basis in abx_tabx_bespoke_sf_cd_os

Tranche ABX and Basis Risk in Subprime RMBS Structured Portfolios

Kevin Kendra

February 20, 2007

Introduction

What are structured subprime RMBS portfolios?

What is “basis risk”?

Why is “basis risk” between these structures important

now?

www.derivativefitch.com 3

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


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


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


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

Subprime RMBS Overview

Subprime RMBS 101


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%


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


Subprime RMBS 101

2/28Hybrid ARM

MortgagePool

Fixed RateMortgage

‘AAA’RMBS

MortgagePools

‘AA’RMBS

‘A’RMBS

‘BBB’RMBS

‘BBB-’RMBS

Residual

RMBSBonds

SpecialPurposeVehicle(RMBSTrust)

REMICTrust

Individual Mortgages

M1 M2 M3 M4 M5 M6 M7 M8 M9 M10

M11 M12 M13 M14 M15 M16 M17 M18 M19 M20

M21 M22 M23 M24 M25 M26 M27 M28 M29 M30

M31 M32 M33 M34 M35 M36 M37 M38 M39 M40

M41 M42 M43 M44 M45 M46 M47 M48 M49 M50

M51 M52 M53 M54 M55 M56 M57 M58 M59 M60

M61 M62 M63 M64 M65 M66 M67 M68 M69 M70

M71 M72 M73 M74 M75 M76 M77 M78 . . .M

2000

M1 M2 M3 M4 M5 M6 M7 M8 M9 M10

M11 M12 M13 M14 M15 M16 M17 M18 M19 M20

M21 M22 M23 M24 M25 M26 M27 M28 M29 M30

M31 M32 M33 M34 M35 M36 M37 M38 . . .

M1000

Sample Subprime RMBS Structure


Subprime RMBS 101

Interest

ScheduledPrincipal

&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

ResidualExcess Interest

Servicer

REMICTrust

Monthly MortgagePayments

M1 M2 M3 M4 M5 M6 M7 M8 M9 M10

M11 M12 M13 M14 M15 M16 M17 M18 M19 M20

M21 M22 M23 M24 M25 M26 M27 M28 M29 M30

M31 M32 M33 M34 M35 M36 M37 M38 M39 M40

M41 M42 M43 M44 M45 M46 M47 M48 M49 M50

M51 M52 M53 M54 M55 M56 M57 M58 M59 M60

M61 M62 M63 M64 M65 M66 M67 M68 M69 M70

M71 M72 M73 M74 M75 M76 M77 M78 . . .M

2000

M1 M2 M3 M4 M5 M6 M7 M8 M9 M10

M11 M12 M13 M14 M15 M16 M17 M18 M19 M20

M21 M22 M23 M24 M25 M26 M27 M28 M29 M30

M31 M32 M33 M34 M35 M36 M37 M38 . . .

M1000

$

$

$ P

$ I

InterestPayments

PrincipalPayments

‘AAA’

‘AA’

‘A’

‘BBB’

‘BBB-’

Residual

$ I

$ P

ScheduledPrincipal

&Prepayments

Sample Subprime RMBS Payments


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


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.


Sample Principal Waterfalls

ScheduledPrincipal

&Prepayments

AccountsPrincipalPayments

‘AAA’

‘AA’

‘A’

‘BBB’

‘BBB-’

Residual

$ P

PaymentsBefore Step Down

Scenario 1: Sequential Principal Repayment

ScheduledPrincipal

&Prepayments

AccountsPrincipalPayments

‘AAA’

‘AA’

‘A’

‘BBB’

‘BBB-’

Residual

$ P

Scenario 2: Performance Test Passes the CreditEnhancement “Steps Down” by Paying Principal

to Subordinated Notes

After Step Down

PaymentsBefore Step Down

After Step Down


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


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

ResidualExcess Interest

InterestPayments

PrincipalPayments

‘AAA’

‘AA’

‘A’

‘BBB’

‘BBB-’

Residual

$ I

ScheduledPrincipal

&Prepayments

Losses

InterestShortfalls

L + % - Net WAC

Step 1 – Interest Paid Sequentiallyto Bonds, Capped

at AFC

L + % - Net WAC

Step 2 – ExcessInterest to

Cover CollateralLosses

Step 3 – RemainingExcess Interest to Pay AFC Shortfalls

Step 4 – RemainingExcess Interest to

Residual Holder


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.

