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Correlation Dangers Deter Tranchelet Players

Some credit dealers are holding off entering the budding tranchelets market because of uncertainty over correlation risks. They say the instruments are extremely sensitive to even the smallest change in the correlation curve and these minuscule changes can be hard to predict. "Because of the narrow attachment points, a small move in the curve will have a big impact on the tranche," said one dealer at a top-tier credit house.

Tranchelets are very thin slices of index equity tranches which first hit the market last year. A handful of firms began quoting two-way prices on them last month (DW, 1/20). One London-based analyst said his firm is comfortable using tranchelets as a risk management tool only, off-setting bespoke tranches of collateralized debt obligations. "We will not trade for trade sake," he added.

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