currently unable to copy this content. Please contact info@risk.net to find out more.

You need to sign in to use this feature. If you don’t have a Risk.net account, please register for a trial.

Sign in
You are currently on corporate access.

To use this feature you will need an individual account. If you have one already please sign in.

Sign in.

Alternatively you can request an individual account here