Dealers are gearing up for CDO market expansion in advance of a Financial Accounting Standards Board amendment, expected to ease accounting requirements for CDO investors. Dealers were broadly positive about the proposed changes to mark-to-market accounting for credit derivative-based deals in the comment period just ended, and expect to see increased investment in CDOs after the change takes effect.
Many clients are taking a more serious look at investing in synthetic CDOs as a result of this amendment. "It is virtually certain to lead to an increase in participation by institutional investors," said one market participant.
Many investors have resisted investing in CDOs because of current requirements that credit derivatives, unlike cash, be marked-to-market on earnings statements. A proposed change to FAS statements 133 and 140 would move mark-to-market accounting for synthetic CDOs off earnings statements and treat them like cash.
This change is expected to push many investors over. "It's fantastic," said one dealer. "We're doing cartwheels," said another. Dealers said the FASB is using their comments in its redeliberation and that they expect them to be taken up.
Karen Dealy, North American co-chair of the International Swaps and Derivatives Association's accounting committee, said she expects FASB to meet its Dec. 15 target for the amendment to come into effect.
