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Derivatives

Beantown Shop Plans Innovative Note for money market investors

State Street Research & Management, with USD40 billion in assets under management, is working on a money-market eligible puttable note and is also considering selling credit protection referenced to asset-backed securities, its first such structures. Ron D'Vari, managing director and head of specialty products and structured finance in Boston, said the money market program will address market appetite for short-term money market structures as investors grapple to determine the direction of the economy. Recent corporate downgrades have eaten into the flow of AAA money market instruments, making this a good time to issue, he noted.

The structure will convert long-term asset-backed securities into short-term instruments through the puttable note, said D'Vari. Structuring the program with the puttable note will allow the firm to cap its funding costs, which in turn helps it maintain a high credit rating, he said. The note has a maturity of 10 years, but will be auctioned several times a year. This means each investor holds it as a short-term instrument. It is structured like this to attract money market investors. If the auction does not provide an investor the put seller takes the note.

The asset manager is talking with derivatives counterparties to act as guarantors and put structurers for the note, according to D'Vari, who declined to name firms. Counterparties need to have a minimum credit rating of A1/P1. D'Vari declined to give details on the expected size of the deal or when it will likely hit the market.

Separately, the asset manager is planning to enter a USD36 million credit-default swap which references asset-backed securities, noted D'Vari. SSRM is looking to gain exposure to specific names for which cash bonds are not available, he said, declining to specify the names the swap will reference.

The default swap works in the same way as a swap on a corporate, in that SSRM pays the economic losses and receives a premium, but it has different triggers. ABS trades are not subject to bankruptcy, so the swap is instead subject to shortfalls, write downs and ultimate loss of principal, all of which can be relatively easily quantified, he said.

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