Their status as independent third parties makes trustees a logical choice to act as collateral administrators on CDOs. Traditionally, the servicer who is sometimes the originator has acted as collateral manager in structured finance deals. But the growth of the synthetic CDO market has involved trustees running concentration tests and portfolio profiles, supplying data for rating agency models and monitoring subordination levels.
Moodys has criticized trustees failure to oversee servicers in some US asset-backed securitization deals. Trustees argue that if they are paid a low fee, they should only be expected to perform their basic administrative functions.
Giving corporate trustees the collateral administration role helps resolve this argument. There is no ambiguity as to who is watching the shop, says Jocelyn Lynch, vice-president, global trust services, The Bank of New York. Every time a trade is proposed, we run the models and stress tests. We know within an instant if there is any additional element of risk in a transaction. Although it isnt acknowledged by the rating agencies, we can effectively provide credit enhancement.
And trustees can charge separate rates for their different functions to reflect the more demanding nature of their work on CDOs. Now, CPPI deals are giving us more to do, says Lynch. We could be getting weekly or daily valuations on the CDS. It is a far more intense role.
As well as providing comfort for investors, the use of trustees to facilitate frequent reporting could boost CDO liquidity. The more information we get out there that is useable, the more it will help the growth of secondary market liquidity, says Lynch.