Bespoke CDO TranchesStructured Credit Derivatives Documentation

Will Mitchell

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Bespoke CDO Tranches (Synthetic CDOs)

Similar to iTraxx or CDX Index Tranche trades but have a bespoke Reference Portfolio, specific to the particular trade.

Documentation has now been standardised and is similar in format to Index Tranche Transaction Supplements.

The key difference is the Reference Portfolio. As it is non-standard, each Reference Entity and Reference Obligation needs to be checked against an approved (‘scrubbed’) spreadsheet provided by DBCG.

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Trade Execution

The GCD desks in London and Stamford will notify Operations of CDO Tranche trades on T in an e-mail to the SH-Structured-Confs inbox. A DBCG approval spreadsheet should be attached. If not, contact SH-DBCG and request a ‘scrubbed’ Reference Portfolio.

The TAs will book the trade in OBS and provide the reference number.

Both the London & Stamford desk book CDO Tranches in Credit Broil (http://wfapps/Broil/tools/indexCB.html) grouped with a cash ticket in OBS.

If UBS is selling protection (Payments booked to Receive side in OBS), or if Counterparty is a client, proceed to Drafting section. If UBS is buying protection (Payments booked to Pay side in OBS), or if trade is for DRCM, proceed to Matching section.

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Drafting (i)

Open O:\Documentation\Structured\Structured Cr\Bespoke Team\UBS Global Tranched CDO Short Form Template.

Input core economic details (TD, ED, MD, Fixed Rate, Buyer/Seller, Notional) as per standard procedure.

Attachment Point and Exhaustion Point are the lower and upper levels of the tranche, e.g. 2-5%. These will be indicated in the trader’s notification e-mail and in the GPL ticket in Credit Broil.

Reference Entity Credit Position is the proportional value of each name in the basket expressed as a percentage. e.g. 0.8% for a Reference Entity in a 125 name Portfolio. (125/100= 0.8) Sometimes names will have differentiated weightings in which case these are specified in Schedule 1.

The Linked Trade section can be deleted unless comments on the OBS ticket or trader’s e-mail refer to Credit Links with other trades. Additional Annexes are required only if a Reference Entity Type is not included in the ISDA Standard Terms Matrix (unlikely).

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Drafting (ii) – Understanding Credit Broil

Log in to Credit Broil at http://wfapps/Broil/tools/indexCB.html using your OBS user name and password.

The Credit Broil GPL ticket represents the Reference Portfolio and the Tranche Economics.

In the top left corner of the ticket, a ‘BUY’ of risk is equivalent to a sell of protection and vice versa.

Immediately below, the three consecutive numbers are as follows: (i) Tranche Attachment Point; (ii) Tranche Detachment Point; (iii) Notional Value of each Reference Entity in the Portfolio. To calculate an attachment/detachment point: (i or ii) / (iii) / number of Reference Entities in the Portfolio, expressed as a percentage.

Trade economics are detailed on the right of the ticket and the Reference Portfolio is the list of curves below the tranche details.

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Credit Broil GPL Ticket

Sell of risk (buy of protection) (i) Tranche Attachment Point; (ii) Tranche

Detachment Point; (iii) Notional Value of each Reference Entity in the Portfolio.

Core Economic Details – Check against OBS

Reference Entity Curves – Copy and input into Broil macro spreadsheet

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Drafting (iii) – Reference Portfolio

The Reference Portfolio booking in credit broil needs to be checked against the scrubbed DBCG portfolio spreadsheet. A macro has been created to streamline this process:

CB (O:\Documentation\Structured\Structured Cr\General Structured\Broil Macro Lookup)

Open the relevant spreadsheet and input the data from Credit Broil under the ‘Broil’ tab. Copy the Legal Reference Entity Names from the DBCG spreadsheet into the ‘Conf’ tab. Place cursor in cell A2 on the first tab and run the macro. Discrepancies between the booking and the scrubbed basket can be found by consecutively filtering the last two columns for N/A.

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Drafting (iv) – Reference Portfolio

You may encounter the following discrepancies between the DBCG spreadsheet and the booking and you may need to consult Reference Entity Mapper (REM - http://sldn1043pap.ldn.swissbank.com:8500/isis/REM/REMHome.do) and/or the markit website (www.markit.com; user name: LDNOPS; password: opsubs and click ‘CDS and ABS’; you can search for reference entities and obligations using the RED tab)

a. Minor spelling/punctuation errors – Check REM/markit for correct legal names.

b. Succession Event - The Reference Entity may have changed it’s name due to a merger or other corporate event. Look up the date of the Event on markit. Use the name that was correct on the Trade Date.

c. Booking Error – Check with the TAs and DBCG for any other inexplicable mismatch between DBCG and the booking. N.b: It’s crucial to ensure that the curve the desk book in Credit Broil matches exactly to both the Reference Entity Name and the ISIN in the DBCG spreadsheet.

Once the Reference Entity curves booked in Credit Broil match exactly to the Names and Obligations in the DBCG spreadsheet, the Reference Entities, Reference Obligations (ISINs) and Transaction Types can be copied from the DBCG spreadsheet into Schedule 1 of the Confirmation. Be sure to check for any curves ending _NR as these will need to be marked as ‘Applicable’ in the Restructuring column.

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Drafting (v) - Bespoke CDO Tranche Template

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Matching

CDO Tranche bookings should be checked as close to T as possible. Ensure that there are no core economic discrepancies between Credit Broil and OBS. Check the Reference Portfolio bookings against a DBCG-approved spreadsheet and query any discrepancies as per the Drafting section.

Counterparty confirmations should be checked for core economics and against our template for language differences. The Reference Portfolio can be checked manually or by requesting an Excel spreadsheet copy of the basket from the counterparty, checking it against our booking using the Credit Broil macro. Discrepancies such as Successor Events or punctuation errors should be queried with the counterparty. Any clear mismatches should be communicated to the TAs and DBCG immediately.

Reference Obligations (ISINs) should also be checked manually or using a vlookup between the DBCG portfolio and the counterparty’s spreadsheet. Remember to check for No Restructuring on North American Reference Entities. Any curve booked ending _NR should have a corresponding ‘Not Applicable’ in the Restructuring column of Schedule 1 in the Confirmation and the counterparty confirmation should not state ‘Not Applicable’ for any name that we do not have booked to _NR.