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Tranche ABX and Basis Risk in Subprime RMBS Structured Portfolios Kevin Kendra February 20, 2007.

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Presentation on theme: "Tranche ABX and Basis Risk in Subprime RMBS Structured Portfolios Kevin Kendra February 20, 2007."— Presentation transcript:

1 Tranche ABX and Basis Risk in Subprime RMBS Structured Portfolios Kevin Kendra February 20, 2007

2 Introduction What are structured subprime RMBS portfolios? What is basis risk? Why is basis risk between these structures important now?

3 2 What are structured subprime RMBS portfolios? > Portfolio exposure to subprime Residential Mortgage-Backed Securities (RMBS) can be obtained using various structures: –Structured Finance Collateralized Debt Obligations (SF CDOs) > Cash SF CDOs > Bespoke SF CDOs > Hybrid SF CDOs –ABX.HE Indices –Tranche ABX.HE (TABX) Indices

4 3 What is basis risk? > Basis risk describes the risk that offsetting investments in a hedging strategy will not experience cash flow or price gains in the same manner. > Basis risk has the potential to create an excess gain or loss and therefore is not directional. The amount of basis risk in a hedging strategy describes the how much risk is left behind due to imperfect correlation between the two investments. > Basis risk in subprime RMBS portfolios generally arises from: –Performance differences in the underlying portfolio assets –Structural differences in portfolio instruments –Liquidity differences in the different secondary markets –Timing of expected cash flows from the portfolio instruments

5 4 Why is basis between these structures important now? > Standard tranches of the ABX.HE Index commenced trading on Feb. 14, 2007 > Index tranches promise to provide: –Liquidity –Transparency –Standardization –Market Consensus > Motivations for TABX participation: –Hedging –Relative Value Trading –Benchmarking –Leveraged Market Positions

6 5 Framework for Understanding Basis Risk in Subprime RMBS Portfolios > Subprime RMBS 101 > Credit Default Swaps on Subprime RMBS –Credit Default Swaps 101 –ISDA Pay-As-You-Go Template 101 –Subprime RMBS AFC Risk > Typical Subprime RMBS Portfolio Structures –Structured Finance CDOs 101 –ABX.HE and TABX.HE Indices 101 > Basis Risk between TABX.HE and Other Structures

7 Subprime RMBS Overview Subprime RMBS 101

8 7 Subprime RMBS 101 > Typical Subprime Borrower and Loan Characteristics –FICO credit score 650 and below –Prior mortgage delinquencies are acceptable –Bankruptcy filing within the last 3 to 5 years are acceptable –Foreclosure within the last 3 to 5 years are acceptable –Debt-to-Income (DTI) ratios of 40% or higher –Loan-to-Value (LTV) ratios greater than 80%

9 8 Subprime RMBS 101 > Typical Subprime Loan Types –Hybrid Adjustable-Rate Mortgages (ARMs) > 2/28 Mortgage is fixed for the first two years and then switches to adjustable rate for the remaining 28 years > Other common Hybrid ARMs 3/27 and 5/25 terms –Hybrid Interest Only (IO) ARMs –40-Year Hybrid ARMs –Piggyback Second Liens –Limited Documentation Loan Programs

10 9 Subprime RMBS 101 2/28 Hybrid ARM Mortgage Pool Fixed Rate Mortgage AAA RMBS Mortgage Pools AA RMBS A RMBS BBB RMBS BBB- RMBS Residual RMBS Bonds Special Purpose Vehicle (RMBS Trust) REMIC Trust Individual Mortgages M1M2M3M4M5M6M7M8M9M10 M11M12M13M14M15M16M17M18M19M20 M21M22M23M24M25M26M27M28M29M30 M31M32M33M34M35M36M37M38M39M40 M41M42M43M44M45M46M47M48M49M50 M51M52M53M54M55M56M57M58M59M60 M61M62M63M64M65M66M67M68M69M70 M71M72M73M74M75M76M77M78... M 2000 M1M2M3M4M5M6M7M8M9M10 M11M12M13M14M15M16M17M18M19M20 M21M22M23M24M25M26M27M28M29M30 M31M32M33M34M35M36M37M38... M 1000 Sample Subprime RMBS Structure