Credit Default Swaps on Subprime RMBS

Credit Default Swaps (CDS) 101

ISDA Pay-As-You-Go (PAUG) Template 101

Subprime RMBS AFC Risk


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



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



Credit-LinkedNote Trust

CDS Premium(bps)

Credit DefaultSwap

ProtectionSeller

CDS SwapCounterparty

ProtectionPayments ($)

Note Coupon(L + bps)

ProtectionBuyer

ProtectionSeller

CLN Proceeds($)

Collateral orEligible

Investments

ReferenceEntity or

Obligation

CLN Proceeds

($)LIBOR

(L)

Sample Credit-Linked Note (CLN) using a CDS



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



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

– Fitch’s 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



> 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



Credit-LinkedNote Trust

CDS Premium(bps)

Credit DefaultSwap

ProtectionSeller


ProtectionPayments ($)


ProtectionBuyer

ProtectionSeller

CLN Proceeds($)


Investments

ReferenceObligation

CLN Proceeds

($)LIBOR

(L)

Sample CLN using a PAUG CDS

FloatingPayments



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



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



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



> 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 pool’s 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



Initial Rating 2001 2002 2003 2004 2005 2006

AAA 0.00% 0.00% 0.00% 0.69% 0.50% 0.00%

AA+ 0.00% 0.00% 0.00% 4.81% 0.96% 0.00%

AA 0.00% 0.00% 0.00% 3.09% 2.24% 0.00%

AA- 0.00% 0.00% 0.00% 6.67% 1.05% 0.00%

A+ 0.00% 0.00% 0.00% 7.46% 3.46% 0.33%

A 0.00% 0.00% 0.93% 4.56% 3.35% 0.77%

A- 0.00% 0.00% 6.56% 5.18% 6.71% 0.75%

BBB+ 0.00% 0.00% 4.95% 10.12% 13.51% 2.96%

BBB 0.00% 0.00% 7.17% 10.10% 19.34% 6.67%

BBB- 0.00% 0.00% 2.77% 16.13% 25.49% 18.17%

BB+ 0.00% 0.00% 0.00% 11.11% 23.00% 33.25%

BB 0.00% 0.00% 0.00% 2.62% 18.04% 35.38%

RMBS Bonds that Experience Unrecovered AFC Interest Shortfalls

> Unrecovered AFC Interest Shortfalls can be prevalent by vintage

> Unrecovered AFC Interest Shortfalls can be present across all rating categories


