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February 2021 | Issue 231
Opinion Credit derivatives
I’m a nosy neighbour... get CSO deals public and embrace the age of information
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A year of staying under the radar has not helped the CSO market
In an age of big data, behavioural futures and constant study by the forces of capitalism, the structured synthetic credit market may still hope to preserve its secrecy — but then it will only ever be small and fragile. Or it can choose to open itself up to scrutiny in the manner of CLOs and become robust and powerful.
I’m not the biggest advocate for privacy. In fact I’m a nosy neighbour. From the doorway of my hill-perched bunker, I command a perfect vista of a small Welsh village. At any moment, lost as I’m wont to be, in my own musings about CDS, I can follow all the comings and goings of those Beddgelert inhabitants down below, almost in the manner of Dylan Thomas’s omniscient narrator in Under Milk Wood. I feel attuned to their dreams and innermost thoughts. Admittedly though, nobody can see into my gaff.
As society gets increasingly caught up with the modern web of data collection and its uses to anticipate our needs as well as manipulate them, you won’t find me fretting. If I could wake each day to find a drone with a freshly lit cigar and tumbler of negroni, the algorithms would be OK with me. Then again I don’t suppose I’m really the main target of instrumentarian companies. My requirements are too easy to predict.
The synthetic bespoke tranche market faces a year where it must decide whether it is to stay a private, largely neglected niche or will transform into something more outward facing. From all I’ve gleaned, 2020 was a lesson in the false wisdom of staying under the radar.
In a sell-off out of nowhere like March/April, how do you trade your way out of peril when hardly anyone even knows there is a CSO market? How do you even find a CDS hedge when there’s no liquidity for the part of the curve in which you operate? The answer to these questions seemed to be that you don’t — and with a huge resulting hit from mark-to-market.
Get CSOs out in the open
A bold if controversial solution that could revive this technology: make CSO deals public. Get them assigned ratings and structured more in the manner of CLOs — including the use of the most liquid five-year tenor. And have them managed by big name asset managers with substitution rights, equity tranche exposure and reputations to uphold.
Of course, this means putting synthetic CSOs — and firms’ association with them — into the public sphere. I appreciate it’s not a light undertaking, given the headlines one reads about CDS and CLOs. Nor do I want to come across as one of those people who says, “If you’ve got nothing to hide you’ve got nothing to worry about.” There are many reasons for wanting to hang onto one’s bastions of sanctuary in a world of over-connection, over-exposure and over-stimulation.
As Shoshana Zuboff puts it in her epic expose, The Age of Surveillance Capitalism, there is a psychological necessity to preserve a realm of “disconnected time and space for the ripening of inward awareness and the possibility of reflexivity — reflection on and by oneself”. She points to empirical research showing that privacy behaviours promote a rich array of functions, from solitude to isolation, anonymity, reserve, intimacy with friends, and intimacy with family.
So too can I see the need for CSO investors to preserve room to move and think. Scrutiny should stop short of exactly who holds which tranches. The biggest concern they might have is the London Whale syndrome — that, once in the spotlight, opportunist funds could gang up against big structured deals (which would be more levered than CLOs) and drive them into disaster.
But this fear is misplaced. Better to embrace the age of information with open eyes and clear objectives. It will come for you anyway — or it will leave you behind.
I know this first hand from my NHS covid track and trace app. I got a notification to say I’d been in the vicinity of someone who had tested positive. That’s strange I thought, I haven’t been out of the bunker. But then I noticed a shadow outside the window. I got to the door just in time to see a poorly disguised figure — who I’m almost certain was the vicar — running away down the hill. On my wall some daubed graffiti I’m not going to describe, along with a crucifix and string of garlic.
In the distance, a faint cough.
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Global credit funds & CLO's
February 2021
| Issue 231
Published in London & New York.
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