11 10 Subprime RMBS 101 Interest Scheduled Principal & Prepayments AAA L + % or Net WAC Accounts AA L + % or Net WAC A L + % or Net WAC BBB L + % or Net WAC BBB- L + % or Net WAC Residual Excess Interest Servicer REMIC Trust Monthly Mortgage Payments M1M2M3M4M5M6M7M8M9M10 M11M12M13M14M15M16M17M18M19M20 M21M22M23M24M25M26M27M28M29M30 M31M32M33M34M35M36M37M38M39M40 M41M42M43M44M45M46M47M48M49M50 M51M52M53M54M55M56M57M58M59M60 M61M62M63M64M65M66M67M68M69M70 M71M72M73M74M75M76M77M78... M 2000 M1M2M3M4M5M6M7M8M9M10 M11M12M13M14M15M16M17M18M19M20 M21M22M23M24M25M26M27M28M29M30 M31M32M33M34M35M36M37M38... M 1000 $ $ $ P $ I Interest Payments Principal Payments AAA AA A BBB BBB- Residual $ I $ P Scheduled Principal & Prepayments Sample Subprime RMBS Payments

12 11 Subprime RMBS 101 > Standard Structural Features of Subprime RMBS –Subordination serves as credit enhancement to account for credit risk –Interest rate instruments to hedge interest rate risk –Performance test at three year mark > If test fails then the priority of payments remains unchanged with the senior notes receiving all principal proceeds > If test passes then principal proceeds repays subordinated notes until targeted subordination is met. –Defaulted loans worked out by servicers > Each Subprime RMBS will have somewhat unique performance profiles

13 12 Subprime RMBS 101 Principal Waterfalls –Sequential pay > All scheduled principal and prepayments go to repay the senior bond holders first until paid-in-full, then to the next senior note holder, etc. > Subprime RBMS are initially sequential pay for the first three years and will remain sequential pay if the performance tests fail –Credit Enhancement (CE) Step Downs, if performance tests pass > If overcollateralization (OC) targets have been met, the CE is stepped down by repaying subordinate bond holders. > OC targets are set to double the original subordination, ie. If the original AAA bond subordination is 7.5% then the target is 15% > Test senior note target for compliance first and if passing then check the next senior bond and so on. > Over periods of rapid prepayments all bonds may be meeting the OC targets, then principal prepayments become inverse sequential pay.

14 13 Sample Principal Waterfalls Scheduled Principal & Prepayments Accounts Principal Payments AAA AA A BBB BBB- Residual $ P Payments Before Step Down Scenario 1: Sequential Principal Repayment Scheduled Principal & Prepayments Accounts Principal Payments AAA AA A BBB BBB- Residual $ P Scenario 2: Performance Test Passes the Credit Enhancement Steps Down by Paying Principal to Subordinated Notes After Step Down Payments Before Step Down After Step Down

15 14 Subprime RMBS 101 Interest Waterfalls –Regular interest > Paid sequentially to bonds, capped at weighted average mortgage rate net of expenses (Net WAC) or available funds cap (AFC) –Excess Interest > Excess interest is the remaining interest proceeds in the interest collection account after paying bondholders regular interest above > First, excess interest is used to recover realized collateral losses > Second, excess interest is used to recover any interest shortfalls created where Net WAC is lower than the stated bond coupon > Finally, the remaining excess interest goes to the residual bond holder

16 15 Sample RMBS Interest Waterfall Interest AAA L + % or Net WAC Accounts AA L + % or Net WAC A L + % or Net WAC BBB L + % or Net WAC BBB- L + % or Net WAC Residual Excess Interest Interest Payments Principal Payments AAA AA A BBB BBB- Residual $ I Scheduled Principal & Prepayments Losses Interest Shortfalls L + % - Net WAC Step 1 – Interest Paid Sequentially to Bonds, Capped at AFC L + % - Net WAC Step 2 – Excess Interest to Cover Collateral Losses Step 3 – Remaining Excess Interest to Pay AFC Shortfalls Step 4 – Remaining Excess Interest to Residual Holder

17 16 Subprime RMBS 101 AFC Interest Shortfall –AFC Shortfall is the difference between the stated bond coupon and the Net WAC –AFC Shortfalls accrue over time and may be recoverable –AFC Shortfalls manifest themselves in times of rising interest rates > Typical subprime RMBS deals have 75% hybrid ARM mortgages > RMBS bonds are generally floating rate bonds based on the London InterBank Offering Rate (LIBOR) > If short-term LIBOR interest rates rise during the 2- or 3-year fixed rate period then the interest coupon from the mortgages is insufficient to pay the RMBS bond holders LIBOR plus the stated spread –AFC shortfalls may be unrecoverable if excess interest is eroded.

