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European bank - restructuring a credit derivative and synthetic CDO Portfolio.

Problem

Promethion was invited by the Head of Credit Derivatives and the General Manager in charge of trading to address portfolio risk issues and help refocus the credit trading business.

After the defection of a credit trading team, a number of units were merged and the Head needed expert product and strategic support while he rebuilt the unit.

Various issues were identified in the credit portfolio which needed prompt action.

Solution

Promethion reviewed 6 major portfolio credit derivative transactions (5 were asset-backed securities hedged with total rate of return swaps through an SPV; one synthetic CDO).

Re-engineered the synthetic CDO to address weakness in the substitution mechanism and other problems.

Assisted in the structuring of one new synthetic CDO.

Negotiated and successfully resolved legal proceedings between client and market CDS counterparty concerning disputed credit event, including assistance with instruction to Q.C, litigation partner, SPV directors and the note investor.

Evaluated the establishment of a separate fund management subsidiary in London to act as a CDO manager



Financial Impact

The total exposures reviewed were approximately $4 bn.

Remedial action on immediate risks avoided a hit to trading P&L from problem exposures totalling $15 million.   


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