Moody's publishes CDO hedge counterparty guidlines

Rating agency Moody's Investors Service today said it has published a series of guidelines outlining the steps by which a collateralised debt obligation (CDO) hedge counterparty can better detach its own credit risk from the CDO itself.

Moody’s said it decided to publish the guidelines to help limit the level of expected loss arising from counterparty risk, with an eye toward better protecting the senior tranches of CDOs.

The guidelines include detailed specifications for the posting of collateral when a hedge counterparty is downgraded and for the appointment of a more highly rated counterparty should the counterparty's ratings decline significantly. The guidelines also address the use of hedge guarantees from more highly rated institutions as an added option, the agency added.