18 Credit Default Swaps on Subprime RMBS Credit Default Swaps (CDS) 101 ISDA Pay-As-You-Go (PAUG) Template 101 Subprime RMBS AFC Risk

19 18 Credit Default Swaps 101 Protection Seller –Receives CDS premium payment and reimbursement payments in exchange for providing protection payments if a credit event occurs. –CDO note holders are protection sellers in a synthetic CDO. Protection Buyer –Pays CDS premium in exchange for protection payments if a credit event occurs. –CDS Swap Counterparty is the protection buyer in a synthetic CDO. Calculation Agent –Determines the amount of the protection payment upon a credit event per the terms of the credit default swap –Usually the Protection Buyer serves this role

20 19 Credit Default Swaps 101 Collateral or Eligible Investment –Highly rated, highly liquid financial instruments purchased from the sales proceeds of the initial CDO notes. –Provides the index portion of the note coupon –Provides protection payments or the return of principal to note holders Reference Entity and Reference Obligation –Reference entities are security issuers like a corporation or sovereign –Reference obligations are securities with specific debt seniority levels > Reference obligations in a corporate CDS is usually informational to establish the seniority of debt to be valued if a credit event occurs > Reference obligations in CDS of structured finance assets or leveraged loans or in total return swap structures

21 20 Credit Default Swaps 101 Credit-Linked Note Trust CDS Premium (bps) Credit Default Swap Protection Seller CDS Swap Counterparty Protection Payments ($) Note Coupon (L + bps) Protection Buyer Protection Seller CLN Proceeds ($) Collateral or Eligible Investments Reference Entity or Obligation CLN Proceeds ($) LIBOR (L) Sample Credit-Linked Note (CLN) using a CDS

22 21 Credit Default Swaps 101 Credit Events –Applicable credit events will vary by CDS –Typical credit events may include: > Bankruptcy > Failure to Pay (FTP) > Restructuring > Repudiation/Moratorium, usually emerging markets and sovereigns only > Obligation Acceleration, usually emerging markets sovereigns only –Once a credit event has been called and settled then the credit default swap is terminated

23 22 Credit Default Swaps 101 Settlement and Valuation Procedures –Protection Buyer calls a credit event by sending notice to the Protection Seller what credit event has occurred –Settlement method is determined by the CDS contract > Physical settlement means the Protection Buyer gives the Seller the reference obligation, or equivalent, in return for cash par amount > Cash settlement means the parties look to the market value of the reference obligation to determine the net protection payment –Fitchs preferred valuation process includes: > Dealer poll of at least 5 dealers, not including the Protection Buyer > Polls typically held 30 to 60 days after credit event notification

24 23 ISDA Pay-As-You-Go (PAUG) Template 101 > ISDA PAUG template is designed to replicate the cash flow profile of the cash bond with a credit default swap (CDS) contract > CDS contracts for corporate and sovereign issuers are insufficient to replicate the payment profile of a structured finance bond > ISDA PAUG template was introduced in the U.S. in XXXX 2005 for RMBS and CMBS securities for CDO securities in June 2006 > Introduces the concept of floating payments –Floating payments are paid by the Protection Seller in the event of an AFC Interest Shortfall –Floating payments may be reimbursed by the Protection Buyer if the AFC Interest Shortfall is ultimately recovered

25 24 ISDA Pay-As-You-Go (PAUG) Template 101 Credit-Linked Note Trust CDS Premium (bps) Credit Default Swap Protection Seller CDS Swap Counterparty Protection Payments ($) Note Coupon (L + bps) Protection Buyer Protection Seller CLN Proceeds ($) Collateral or Eligible Investments Reference Obligation CLN Proceeds ($) LIBOR (L) Sample CLN using a PAUG CDS Floating Payments

26 25 ISDA Pay-As-You-Go (PAUG) Template 101 PAUG Credit Events –Failure to Pay (FTP) Principal –Writedown –Distressed Rating Downgrade (CCC or below) –FTP Interest for CDO reference obligations only PAUG Floating Amount Events –Interest Shortfalls –Principal Shortfalls –Writedown Amounts > Protection Buyers typically have an option whether to call a credit event or a floating amount event

