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Structured products: CFXOs bring in new investors

Merrill Lynch and JPMorgan launch collateralized FX obligations.

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 and will consist of a basket of currencies. "The CFXO will have 10 currency pairs at any one time, and it will have one-to-five event triggers on each pair," says Nicolas Rabeau, co-head of global rates exotics trading and global head of hybrids trading at Merrill Lynch.

He adds that a small portion of the fund – 10% to 30% – will be allocated to emerging market currencies.

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