TAILIEUCHUNG - Credit Derivatives Explained Market, Products, and Regulations

There are other interesting parallels: In both countries, changes in investment ratios seem not to have been triggered by changes in household savings ratios, but have shown separate trends: In Germany, the investment-to-GDP ratio rose from 1951 to 1954 from 20 to 25 per cent, and hovered between 23 and 25 per cent until the late 1960s. The household savings rate, on the other hand, started from a very low level of just 4 per cent of disposable income in 1950 (which even translates into a lower share of GDP as disposable income is only a share of GDP) a. | LEHMAN Brothers S T R U C T U R E D C R E D I T R E S E A R C H Credit Derivatives Explained Market Products and Regulations HIGHLIGHTS March 2001 Dominic O Kane 44-0-20-7260-2628 dokane@ Credit derivatives are revolutionizing the trading of credit risk. The credit derivative market current outstanding notional is now close to 1 trillion. Credit default swaps dominate the market and are the building block for most credit derivative structures. While banks are the major users of credit derivatives insurers and re-insurers are growing in importance as users of credit derivatives. The main focus of this report is on explaining the mechanics risks and uses of the different types of credit derivative. We set out the various bank capital treatments for credit derivatives and discuss the New Basel Capital Accord. We review the legal documentation for credit derivatives. We discuss the effect of FAS 133 and IAS 39 on credit derivatives. Lehman Brothers International Europe STRUCTURED CREDIT RESEARCH TABLE OF CONTENTS 1 Introduction 3 2 The Market 6 3 Credit Risk Framework 11 4 Single-Name Credit Derivatives 17 Floating Rate Notes 17 Asset Swaps 19 Default Swaps 25 Credit Linked Notes 34 Repackaging Vehicles 35 Principal Protected Structures 37 Credit Spread Options 39 Bond Options 41 Total Return Swaps 42 5 Multi-Name Credit Derivatives 45 Index Swaps 45 Basket Default Swaps 46 Understanding Portfolio Trades 50 Portfolio Default Swaps 53 Collateralized Debt Obligations 54 Arbitrage CDOs 57 Cash Flow CLOs 57 Synthetic CLOs 58 6 Legal Regulatory and Accounting Issues 61 Legal Documentation 61 Bank Regulatory Capital Treatment 66 Accounting for Derivatives 73 7 Glossary of Terms 77 8 Appendix 80 9 Bilbliography 83 Acknowledgements The author would like to thank all of the following for their help in preparing this report Mark Ames Georges Assi Jamil Baz Ugo Calcagnini Robert Campbell .

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