BoA says there are many pitfalls in recovery lock market

In their latest research report, Bank of America analysts say there are many risks involved in the recovery lock market. They maintain they are not suitable for all investors. Particularly, recovery locks are a relatively new and untested market. They also say recovery locks have significantly less liquidity than regular CDS, such as a smaller size, wider bid-offer premium and fewer dealers making markets. Since recovery locks trade on reference entities that have suffered significant spead widening over the past year, it indicates a greater degree of protection buying and potential for a one-way market, they say. Recovery locks may also be more difficult and more expensive to roll than regular CDS. Also, they say it may be harder to monetize profits in a recovery lock relative to CDS.
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