27 26 ISDA Pay-As-You-Go (PAUG) Template 101 PAUG Settlement –The secondary market for structured finance securities is not liquid and therefore valuation procedures are not applicable –Floating payments are designed to replicate the actual loss amounts –If a credit event occurs then the Protection Buyer has the option to physically deliver all or part of the notional amount to the Seller > If the entire notional is physically settled then the CDS is terminated > If a portion of the notional is settled then the CDS continues on the remaining amount

28 27 ISDA Pay-As-You-Go (PAUG) Template 101 Interest Shortfalls –RMBS reference obligations are called AFC shortfalls –CMBS reference obligations are called WAC shortfalls –CDO reference obligations are called PIK-ing shortfalls Interest Shortfall Cap Options –Fixed Cap: Floating payments are limited to the amount of the CDS premium –Variable Cap: Floating payment are limited to LIBOR + premium –No Cap: No limit to the floating rate payments > Completely replicates the payments of the cash bond or total return swap > May require principal to be liquidated to pay interest shortfall

29 28 Subprime RMBS AFC Risk > Available Funds Cap (AFC) Risk –REMIC law limits a floating rate RMBS bond pass-through rate to the lesser of: > Bond spread plus some index (typically 1 month LIBOR), or > Underlying mortgage collateral pools weighted average coupon, net of expenses (Net WAC). –AFC Risk varies by RMBS transaction based on: > Actual prepayment speeds of underlying mortgages > Effectiveness of interest rate hedges in the RMBS structure > Short-term interest rate increases before Hybrid ARM mortgages switch to floating interest rate payments

30 29 Subprime RMBS AFC Risk > Unrecovered AFC Interest Shortfalls can be prevalent by vintage > Unrecovered AFC Interest Shortfalls can be present across all rating categories

31 30 Key Risks – AFC Risk > Unrecovered AFC Interest Shortfall amounts have been small > Difference in CDS premium required for No Cap protection may exceed the actual unrecovered AFC interest shortfalls experience in the cash bond market

32 Subprime RMBS Portfolio Structures Structured Finance CDOs 101 ABX.HE and TABX.HE 101

33 32 Structured Finance CDOs 101 > Generic Types of SF CDOs –Cash SF CDOs –Bespoke SF CDOs –Hybrid SF CDOs

34 33 Structured Finance CDOs 101 AAA CDO AA CDO A CDO BBB CDO Preferred Shares or Equity CDO Bonds Special Purpose Vehicle (CDO Trust) CDO Trust CDO Portfolio CDO Bond 1 Sample Cash SF CDO Structure CDO Bond 3 CDO Bond 4 CDO Bond 5 CDO Bond 2 RMBS Bond 1 RMBS Bond 3 RMBS Bond 4 RMBS Bond 5 RMBS Bond 2 RMBS Bond 6 RMBS Bond 8 RMBS Bond 9 RMBS Bond 10 RMBS Bond 7 RMBS Bond 11 RMBS Bond 13 RMBS Bond 14 RMBS Bond 15 RMBS Bond 12 RMBS Bond 16 RMBS Bond 18 RMBS Bond 19 RMBS Bond 20 RMBS Bond 17 RMBS Bond 21 RMBS Bond 23 RMBS Bond 24 RMBS Bond 25 RMBS Bond 22 RMBS Bond 26 RMBS Bond 28 RMBS Bond 29 RMBS Bond 30 RMBS Bond 27 RMBS Bond 31 RMBS Bond 33 RMBS Bond 34 RMBS Bond 35 RMBS Bond 32 RMBS Bond 36 RMBS Bond 38 RMBS Bond 80 RMBS Bond CDO Bond 6 CDO Bond 8 CDO Bond 9 CDO Bond 10 CDO Bond 7 Note Coupon (L + bps) Proceeds ($) Bond Coupons (L + bps) Proceeds ($)

35 34 Structured Finance CDOs 101 > Cash SF CDO Asset Portfolio Highlights –Portfolios contain between 60 and 140 bonds –Assets may be diversified by market sector, however recent vintage SF CDOs have been concentrated in subprime RMBS –Assets may be diversified by risk profile (intial ratings) –Assets may be diversified by vintage –Asset acquisition and selection > Asset manager warehouses bonds prior to issuing CDO notes > CDO notes typically issued when asset manager has accumulated approximately 60-80% of the target portfolio > Initial portfolio is typically fully ramped within 6 months of CDO note issuance

