An estimated USD70 billion in notional has been traded on the North American synthetic asset-backed security market since the International Swaps and Derivatives Association published documentation templates for the trades in June, said dealers at a CDS on ABS ISDA seminar in London recently. The volume eclipses the USD10 billion traded in Europe.
Laila Kollmorgen, senior trader at BNP Paribas in London and panelist at the seminar, said the U.S. boom is a function of the huge USD240 billion underlying ABS market, as well as the higher returns from CDOs referencing synthetic U.S. home equity and CMBS. "A CDO on mezzanine European ABS is more than challenging because spreads are tight and arbitrage just isn't there," she said.
Market officials at the seminar also debated the use of different synthetic ABS documentation templates on either side of the Atlantic. Some delegates reportedly expressed concern at the complexity of the U.S. pay-as-you-go documentation, as opposed to the cash or physical settlement approach used in Europe. "It's 30 pages long and does not make an easy read for the average investor," said one attendee.
