Trading CDO/CLO tranches

Rookie_Quant · Post by **Rookie_Quant** » Thu Jan 03, 2019 7:16 pm

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.

Rookie_Quant · Post by **Rookie_Quant** » Thu Jan 03, 2019 7:19 pm

as an addendum, is it possible/feasible to select a collateral pool of corporate/muni bonds and tranche it out and buy protection?

day1pnl · Post by **day1pnl** » Thu Jan 03, 2019 8:45 pm

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 · Post by **Rookie_Quant** » Thu Jan 03, 2019 9:39 pm

Extremely helpful. I’ll digest and may have more questions but this helps me get started.

Rookie_Quant · Post by **Rookie_Quant** » Mon Jan 07, 2019 3:43 pm

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?)

Cheng · Post by **Cheng** » Tue Jan 08, 2019 8:30 am

Is it possible to put together a basket and structure some kind of protection on it in a customized way?

Abacus... Wink

Rookie_Quant · Post by **Rookie_Quant** » Tue Jan 08, 2019 12:30 pm

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.

Cheng · Post by **Cheng** » Tue Jan 08, 2019 4:31 pm

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...

day1pnl · Post by **day1pnl** » Tue Jan 08, 2019 5:32 pm

@RQ Also please define leverage?

Highest marginal jump-to-default? Highest delta? Lowest tranche spread per unit of delta? Max upside?

Rookie_Quant · Post by **Rookie_Quant** » Tue Jan 08, 2019 10:04 pm

@day1pnl

Closest to what we are thinking is lowest tranche spread per unit of delta.