36 35 Structured Finance CDOs 101 > Managed vs Static Portfolios –Static portfolios are typically fully ramped at closing and principal proceeds are used to amortize the senior notes –Managed portfolios are typically partially ramped at closing and principal proceeds are typically reinvested for a finite period between 3 and 6 years > If the portfolio experiences negative credit migration then discretionary trading is limited to maintain or improve credit quality > If the portfolio significantly under performs then the transactions may shift to a static portfolio

37 36 Structured Finance CDOs 101 > Cash SF CDO Note Highlights –Credit enhancement comes from subordination and excess spread –Interest is paid sequentially to note holders –Overcollateralization (OC) and Interest Coverage (IC) performance tests are checked prior to distributions to subordinate notes –Excess interest may be used to: > If tests are passing then distributed to Preferred Shares or Equity > A portion may be used to repay mezzanine notes > If tests are failing then distributions may be used to cure the tests –Purchase new assets –Pay down senior notes

38 37 Structured Finance CDOs 101 Unfunded Super-Senior Revolver First Loss CDO Structure Special Purpose Vehicle (CDO Trust) CDO Trust Reference Portfolio Sample Bespoke SF CDO Structure CDS Premium Protection Payments AAA Note Proceeds ($) Unfunded CDS Unfunded CDS Note Coupon (L + bps) Collateral or Eligible Investments Proceeds ($) LIBOR (L) RMBS Bond 1 RMBS Bond 3 RMBS Bond 4 RMBS Bond 5 RMBS Bond 2 RMBS Bond 6 RMBS Bond 8 RMBS Bond 9 RMBS Bond 10 RMBS Bond 7 RMBS Bond 11 RMBS Bond 13 RMBS Bond 14 RMBS Bond 15 RMBS Bond 12 RMBS Bond 16 RMBS Bond 18 RMBS Bond 19 RMBS Bond 20 RMBS Bond 17 RMBS Bond 21 RMBS Bond 23 RMBS Bond 24 RMBS Bond 25 RMBS Bond 22 RMBS Bond 26 RMBS Bond 28 RMBS Bond 29 RMBS Bond 30 RMBS Bond 27 RMBS Bond 31 RMBS Bond 33 RMBS Bond 34 RMBS Bond 35 RMBS Bond 32 RMBS Bond 36 RMBS Bond 38 RMBS Bond 80 RMBS Bond CDS Swap Counterparty

39 38 Structured Finance CDOs 101 > Bespoke SF CDO Asset Portfolio Highlights –Portfolios reference between 60 and 100 securities –Assets may be diversified by market sector but typically have a concentration in subprime RMBS –Assets may be diversified by risk profile (initial ratings –Assets may be diversified by vintage –Asset selection > Portfolio is negotiated between the Bespoke CDO note holder and the CDS Swap counterparty

40 39 Structured Finance CDOs 101 > Bespoke SF CDO Note Highlights –Attachment points define the amount of portfolio losses the structure needs to sustain before a protection payment would be made –Detachment point defines the maximum amount of protection payments that the notes could be required to make –Credit enhancement comes solely from subordination

41 40 Structured Finance CDOs 101 Unfunded Super-Senior Revolver AA CDO A CDO BBB CDO Preferred Shares or Equity CDO Structure Special Purpose Vehicle (CDO Trust) CDO Trust CDS Portfolio CDO CDS 1 Sample Hybrid SF CDO Structure CDO CDS 3 CDO CDS 4 CDO CDS 5 CDO CDS 2 RMBS CDS 1 RMBS CDS 3 RMBS CDS 4 RMBS CDS 5 RMBS CDS 2 RMBS CDS 6 RMBS CDS 8 RMBS CDS 9 RMBS CDS 10 RMBS CDS 7 RMBS CDS 11 RMBS CDS 13 RMBS CDS 14 RMBS Bond 15 RMBS CDS 12 RMBS CDS 16 RMBS CDS 18 RMBS CDS 20 RMBS CDS Bond Portfolio CDO Bond 1 CDO Bond 3 CDO Bond 4 CDO Bond 5 CDO Bond 2 RMBS Bond 1 RMBS Bond 3 RMBS Bond 4 RMBS Bond 5 RMBS Bond 2 RMBS Bond 6 RMBS Bond 8 RMBS Bond 9 RMBS Bond 10 RMBS Bond 7 RMBS Bond 11 RMBS Bond 13 RMBS Bond 14 RMBS Bond 15 RMBS Bond 12 RMBS Bond 16 RMBS Bond 18 RMBS Bond 20 RMBS Bond Bond Coupons (L + bps) Proceeds ($) CDS Premium Protection Payments AAA CDO Note Coupon (L + bps) Proceeds ($) Funded Notes Unfunded CDS CDS Premium Super-Senior Protection Payments

