Nomura research highlights synthetic-cash ABS mismatches

Nomura has published a research report, ‘Synthetic ABS nuances’ looking at asset-backed credit default swaps, and addressing the mismatches that can drive pricing disparities between an ABS credit default swap and its underlying reference security. In particular, the paper looks at access to information, voting rights, disputes, legal uncertainty, counterparty risk and liquidity.

The report concludes that the effect of mismatch between synthetic ABS and actual ABS can be slight or material depending on the particular circumstances. It warns market participants not to treat synthetic ABS and the underlying assets as perfect substitutes for each other. The report says: for now those who ascribe a high value to liquidity probably will favour actual securities over credit default swaps. In the future though, ABS credit default swaps might become as liquid as their reference obligations.

Source: madelson@us.nomura.com