ABN AMRO has made its collateralized debt obligations business a joint venture between credit trading and asset-backed securities in a move that will significantly boost the firm's CDO structuring and sales capabilities. "This means no fussing and mussing over CDOs," said John Mullen, global head of structured credit markets in London. Putting CDOs in one group across trading and ABS broadens the choice of assets available as reference entities and simplifies the hedging and sales process, explained Niall Cameron, global head of credit markets in London. Fernando Guerrero, global head of CDOs in New York, now reports jointly to Cameron and Mullen. Previously securitizations with an ABS bent were in Mullen's group and those referenced to default swaps were under Cameron's domain.
A rival CDO head said the integration made sense, as most banks that have multiple profit centers working on a deal end up with a fight at year-end. But, larger firms may find this structure unwieldy, another CDO structurer added.
Putting the CDO team across the two groups will eliminate competition for the group's profit. In particular, the problem of desks charging internal clients wide bid/offer spreads in order to capture a slice of the CDO profit--known as transfer pricing--will be removed. "High transfer prices can mean you either end up with a deal at unattractive prices or a lot of internal disputes," said Cameron. For example, if the firm wants to reference a CDO to a portfolio of loans it has to buy those loans internally and it then may, depending on what tranches it sells, need to hedge out the risk. The loan desk and the credit derivatives desk may charge wide bid/offer spreads in the knowledge that the CDO desk is a captive client. This reorganization will, according to Cameron, eradicate that problem.
As part of the move Arne Groes, head of credit derivatives in London, has been promoted to a new role of head of credit markets trading. His former trading responsibilities have been taken over by James McNabb, senior credit derivatives trader in London. McNabb is now head of credit derivatives trading. Part of the reason for splitting Groes' role is the credit derivatives trading and structuring group has grown three fold to around 25 staffers in the last couple of years. McNabb will continue to report to Groes.