42 41 Structured Finance CDOs 101 > Hybrid SF CDO Asset Portfolio Highlights –Portfolio assets may be in a cash or synthetic form –Portfolios contain between 60 and 140 bonds or CDS –Asset attributes similar to the cash SF CDO portfolios –Portfolios are typically managed > Asset managers can find relative value on the same asset between cash and synthetic markets > Asset managers can use the synthetic market to access collateral from vintages that are not available in the secondary market > Asset managers can use the synthetic market to get full exposure to cash bonds where they received a partial allocation

43 42 ABX.HE and TABX.HE Indices 101 AAA RMBS AA RMBS A RMBS BBB RMBS BBB- RMBS Residual RMBS 1 AAA RMBS AA RMBS A RMBS BBB RMBS BBB- RMBS Residual RMBS 2 AAA RMBS AA RMBS A RMBS BBB RMBS BBB- RMBS Residual RMBS 3 AAA RMBS AA RMBS A RMBS BBB RMBS BBB- RMBS Residual RMBS 4 AAA RMBS AA RMBS A RMBS BBB RMBS BBB- RMBS Residual RMBS 5 AAA RMBS AA RMBS A RMBS BBB RMBS BBB- RMBS Residual RMBS 6 AAA RMBS AA RMBS A RMBS BBB RMBS BBB- RMBS Residual RMBS 7 AAA RMBS AA RMBS A RMBS BBB RMBS BBB- RMBS Residual RMBS 8 ABX.HE.AAA AAA RMBS AA RMBS A RMBS BBB RMBS BBB- RMBS Residual RMBS 9 AAA RMBS AA RMBS A RMBS BBB RMBS BBB- RMBS Residual RMBS 10 AAA RMBS AA RMBS A RMBS BBB RMBS BBB- RMBS Residual RMBS 20 AAA RMBS AA RMBS A RMBS BBB RMBS BBB- RMBS Residual RMBS ABX.HE.AA ABX.HE.A ABX.HE.BBB ABX.HE.BBB-

44 43 ABX.HE and TABX.HE Indices 101 > ABX.HE Asset Portfolio Highlights –Portfolios reference 20 bonds –Assets are all subprime RMBS –Assets are homogenous by risk profile (intial ratings) –Assets are originated in a 6 month time frame –Asset selection > Aggregate a list of the largest volume subprime RMBS issuers > Select two representative transactions from each issuer > Index participants vote on transactions to be included in each index

45 44 ABX.HE and TABX.HE Indices 101 BBB RMBS 1 BBB RMBS 20 TABX.HE.BBB Reference Obligations BBB RMBS 2 BBB RMBS 3 BBB RMBS 4 BBB RMBS 5 BBB RMBS 6 BBB RMBS 7 BBB RMBS – 100% 20 – 35% 12 – 20% 7 – 12% 3 – 7% 0 – 3% TABX.HE.BBB Tranches ABX.HE.BBB 06-2 Portfolio BBB RMBS 1 BBB RMBS 20 BBB RMBS 2 BBB RMBS 3 BBB RMBS 4 BBB RMBS 5 BBB RMBS 6 BBB RMBS 7 BBB RMBS ABX.HE.BBB 07-1 Portfolio

46 45 ABX.HE and TABX.HE Indices 101 > TABX.HE Asset Portfolio Highlights –Portfolios reference 40 bonds from two ABX.HE indices –Assets are all subprime RMBS –Assets are homogenous by risk profile (intial ratings) –Assets are originated in a one year time frame

47 Conclusions

48 47 ABX.HE and TABX.HE Conclusions > The ABX.HE has proven to be effective in providing market transparency in an otherwise opaque market –Allows market participant to express market views > The TABX.HE promises to provide similar benchmarking and relative value views for the Bespoke SF CDO market > TABX.HE will be less effective in benchmarking for cash and hybrid SF CDOs –Portfolios have significantly different portfolio characteristics –Portfolios are typically managed in SF CDOs –TABX.HE is equally weighted by the largest issuers whereby SF CDOs portfolios are typically selected by an asset manager

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