State Street Research and Management, a Boston-based asset manager with USD40 billion under management, recently entered into credit default swaps as a means of managing so-called "vintage risk" in a true sale collateralized debt obligation it recently brought to market. Since the secondary market in asset-backed securities is relatively illiquid, issuers of CDOs of ABS have to purchase ABS in the primary market and as a result the reference pool consists entirely of securities of the same vintage, explained Ron D'Vari, managing director and head of specialty products and structured finance in Boston.
State Street was able to overcome this problem by selling credit protection on ABS issued in a variety of years, thus increasing diversification in the portfolio. This is the first time SSRM has entered into CDS contracts referencing ABS.
