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Malay Bansal
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Malay Bansal is a capital markets professional with over 16 years of wide capital markets, commercial real estate, and structured finance experience.  He is a Managing Director at a New York based advisory firm working on structured finance, commercial real estate , clean energy, infrastructure,... More
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  • mauldin0495
    , contributor
    Comments (209) | Send Message
     
    "The concept is similar, but there are some differences in implementation as the TRX is a contract (Total Return Swap contract) rather than a physical bond. For one party to go long, there has to be another party to take the short side. All that is needed for a TRX trade are the two parties wanting to take the opposite positions, and neither has to actually own or find the underlying bonds to initiate or close a position. ... This ability to short easily is what makes it possible for loan originators to hedge their loans being aggregated for securitization."

     

    i hate this kind of instrument that serves no purpose other than speculative trade. Use as hedge? Lol, without the need for underlying security, then is not hedge, is speculative trade. This instrument is financial WMD!!!
    18 May 2012, 08:31 AM Reply Like
  • Malay Bansal
    , contributor
    Comments (43) | Send Message
     
    Author’s reply » Looking at the loan origination process might help understand better why this works as a hedge. A loan conduit originates loans. Once it has enough loans, it does a securitization, which creates new bonds, and sells to investors. While the conduit is aggregating loans, it actually has the collateral for the deal. The short is merely selling the bonds that it will create in future. The short is hedge for the loans that the conduit already owns. It is a hedge. It is not a speculative position. It is no different from producers selling futures in commodity markets to hedge their future production (of metals, agricultural products, etc). That has been done for a long long time, and serves a useful purpose.

     

    You may be thinking of CMBX, which are CDS contracts and have been used for speculation. Many, including myself, believe that they increased volatility in the CMBS market. However, TRX contracts are much more closely tied to cash markets than CMBX as in TRX, the return is exchanged every month, as opposed to CMBX where the ultimate payment is not till the maturity of the bond, and so the CMBX and cash can diverge significantly over a long period of time.
    2 Jun 2012, 09:26 PM Reply Like
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