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Derivatives

Equity CDOs Expected To Take Off

CDO houses, including JPMorgan, expect a flurry of activity in CDOs linked to out of the money barrier options--known as equity default swaps--this year.

CDO houses, including JPMorgan, expect a flurry of activity in CDOs linked to out of the money barrier options--known as equity default swaps--this year. Daniel Smith, managing director, said the firm is readying the launch of several deals in the U.S. after recently issuing the first rated structure in Europe. The European deal comprises a portfolio of only 10% equity-default swaps, compared with 90% credit-default swaps. In new deals, however, the proportion of equity-default swaps is expected to be higher.

Nik Khakee, director at Standard & Poor's, said the ratings agency has several equity-default swap deals in the pipeline in New York, London and Tokyo. S&P has already developed a capability for rating such deals and will release its ratings criteria for EDS in the coming weeks, he said. Moody's Investors Service released its criteria last month.

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