c






  
  
 

Kevin Kendra
February 20, 2007
 


= at are structured subprime RMBS portfolios?

= at is ³basis risk´?
= y is ³basis risk´ between t ese structures important
now?


  
   

_ ortfolio exposure to subprime Residential Mortgage-Backed Securities

(RMBS) can be obtained using various structures:
± Structured Finance Collateralized Debt Obligations (SF CDOs)
_ Cas SF CDOs
_ Bespoke SF CDOs
_
ybrid SF CDOs
± ABX.
 Indices
± Tranc e ABX.
 (TABX) Indices

ððð
 
  


  

_ Basis risk describes t e risk t at offsetting investments in a edging strategy

will not experience cas flow or price gains in t e same manner.
_ Basis risk as t e potential to create an excess gain or loss and t erefore is
not directional. T e amount of basis risk in a edging strategy describes t e
ow muc risk is left be ind due to imperfect correlation between t e two
investments.
_ Basis risk in subprime RMBS portfolios generally arises from:
± erformance differences in t e underlying portfolio assets
± Structural differences in portfolio instruments
± Liquidity differences in t e different secondary markets
± Timing of expected cas flows from t e portfolio instruments

ððð
 
  
"
 ð   

ð
_ Standard tranc es of t e ABX.
 Index commenced trading on Feb. 14, 2007
_ Index tranc es promise to provide:
± Liquidity
± Transparency
± Standardization
± Market Consensus
_ Motivations for TABX participation:
±
edging
± Relative Value Trading
± Benc marking
± Leveraged Market ositions

ððð
 
  !
$
ð  %
 

&
 
   
_ Subprime RMBS 101
_ Credit Default Swaps on Subprime RMBS
± Credit Default Swaps 101
± ISDA ay-As-You-Go Template 101
± Subprime RMBS AFC Risk
_ Typical Subprime RMBS ortfolio Structures
± Structured Finance CDOs 101
± ABX.
 and TABX.
 Indices 101
_ Basis Risk between TABX.
 and Ot er Structures

ððð
 
  #
  ' ð

Subprime RMBS 101

  )*)

_ Typical Subprime Borrower and Loan C aracteristics

± FICO credit score 650 and below
± rior mortgage delinquencies are acceptable
± Bankruptcy filing wit in t e last 3 to 5 years are acceptable
± Foreclosure wit in t e last 3 to 5 years are acceptable
± Debt-to-Income (DTI) ratios of 40% or ig er
± Loan-to-Value (LTV) ratios greater t an 80%

ððð
 
  (
  )*)

_ Typical Subprime Loan Types

±
ybrid Adjustable-Rate Mortgages (ARMs)
_ 2/28 Mortgage is fixed for t e first two years and t en switc es to
adjustable rate for t e remaining 28 years
_ Ot er common
ybrid ARMs 3/27 and 5/25 terms
±
ybrid Interest Only (IO) ARMs
± 40-Year
ybrid ARMs
± iggyback Second Liens
± Limited Documentation Loan rograms

ððð
 
  +
  )*)

Sample Subprime RMBS Structure

 &
& -




 &
&
 c  

M1 M2 M3 M4 M5 M6 M7 M8 M9 M10

M11 M12 M13 M14 M15 M16 M17 M18 M19 M20

M21 M22 M23 M24 M25 M26 M27 M28 M29 M30
2/28 µAAA¶
M31 M32 M33 M34 M35 M36 M37 M38 M39 M40 RMBS

ybrid ARM
M41 M42 M43 M44 M45 M46 M47 M48 M49 M50 Mortgage
ool
M51 M52 M53 M54 M55 M56 M57 M58 M59 M60 Special
urpose
M61 M62 M63 M64 M65 M66 M67 M68 M69 M70 Ve icle
(RMBS
M µAA¶
M71 M72 M73 M74 M75 M76 M77 M78   Trust)
2000 RMBS

M1 M2 M3 M4 M5 M6 M7 M8 M9 M10 µA¶
RMBS
M11 M12 M13 M14 M15 M16 M17 M18 M19 M20 µBBB¶
Fixed Rate RMBS
M21 M22 M23 M24 M25 M26 M27 M28 M29 M30 Mortgage µBBB-¶
M31 M32 M33 M34 M35 M36 M37 M38   RMBS
M
Residual
1000

ððð
 
  ,
   )*)


Sample Subprime RMBS ayments

" &
& -
   



" c  
" 
"
M1 M2 M3 M4 M5 M6 M7 M8 M9 M10 Sc eduled
rincipal
M11 M12 M13 M14 M15 M16 M17 M18 M19 M20 &
repayments
M21 M22 M23 M24 M25 M26 M27 M28 M29 M30

