DBRS's revised rating criteria for leveraged super senior tranches funded by Canadian commercial paper conduits had the market buzzing last week as the changes appear to be a stronger shift toward requiring a global rather than just Canadian standard of liquidity.
The agency will likely require sponsoring banks to put up more capital than is currently set aside to support a liquidity reserve for leveraged super-senior tranches of collateralized debt obligations. This is expected to hurt the profits of dealers that have relied on the Canadian conduit market to offset their super-senior risk.
Dealers last week were grumbling that spreads on the underlying will now have to be wider than current levels for the economics of LSS trades to work. For the past year, the less comprehensive Canadian liquidity standards have made it an easy market for dealers worldwide to cheaply and efficiently sell leveraged super senior tranches into. Prices of 10-year protection remained stable after the announcement, as most of the move was already priced in (DW, 12/15).
