2007_Subprime_Shorting-Home-Equity-Mezzanine-Tranches-1
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Footnote Exhibits - Page 0975
Strictly private & confidential
Pay-as-you-go (PAUG) structure: the market's answer
to challenges posed to ABS CDS
Cr,
M The physical delivery and credit event-settlement are not required
Unlike corporate CDS, ABS CDS does not require physical delivery of the underlying bond
from the protection buyer (who has effectively sold the underlying bond short). This helps
to greatly neutralize the risk of a short squeeze.
Nor is cash settlement at the credit event mandatory. This would avoid either party from
been trapped with artificially high or low quotes.
U The cashflow of the PAUG ABS CDS is dictated by the underlying bonds
distribution cashflow, outstanding balance, and interest shortfalls or principal
writedown, if any.
The underlying bond's balance, interest shortfall and principal writedown are calculated
using rules set at the issuance. (See Appendix for typical bond payment structure.)
If the underlying bond is paid down, the notional amount for the CDS will decline
accordingly.
If there is an interest shortfall in the underlying bond resulted from the available funds cap,
premium payment for CDS will be reduced accordingly, subject to the ceiling of the
premium size.
If there is an interest shortfall due to credit loss or there is a principal writedown, the
protection seller will pay the protection buyer accordingly
I
Deutsche Bank
All numbers shown in this presentation are indicative and are based on a sample portfolio. Actual numbers will be
different and will depend on the actual portfolios selected.
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