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Contractually linked instruments (TRANCHES (Leveraged credit risk? (YES…
Contractually linked instruments
TRANCHES
Subordination
Leveraged credit risk?
YES
NO amortised cost, NO FVOCI (sometimes not appropriate)
Credit risk
Individual tranches are based on pre-defined waterfall structure
SPPI PASSED
=
"LOOK THROUGH" test
UNDERLYING POOL of FIN. INSTRUMENTS
ONE or more fin instruments must have contractual CF that meet SPPI
and
ANY other instrument**
Reduce CF variability of primary instrument, result in CF that meet SPPI
Align CF of tranches and primary instrument to address differences in:
currency CFs are nominated, incl. inflations
timing of CFs
interest fixed or floating
Contractual term of tranche gives rise to CFs that meet SPPI
Credit risk of single instrument in the pool < or = summe of the all instruments of the fin. pool
All underlying reference asset of CDO shall meet SPPI (difficult)
,
=> interest in CDO @ amortised cost or FVOCI
Features of the
prepayable
tranche must meet SPPI
:star: Interest rates swap, credit default swap (cash)
:red_cross:synthetic CDO