M31 M32 M33 M34 M35 M36 M37 M38 M39 M40
 µAAA¶
L + % or Net =AC
M41 M42 M43 M44 M45 M46 M47 M48 M49 M50 µAAA¶
 Interest
M51 M52 M53 M54 M55 M56 M57 M58 M59 M60

M61 M62 M63 M64 M65 M66 M67 M68 M69 M70 Servicer
M µAA¶
M71 M72 M73 M74 M75 M76 M77 M78   µAA¶
2000 L + % or Net =AC

M1 M2 M3 M4 M5 M6 M7 M8 M9 M10 µA¶
µA¶
L + % or Net =AC
M11 M12 M13 M14 M15 M16 M17 M18 M19 M20 µBBB¶
 L + % or Net =AC
µBBB¶
M21 M22 M23 M24 M25 M26 M27 M28 M29 M30
 Sc eduled µBBB-¶
µBBB-¶
M31 M32 M33 M34 M35 M36 M37 M38   rincipal L + % or Net =AC
M & Residual
repayments Residual
1000 xcess Interest

ððð
 
  )*
  )*)

_ Standard Structural Features of Subprime RMBS

± Subordination serves as credit en ancement to account for credit risk
± Interest rate instruments to edge interest rate risk
± erformance test at t ree year mark
_ If test fails t en t e priority of payments remains unc anged wit t e
senior notes receiving all principal proceeds
_ If test passes t en principal proceeds repays subordinated notes until
targeted subordination is met.
± Defaulted loans worked out by servicers
_ ac Subprime RMBS will ave somew at unique performance profiles

ððð
 
  ))
  )*)

rincipal =aterfalls
± Sequential pay
_ All sc eduled principal and prepayments go to repay t e senior bond olders
first until paid-in-full, t en to t e next senior note older, etc.
_ Subprime RBMS are initially sequential pay for t e first t ree years and will
remain sequential pay if t e performance tests fail
± Credit n ancement (C) ³Step Downs´, if performance tests pass
_ If overcollateralization (OC) targets ave been met, t e C is stepped down by
repaying subordinate bond olders.
_ OC targets are set to double t e original subordination, ie. If t e original µAAA¶
bond subordination is 7.5% t en t e target is 15%
_ Test senior note target for compliance first and if passing t en c eck t e next
senior bond and so on.
_ Over periods of rapid prepayments all bonds may be meeting t e OC targets,
t en principal prepayments become inverse sequential pay.

ððð
 
  )
 
 

 

Scenario 2: erformance Test asses t e Credit
n ancement ³Steps Down´ by aying rincipal
Scenario 1: Sequential rincipal Repayment to Subordinated Notes



 

 
 
 
"

"
Sc eduled
Sc eduled rincipal
rincipal ayments
ayments & Before Step Down
& Before Step Down repayments
repayments

After Step Down

µAAA¶
µAAA¶

µAA¶
µAA¶

µA¶
µA¶

µBBB¶
µBBB¶
µBBB-¶
µBBB-¶ After Step Down

Residual
Residual

ððð
 
  )
  )*)

Interest =aterfalls
± Regular interest
_ aid sequentially to bonds, capped at weig ted average mortgage
rate net of expenses (Net =AC) or available funds cap (AFC)
± xcess Interest
_ xcess interest is t e remaining interest proceeds in t e interest
collection account after paying bond olders regular interest above
_ First, excess interest is used to recover realized collateral losses
_ Second, excess interest is used to recover any interest s ortfalls
created w ere Net =AC is lower t an t e stated bond coupon
_ Finally, t e remaining excess interest goes to t e residual bond older

ððð
 
  )!

  
 

Step 1 ± Interest Step 2 ± xcess Step 3 ± Remaining
aid Sequentially Interest to xcess Interest to
to Bonds, Capped Cover Collateral ay AFC S ortfalls
at AFC Losses


   
  
  


" 
"
Sc eduled
rincipal
&
repayments

µAAA¶
L + % or Net =AC

µAAA¶
Interest

µAA¶
µAA¶
L + % or Net =AC
µA¶
µA¶
L + % or Net =AC
µBBB¶
µBBB¶ L + % - Net =AC
L + % or Net =AC
µBBB-¶
µBBB-¶
L + % or Net =AC L + % - Net =AC
Residual Residual
xcess Interest Losses Step 4 ± Remaining
xcess Interest to
Residual
older

ððð
 
  )#
  )*)

AFC Interest S ortfall

± AFC S ortfall is t e difference between t e stated bond coupon and t e
Net =AC
± AFC S ortfalls accrue over time and may be recoverable
± AFC S ortfalls manifest t emselves in times of rising interest rates
_ Typical subprime RMBS deals ave 75% ybrid ARM mortgages
_ RMBS bonds are generally floating rate bonds based on t e London
InterBank Offering Rate (LIBOR)
_ If s ort-term LIBOR interest rates rise during t e 2- or 3-year fixed
rate period t en t e interest coupon from t e mortgages is insufficient
to pay t e RMBS bond olders LIBOR plus t e stated spread
± AFC s ortfalls may be unrecoverable if excess interest is eroded.

