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FOREIGN EXCHANGE

New products tap popularity of FX: Merrill Lynch, JPMorgan, Citi

The acceptance of FX as a recognised asset class seems to be driving an increasing amount of interest from a wide range of new investors, which is spurring banks to launch new products to cater for their needs. This week, Merrill Lynch announced it is poised to launch the first FX collateralised debt obligation (CDO) or Collateralised FX Obligation (CFXO). The banks says the product will apply the methodology used in the credit world to FX. The product will be managed by Crédit Agricole Asset Management and rated by S&P. The existence of a rated product will allow certain institutional investors to invest in a basket of FX assets for the first time. Merrill says the development of an FX CDO signifies an important development in the market.

Coincidentally, JPMorgan published a research note on April 26 entitled An Introduction to CFXOs. Market sources suggest that the bank is poised to launch a hybrid FX/credit product and go out on a road show starting next week. A friend at another bank told me that he got asked to price a CFXO on Thursday (yesterday) for the first time. While not overwhelming proof of the demand, it does suggest that there is interest out there.

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