The newest developments and dramatic growth within the single-name home equity ABS credit default swap market lies behind some of the biggest innovations within the structured finance CDO sector seen this year. These developments not only are responsible for some of the volatility seen of late, but also a new world of innovation. The ABS CDO market - often deemed the "CDO machine" by market participants, has been a huge patron of home equity ABS this year, with collateral portions in more than a few deals topping 80%.
And as search for yield has left desirably priced ABS collateral scarce in order to complete CDOs, the ability for portfolio managers to mix synthetic collateral with cash collateral is allowing CDOs not only increased diversification but the ability to ramp up a deal in a much faster time frame. "While accumulating $250 million in triple-B rated cash [home equity] securities could take as much as three-to-four months, the CDS market allows an equivalent sized exposure to be taken on in the course of a single day," according to Bear Stearns.