Synthetic collateralized foreign exchange obligations are beginning to appear in dealer pipelines. A number of firms, including Barclays Capital, are working on the structures, which package and tranche baskets of emerging-market currency swaps. Derivative Fitch in London has seen proposals from four or five dealers in Europe.
So-called CFXOs are similar to collateralized commodity obligations in that they are structured with trigger events based on swap price movements. Lars Jebjerg, senior director at Derivative Fitch in London, said the proposals he has seen are well diversified and reference about 10 to 20 currencies in Latin America, Eastern Europe and Asia, with multiple trigger levels set 20-60% away from spot prices. Some proposals also combine fx trigger swaps with sovereign credit-default swaps in low-correlation hybrid structures.
Derivative structurers and marketers said CFXOs are a natural outgrowth of CCOs. Like CCOs, CFXOs appeal to traditional credit investors interested in diversifying exposure to new asset classes rather than fx investors.
Some credit derivatives structurers were sceptical there will be natural buyers for the fx-linked structures and said CFXOs may be difficult to structure because fx and credit groups are not always well integrated. Philippos Kassimatis, global co-head of fx structuring at Barclays in London--which recently closed a EUR50 million bespoke deal and is working on a public deal that will likely launch next month--said Barclays' deals will be structured on the fx desk and distributed by credit sales teams to traditional collateralized debt obligation investors.
"Investors with credit appetite are looking for familiar structures and diversified asset classes," Kassimatis said, adding Barclays is targeting investors who already expressed interest in CCOs. "Clearly there is demand, but it is a work in progress," he said.
Rating agencies are several months away from rating the fx-linked trades. Analysts at Moody's Investors Service and Standard & Poor's did not return calls.
