Structured products: CFXOs bring in new investors

In May, both Merrill Lynch and JPMorgan divulged that they were going to launch foreign exchange linked credit obligations. Ostensibly, CFXOs look little different from existing FX products. What sets them apart is that they will be rated, which could well attract a lot of fresh investors into the industry.

As JPMorgan explained in a research note it issued in April, the building blocks of CFXOs are FX default swaps, where a barrier is set a certain percentage away from the prevailing spot rate when the deal is transacted. The default event occurs when the barrier is breached, making it essentially the same as a one-touch option.

Merrill was the first to announce that it was launching a CFXO and, at the time of writing, it was able to provide more details of its product than JPMorgan. Its CFXO will be managed by Crédit Agricole Asset Management...