JP Morgan CDO Handbook

Foreclosure Fraud Overview Structured Finance (SF) CDOs are leveraged investment vehicles that invest primarily in the senior and mezzanine tranches of structured products (ABS, RMBS, CMBS, and CDOs). They utilize the same technology as traditional credit CDOs with the only difference being their underlying collateral. SF CDOs issue securities to fund the purchase of collateral or assume risk synthetically via credit derivatives. Highlights • SF CDOs are designed to exploit arbitrage opportunities by taking advantage of liquidity/complexity premiums and the credit curve, to be a source of funding, or to manage balance sheet exposures. They have been growing as a portion of total CDO issuance. • Overall, the SF CDO underlying collateral makeup largely mirrors the structured products market. Some adjustments are made to enhance arbitrage. • Structured product collateral offers a spread pick-up, lower event risk, and comparable default/recovery rates versus like-rated corporates, as well as diversification opportunities. • Rating agency structured product default and recovery assumptions are conservative compared with actual collateral performance. • SF CDOs have several variables, including quality of collateral (AAA/AA or BBB) and form of exposure (cash or synthetic). Each type has unique structural features. • Manager/issuer selection is critical in both actively managed and static deals. 4closureFraud