Key Risks – AFC Risk

Initial Rating 2001 2002 2003 2004 2005 2006

AAA 0.00% 0.00% 0.00% 0.01% 0.03% 0.00%

AA+ 0.00% 0.00% 0.00% 0.04% 0.21% 0.00%

AA 0.00% 0.00% 0.00% 0.08% 0.22% 0.00%

AA- 0.00% 0.00% 0.00% 0.06% 0.20% 0.00%

A+ 0.00% 0.00% 0.00% 0.08% 0.27% 0.05%

A 0.00% 0.00% 0.01% 0.05% 0.31% 0.04%

A- 0.00% 0.00% 0.07% 0.05% 0.06% 0.05%

BBB+ 0.00% 0.00% 0.16% 0.08% 0.09% 0.04%

BBB 0.00% 0.00% 0.18% 0.19% 0.07% 0.04%

BBB- 0.00% 0.00% 0.64% 0.22% 0.08% 0.05%

BB+ 0.00% 0.00% 0.00% 0.34% 0.13% 0.03%

BB 0.00% 0.00% 0.00% 0.11% 0.12% 0.03%

Cumulative Unrecovered AFC Interest Shortfalls as % of Bond Balance

> 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

Subprime RMBS Portfolio Structures

Structured Finance CDOs 101

ABX.HE and TABX.HE 101



> Generic Types of SF CDOs

– Cash SF CDOs

– Bespoke SF CDOs

– Hybrid SF CDOs



‘AAA’CDO

‘AA’CDO

‘A’CDO

‘BBB’CDO

Preferred Sharesor Equity

CDOBonds

SpecialPurposeVehicle(CDOTrust)

CDOTrust

CDO Portfolio

CDOBond 1

Sample Cash SF CDO Structure

CDOBond 3

CDOBond 4

CDOBond 5

CDOBond 2

RMBSBond 1

RMBSBond 3

RMBSBond 4

RMBSBond 5

RMBSBond 2

RMBSBond 6

RMBSBond 8

RMBSBond 9

RMBSBond 10

RMBSBond 7

RMBSBond 11

RMBSBond 13

RMBSBond 14

RMBSBond 15

RMBSBond 12

RMBSBond 16

RMBSBond 18

RMBSBond 19

RMBSBond 20

RMBSBond 17

RMBSBond 21

RMBSBond 23

RMBSBond 24

RMBSBond 25

RMBSBond 22

RMBSBond 26

RMBSBond 28

RMBSBond 29

RMBSBond 30

RMBSBond 27

RMBSBond 31

RMBSBond 33

RMBSBond 34

RMBSBond 35

RMBSBond 32

RMBSBond 36

RMBSBond 38

RMBSBond 80

RMBSBond 37 . . .

CDOBond 6

CDOBond 8

CDOBond 9

CDOBond 10

CDOBond 7


Proceeds($)

Bond Coupons(L + bps)

Proceeds($)



> 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



> 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



> 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



UnfundedSuper-Senior

Revolver

First Loss

CDOStructure


CDOTrust

Reference Portfolio

Sample Bespoke SF CDO Structure

CDSPremium

ProtectionPayments

‘AAA’Note

Proceeds($) Unfunded

CDS

UnfundedCDS

NoteCoupon(L + bps)


Investments

Proceeds($)

LIBOR(L)

RMBSBond 1

RMBSBond 3

RMBSBond 4

RMBSBond 5

RMBSBond 2

RMBSBond 6

RMBSBond 8

RMBSBond 9

RMBSBond 10

RMBSBond 7

RMBSBond 11

RMBSBond 13

RMBSBond 14

RMBSBond 15

RMBSBond 12

RMBSBond 16

RMBSBond 18

RMBSBond 19

RMBSBond 20

RMBSBond 17

RMBSBond 21

RMBSBond 23

RMBSBond 24

RMBSBond 25

RMBSBond 22

RMBSBond 26

RMBSBond 28

RMBSBond 29

RMBSBond 30

RMBSBond 27

RMBSBond 31

RMBSBond 33

RMBSBond 34

RMBSBond 35

RMBSBond 32

RMBSBond 36

RMBSBond 38

RMBSBond 80

RMBSBond 37 . . .




> 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



> 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



UnfundedSuper-Senior

Revolver

‘AA’CDO

‘A’CDO

‘BBB’CDO

Preferred Sharesor Equity

CDOStructure


CDOTrust

CDS Portfolio

CDOCDS 1

Sample Hybrid SF CDO Structure

CDOCDS 3

CDOCDS 4

CDOCDS 5

CDOCDS 2

RMBSCDS 1

RMBSCDS 3

RMBSCDS 4

RMBSCDS 5

RMBSCDS 2

RMBSCDS 6

RMBSCDS 8

RMBSCDS 9

RMBSCDS 10

RMBSCDS 7

RMBSCDS 11

RMBSCDS 13

RMBSCDS 14

RMBSBond 15

RMBSCDS 12

RMBSCDS 16

RMBSCDS 18

RMBSCDS 20

RMBSCDS 17

. . .

