STRUCTURED FINANCE Special Report Understanding The Risks In Credit Default Swaps AUTHOR: CONTENTS: Jeffrey S. Tolk • Summary Opinion Vice President Senior Credit Officer • Credit Default Swaps (212) 553-4145
[email protected] • The Typical Structure • Isolating The Reference Portfolio's Credit Risk CONTACTS: • Moody's Definition Of Default And Loss Issac Efrat Managing Directior • ISDA Credit Events (212) 553-7856
[email protected] • The Problem Of “Soft” Credit Events: Synthetic Vs. Cash Gus Harris • Moral Hazard Managing Director (212) 553-1473 • Marking-To-Market/Calculation Of Losses
[email protected] • Reference Credits Other Than Corporate Obligations Jeremy Gluck Managing Director • Good Faith Of The Sponsor (212) 553-3698
[email protected] • Conclusion Investor Liaison SUMMARY OPINION Vernessa Poole Credit derivatives offer unique opportunities and risks to investors. They allow All Asset Backed and investors to have exposure to a firm without actually buying a security or loan Residential Mortgage issued by that firm. Because the exposure is synthetic, the transaction can be Backed Securities tailored to meet investors’ needs with respect to currency, cash flow, and tenor, (212) 553-4796 among other things. However, if the transaction is not structured carefully, it may
[email protected] pass along unintended risks to investors. Significantly, it may expose investors to Sally Cornejo higher frequency and severity of losses than if they held an equivalent cash position. Collateralized Debt Obligations, Moody's has rated numerous structured transactions — mostly synthetic collateral- Commercial Mortgage ized debt obligations (CDOs) and credit-linked notes (CLNs) — whose key feature is Backed, and Fully a cash-settled credit default swap.