Can someone tell me about CDO trading please?
Can someone tell me about CDO trading, and what it is please? I have an interview with a CLO desk in a couple of weeks and I don't really know what it is. I spent a year in Cash Equities Trading, they didn't have a spot but the firm is looking to find me another desk, however this is the only desk they've found so far. I'm pretty sure it's not something I'd be suite for, nor do I think the desk will think I'm suited for it. But still I'd like to know more about what it is first.
I pretty much only spoke to the guy for a minute, and I didn't really get what it was. I assumed it was just making a buy/sell market on existing CLO notes and the money was made on the spread.
However, from what I gathered it sounded like the Structuring desk would put a product together and the trading desk would price it up and sell it to an investor.
What exactly are the structuring desk putting together? Are they creating a new CLO from a pool of receivables? If so, what pool of receivables is it and how do they have the capacity to securitise it? Or are they creating a product from existing CLO products? If so, what are they doing, just pulling out different sets of notes from existing CLOs? Really unsure about this.
Then once the structuring desk has put the product together, how do the traders make money off it? Are they quoting a two-way price on these products? Where is the risk on their books and how do they manage it?
CDO's and CLO's are often used interchangeably but they have material differences. You should know exactly which one your interviewing for.
With that being said, the CLO desk will generally try and make money in a few ways:
1) Trading: Make bid/ask markets on outstanding secondary CLO's and attempting to profit the spread.
2) Mark-To-Market: In order to better facilitate market making activity the desk is generally allowed to hold some bonds in inventory. If they are not fully hedged (arguably impossible in CLO's given there is no perfect hedge) then spreads can tighten more than hedges widen and you will have MTM PnL. The inverse can happen you will have a MTM loss.
3) carry: The difference in the bond coupon and the financing rate. This is generally the smallest component of PnL (and if this is the only way your making money you will be fired).
4) Pay downs: Receiving principal payments on bonds held in inventory. Sometimes this is included in mark-to-market because most CLO's trade at a discount so partial principal payments should help the bond accrete towards par (all else being equal this should lower the spread/yield required by investors to hold the bond .... hence higher price).
5) New Issue: The desk will often have a new issue team which structures new deals for CLO managers. This includes everything from developing a structure that fits all parties, working with the rating agencies, sourcing potential investors and eventually pricing/syndicating the deal. Often it also includes providing warehouse financing so the manger can purchase loans before the CLO has officially been issued. The secondary trading desk also plays a roll in this process as they will often provide relevant market color regarding the structure, trading levels, potential investors to contact, etc. They will also support the deal (providing secondary market liquidity) once it has been priced.
Also, regarding your comment about structuring up receivables, you should do some reading on what a CLO actually is (if thats what your interviewing for). CLO's are securitization of high yield corporate loans - they are not receivable securitizations.
Feel free to PM me if you have any additional questions.
I cannot believe how you could get this interview without the knowledge of those top prevailing products....... GL with your interview. I would suggest you reading some FRM materials. Search: Bionic Turtle on Youtube. Lots of good short instructive vedios there
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