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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: 49
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: 2860
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: 2860
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: 49
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
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