JPMorgan recently published a report on collateralized swap obligations (CSO) that claims the new hybrid blends the benefits of a managed cash CDO with those of a static synthetic CDO, bringing out the best in both structures.

CSOs essentially combine the arbitrage opportunity and asset management benefits of cashflow CDO technology with the efficiency of the credit derivative market, according to authors Chris Flanagan and Tim Milton. Some of the key differences between a CSO structure and more traditional CDO structures are largely the result of the underlying collateral. A CSO sources collateral credit risk and return from the high-grade credit derivatives market versus traditional funded cash CDOs that are backed by corporate credit obligations or structured finance assets.

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