Collateralized Debt Obligations and Structured Finance
New Developments in Cash and Synthetic Securitization
Chapter One
The CDO Paradigm Shift
In the past five years, synthetics have been the most powerful driving
force for change in the way collateralized debt obligations (CDOs) are
structured. Synthetics have gained increasing attention because of the
rapid growth in the credit default swap (CDS) market. In 1996, the global
CDS market was only $100 billion to $200 billion in size. Morgan Stanley
estimates the CDS market grew to $2.4 trillion in 2002. The size of
this over-the-counter (OTC) market is difficult to estimate, because transactions
are private and off-balance sheet. It isn't surprising that different
sources have different estimates of market size. The British Banker's Association
(BBA) estimates that the CDS volume was close to $1.2 trillion in
2001, grew to $1.9 trillion in 2002, and will approach $4.8 trillion in
2004. These figures do not include asset swaps or total return swaps. Furthermore,
the BBA estimates that about 50 percent of CDS trading takes
place in London.
ESTIMATED MARKET SIZE
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