Collateral concerns

Collateralised foreign exchange obligations are hitting the market, offering sophisticated investors easy access to the asset class in a credit-type format. But at a time when mark-to-model pricing and rating agency credibility are coming under fire, is it a step too far? By John Ferry

The investment case seems clear enough. Institutional investors are engaged in a constant search for diversification and yield enhancement, yet many are constrained by strict mandates that prohibit investing in non-rated assets. So it was only a matter of time before investment bankers would take the techniques developed in the structured credit market and apply them to new types of assets. Foreign exchange is the most recent target, with two collateralised foreign exchange obligations (CFXOs)