Collateralized Debt Obligations Market

by Axel Pierron, October 31, 2005


Paris, France October 31, 2005

Celent estimates that the CDO market will reach close to US$2 trillion by the end of 2006.

Due to impressive growth and innovation the collateralized debt obligations (CDO) market is drawing a lot of attention from players outside the derivatives industry. In a new report, " ," Celent demystifies these complex instruments and outlines the main benefits and uses of various CDO instruments. The report includes statistics on the size of the CDO market with a breakdown by geography and instrument, an analysis of CDOs’ impact on the financial services industry, and the IT challenges they have generated.

A CDO is typically a structured transaction in which a special purpose vehicle is established to sell credit protection on a range of underlying assets. Despite numerous credit events and difficult market conditions, the CDO market has continued to grow thanks to innovation. Since 1998, the CDO market has experienced an average annual growth rate of 150%. Celent estimates that the overall CDO market represents over US$1.5 trillion and will grow close to US$2 trillion by the end of 2006.

"The CDO market has become one of the most profitable markets for investment banks," given diminished IPO and M&A activity, says Axel Pierron, analyst and author of the report. "The growth of this market is not going to slow down dramatically, despite various hiccups," he adds.

The emergence of synthetic deals has clearly boosted the CDO market. The market is dominated by synthetic deals, and today 75% of CDOs issued are synthetic CDOs. This marks a clear evolution in the CDO market. In fact, the two most recent products, single tranche CDOs and ABS-backed CDOs, now account for, respectively, 66% and 25% of the synthetic CDO market. The market is moving toward "on demand" credit risk, where an investor can specify a product’s risk/return and the bank originates the "raw material" (bonds, ABS, etc.) and then distorts the risk/return ratio of its portfolio and delivers a new product to its client.

The development of the synthetic CDO market on the back of the CDS market is having a tremendous impact on the credit market, reorganizing the credit value chain. The development of the credit derivatives market and especially CDOs has had a tremendous impact in the positioning of banks in the risk management value chain," says Pierron. In the medium term, regional and smaller banks will concentrate on sourcing risk (especially via loans), while brokerage houses and investment banks will focus on deal structuring. The distribution will be shared between various players, from large banks to insurance companies, he adds.

The 42-page report contains 13 figures and 2 tables.

All Members of Celent's Institutional Securities & Investments research service can download the report electronically by clicking on the icon to the left.  Non-members should contact for more information.


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Celent is a research and advisory firm dedicated to helping financial institutions formulate comprehensive business and technology strategies. Celent publishes reports identifying trends and best practices in financial services technology and conducts consulting engagements for financial institutions looking to use technology to enhance existing business processes or launch new business strategies. With a team of internationally based analysts, Celent is uniquely positioned to offer strategic advice and market insights on a global basis. Celent is a member of the Oliver Wyman Group, which is a wholly-owned operating unit of Marsh & McLennan Companies [NYSE: MMC].

Media Contacts

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Michele Pace
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Table of Contents


Paris, France October 31,  2005

Return to report Abstract

Executive Summary 3
Introduction 5
Definition 6
  Cash CDOS: CBO and CLO 7
  Synthetic CDOS 11
  On Demand/Single Tranche CDOS 16
Market Overview 24
  Market Volume 24
  Geographic Breakdown 28
Market Participants 31
  Banks and Brokerage Houses 31
  Insurance Companies 33
  Asset Managers/Hedge Funds 34
  Retail Customers 35
Technology Solutions 36
  CDO Management Tools 36
  Analytical Tools 37
Conclusion 39
Objectivity & Methodology 41

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