Balance sheet or arbitrage CDOs?
The outcome of any deal can vary widely depending on which instrument is used, and the use of balance sheet versus arbitrage CDOs is a case in point
In the early days of its evolution, the CDO market was dominated principally by balance sheet instruments, which refer to transactions in which assets are removed from the issuer's balance sheet, repackaged into the tranched CDO format and distributed to investors in the capital market.
For the banks that led the first wave of balance sheet CDO issuance in the 1990s, the principal motive was to maximise the efficiency of their regulatory capital management in accordance with the Basel Accord of
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