Jeg har begynt å følge bloggen Lawbitrage, mest fordi min interesse for praktisk finans er litt periferisk. Det er det praktiske som gjør det verdt å følge med på. For noen dager tilbake var det en interessant diskusjon om transaksjonsavgiften, for-og-imot stil. Denne gangen er det ‘best-practice’ innen credit risk transfer. Ett lite innblikk i literaturen folkens:
A valuable theory should be able to guide practice. I have written an academic article developing a theory of credit risk transfer (CRT) governance that at a general level should help investors, dealers, attorneys, and other practitioners when approaching securtizations, credit default swaps (CDSs), and other CRT transactions. The theory provides a broader context for best practice guides.
CRT governance is the extent to which a CRT transaction protects investors (or counterparties) from losses in the underlying credit risk being transferred. CRT governance mechanisms include collateralization and netting for CDSs, and credit enhancements and active collateral management in securitizations.
The general principles of CRT governance include the following. First, good (or high levels of) governance can protect investors (or counterparties) from losses even if the underlying assets whose credit risk is transferred experience significant losses. Bad CRT governance, by contrast, creates transaction structures that leave parties with highly sensitive exposures to losses in underlying credit instruments. In addition, either good or bad governance can be efficient. Efficiency requires the price of a CRT instrument to accurately reflect the protection provided by governance mechanisms in relation to the credit risk being transferred. However, governance mechanisms are limited in their ability to protect investors or counterparties if the underlying credit risk is too high. The direct implication is that practitioners in CRT markets should increase or decrease the governance of a particular transaction relative to the risk of the underlying credits–and price accordingly.
A February 2009 article in Risk by Ashish Dev and Bo Qian reflects CRT governance theory in the context of residential mortgage-backed securities (RMBS):
When PD [probability of default] is relatively low, it is possible to make high-quality (AAA-rated) CDO tranches with close to zero EL [expected losses] out of RMBS mezzanine tranches, although the CDO tranches often have ULs [unexpected losses] that cannot be ignored. On the other hand, for subprime mortgages or in situations where PD rises to 5%, even a credit enhancement of 50% is not enough to make the senior tranche of the CDO safe in terms of EL. Moreover, the corresponding UL is substantial. . . . [I]t is almost impossible to create an AAA tranche in a CDO structure backed by mezzanine or junior RMBS tranches with subprime mortgages as underlying collateral.
Unfortunately, the basic principles of CRT governance were violated by practitioners with the $300 billion worth of CDOs created from mezzanine RMBS that were issued from 1999 to 2007. Fortunately, post-crisis mortgage securitizations now seem to be more in line with the basic principles of CRT governance.