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Capital Markets

Credit derivatives: CDS of ABS myth exposed

Eight out of 10 investors say they have yet to use the heavily marketed trades

Those pushing for investors in asset-backed securities to take more of an interest in using credit default swaps got a bit of a shock at last month's American Securitization Forum meeting in New York. More than half of those attending the conference said, in an audience poll, that they would not use CDS of ABS. Only 17% had actually used them, while 31% voted that they would be likely to do their first trade in the next 12 months. But 41% said they have no intention of using them, while a further 11% said they thought the product was simply a passing fad.

That's not stopping a more upbeat message from those on the sell side, though. "It was a product in search of a customer until about 12 months ago," says Jonathan Egol, a vice-president at Goldman Sachs who was on the securitization credit derivatives panel at the conference. "Why bother shorting structured product was what many thought."

According to Egol, the market started with banks using single-name CDS of ABS to hedge their loan pipelines, and then in the second half of last year became "a viable distribution vehicle for hedging loans.

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