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Breaking Down Structured Credit Archives - Indus Valley Partners

A case for automation while Trading Structured Credit

A Case for Automation While Trading Structured Credit

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Our last two blogs on structured credit covered in detail the ever-evolving complexities involved in pricing structured instruments, especially during the pandemic. Luckily, these complexities can be managed with the introduction of automation to improve efficiency and transparency throughout the pricing process, thus leading to the generation of alpha. There are several areas within the pricing process that can be streamlined and automated as indicated below:

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Impact of COVID-19 on Pricing Structured Credit

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COVID-19 has drastically changed the world and its economy in unprecedented ways. With a specific focus on the financial industry, the pandemic has caused securitized credit instruments to face a much higher risk of credit downgrade and default. This risk is due to the decreased ability of the counterparty to honor payment obligations and to make matters worse given the current situation, lower valuations and changing credit ratings pose an additional challenge in the pricing process. Throughout this blog, we will explore a few aspects involved in the process of pricing structured credit instruments to help you navigate these uncertain times.

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Navigating the Maze of Structured Credit Part 1

Complexities Involved in Pricing Structured Products

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As a multi-trillion dollar market, structured products offer many unique benefits around returns, diversification, and internal and external protections. Due to this fact, asset managers deal in a lot of structured instruments, especially CLOs, MBSs, CDOs and others. However, this asset class comes with its own set of complexities around pricing and associated reporting as prices of these instruments are not readily available and can be highly disputed. As a result, funds who deal in these instruments have a more complex and elaborate pricing process that involves multiple counterparties and intricate approval workflows. We will explore some of these complexities below: Read More