The ability of managers of investment grade corporate synthetic CDOs to trade has been dramatically reduced as a result of structural constraints, a lack of market liquidity and unprecedented spread widening, Fitch Ratings analysts said.

These liquidity and operating pressures have partly resulted from a reduction in the number of credit derivatives dealers and the capital allocation to correlation desks, which are hindering the ability of IG Corp synthetic CDO managers to trade.

"IG Corp synthetic CDO managers have refrained from executing trades that would reduce the amount of available subordination, or would result in a breach of one or more other portfolio parameters," analysts said. "This has led to a number of IG Corp synthetic CDOs becoming virtually unmanageable, leaving them exposed to potential credit events."

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