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FRM Part II · FRM Exam Part II · An Introduction to Securitisation

A risk manager compares a CLO with a cash CDO backed by mezzanine ABS tranches. Which statement correctly distinguishes the collateral of the two products?

A CLO is backed mainly by syndicated corporate loans, whereas an ABS CDO is backed by tranches of other securitisations. This re-securitisation makes the CDO's mezzanine tranches highly sensitive to correlated losses in the underlying pools.

  1. AA CLO is backed mainly by broadly syndicated corporate loans, while an ABS CDO is backed by tranches of other securitisations, creating re-securitisation exposureCorrect
  2. BA CLO is backed by residential mortgages, while an ABS CDO is backed by corporate bonds
  3. CBoth are backed exclusively by credit default swaps, so there is no funded collateral
  4. DA CLO is backed by other CLO tranches, while an ABS CDO is backed by corporate loans

Explanation

CLOs hold pools of corporate (often leveraged) loans. ABS CDOs hold tranches of other ABS or MBS, so they are re-securitisations whose losses depend on correlated underlying pools, amplifying losses in the crisis. The other options reverse or misstate the collateral.

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