Bond Portfolio

CDOBond 1

CDOBond 3

CDOBond 4

CDOBond 5

CDOBond 2

RMBSBond 1

RMBSBond 3

RMBSBond 4

RMBSBond 5

RMBSBond 2

RMBSBond 6

RMBSBond 8

RMBSBond 9

RMBSBond 10

RMBSBond 7

RMBSBond 11

RMBSBond 13

RMBSBond 14

RMBSBond 15

RMBSBond 12

RMBSBond 16

RMBSBond 18

RMBSBond 20

RMBSBond 17

. . .

Bond Coupons(L + bps)

Proceeds($)

CDS Premium

ProtectionPayments

‘AAA’CDO


Proceeds($)

FundedNotes

UnfundedCDS

CDS Premium

Super-SeniorProtectionPayments



> 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


ABX.HE and TABX.HE Indices 101

‘AAA’RMBS

‘AA’RMBS

‘A’RMBS

‘BBB’RMBS

‘BBB-’RMBS

Residual

RMBS1

‘AAA’RMBS

‘AA’RMBS

‘A’RMBS

‘BBB’RMBS

‘BBB-’RMBS

Residual

RMBS2

‘AAA’RMBS

‘AA’RMBS

‘A’RMBS

‘BBB’RMBS

‘BBB-’RMBS

Residual

RMBS3

‘AAA’RMBS

‘AA’RMBS

‘A’RMBS

‘BBB’RMBS

‘BBB-’RMBS

Residual

RMBS4

‘AAA’RMBS

‘AA’RMBS

‘A’RMBS

‘BBB’RMBS

‘BBB-’RMBS

Residual

RMBS5

‘AAA’RMBS

‘AA’RMBS

‘A’RMBS

‘BBB’RMBS

‘BBB-’RMBS

Residual

RMBS6

‘AAA’RMBS

‘AA’RMBS

‘A’RMBS

‘BBB’RMBS

‘BBB-’RMBS

Residual

RMBS7

‘AAA’RMBS

‘AA’RMBS

‘A’RMBS

‘BBB’RMBS

‘BBB-’RMBS

Residual

RMBS8

ABX.HE.AAA‘AAA’RMBS

‘AA’RMBS

‘A’RMBS

‘BBB’RMBS

‘BBB-’RMBS

Residual

RMBS9

‘AAA’RMBS

‘AA’RMBS

‘A’RMBS

‘BBB’RMBS

‘BBB-’RMBS

Residual

RMBS10

‘AAA’RMBS

‘AA’RMBS

‘A’RMBS

‘BBB’RMBS

‘BBB-’RMBS

Residual

RMBS20

‘AAA’RMBS

‘AA’RMBS

‘A’RMBS

‘BBB’RMBS

‘BBB-’RMBS

Residual

RMBS11

. . .

. . .

. . .

. . .

. . .

. . .

. . .

ABX.HE.AA

ABX.HE.A

ABX.HE.BBB

ABX.HE.BBB-



> 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



‘BBB’RMBS 1

‘BBB’RMBS 20

TABX.HE.BBBReference Obligations

‘BBB’RMBS 2

‘BBB’RMBS 3

‘BBB’RMBS 4

‘BBB’RMBS 5

‘BBB’RMBS 6

‘BBB’RMBS 7

‘BBB’RMBS 8

.

.

.

35 – 100%

20 – 35%

12 – 20%

7 – 12%

3 – 7%

0 – 3%

TABX.HE.BBBTranches

ABX.HE.BBB06-2 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 8

.

.

.

ABX.HE.BBB07-1 Portfolio



> 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

Conclusions


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

www.derivativefitch.com

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basis in abx_tabx_bespoke_sf_cd_os

Economy & Finance

securities rmbs

sample subprime rmbs

sample subprime rmbs

subprime residential

credit risk

typical subprime borrower

understanding basis

rate risk performance