ððð
 
  ).


/
ð
 


Credit Default Swaps (CDS) 101

ISDA ay-As-You-Go ( AUG) Template 101
Subprime RMBS AFC Risk


/
ð
)*)

rotection Seller
± Receives CDS premium payment and reimbursement payments in
exc ange for providing protection payments if a credit event occurs.
± CDO note olders are protection sellers in a synt etic CDO.
rotection Buyer
± ays CDS premium in exc ange for protection payments if a credit event
occurs.
± CDS Swap Counterparty is t e protection buyer in a synt etic CDO.
Calculation Agent
± Determines t e amount of t e protection payment upon a credit event per
t e terms of t e credit default swap
± Usually t e rotection Buyer serves t is role

ððð
 
  )+


/
ð
)*)

Collateral or ligible Investment

±
ig ly rated, ig ly liquid financial instruments purc ased from t e sales
proceeds of t e initial CDO notes.
± rovides t e index portion of t e note coupon
± rovides protection payments or t e return of principal to note olders
Reference ntity and Reference Obligation
± Reference entities are security issuers like a corporation or sovereign
± Reference obligations are securities wit specific debt seniority levels
_ Reference obligations in a corporate CDS is usually informational to
establis t e seniority of debt to be valued if a credit event occurs
_ Reference obligations in CDS of structured finance assets or
leveraged loans or in total return swap structures

ððð
 
  ),


/
ð
)*)

Sample Credit-Linked Note (CLN) using a CDS

 

/
  
" ð
 
CDS remium Note Coupon
(bps) (L + bps)

CDS Swap Credit-Linked rotection

Counterparty Note Trust Seller
rotection CLN roceeds
ayments ($) ($)

CLN
LIBOR roceeds
(L) ($)

Reference Collateral or
ntity or ligible
Obligation Investments

ððð
 
  *


/
ð
)*)

Credit vents
± Applicable credit events will vary by CDS
± Typical credit events may include:
_ Bankruptcy
_ Failure to ay (FT )
_ Restructuring
_ Repudiation/Moratorium, usually emerging markets and sovereigns only
_ Obligation Acceleration, usually emerging markets sovereigns only
± Once a credit event as been called and settled t en t e credit default swap
is terminated

ððð
 
  )


/
ð
)*)

Settlement and Valuation rocedures

± rotection Buyer calls a credit event by sending notice to t e rotection
Seller w at credit event as occurred
± Settlement met od is determined by t e CDS contract
_ ysical settlement means t e rotection Buyer gives t e Seller t e
reference obligation, or equivalent, in return for cas par amount
_ Cas settlement means t e parties look to t e market value of t e
reference obligation to determine t e net protection payment
± Fitc ¶s preferred valuation process includes:
_ Dealer poll of at least 5 dealers, not including t e rotection Buyer
_ olls typically eld 30 to 60 days after credit event notification

ððð
 
  
/
"001023%24c
)*)

_ ISDA AUG template is designed to replicate t e cas flow profile of t e cas

bond wit a credit default swap (CDS) contract
_ CDS contracts for corporate and sovereign issuers are insufficient to replicate
t e payment profile of a structured finance bond
_ ISDA AUG template was introduced in t e U.S. in XXXX 2005 for RMBS and
CMBS securities for CDO securities in June 2006
_ Introduces t e concept of ³floating payments´
± Floating payments are paid by t e rotection Seller in t e event of an AFC
Interest S ortfall
± Floating payments may be reimbursed by t e rotection Buyer if t e AFC
Interest S ortfall is ultimately recovered

ððð
 
  
/
"001023%24c
)*)

Sample CLN using a AUG CDS

Floating
ayments

 

/
  
" ð
 
CDS remium Note Coupon
(bps) (L + bps)

CDS Swap Credit-Linked rotection

Counterparty Note Trust Seller
rotection CLN roceeds
ayments ($) ($)

CLN
LIBOR roceeds
(L) ($)

Reference Collateral or
Obligation ligible
Investments

ððð
 
  !
/
"001023%24c
)*)

AUG Credit vents

± Failure to ay (FT ) rincipal
± =ritedown
± Distressed Rating Downgrade (µCCC¶ or below)
± FT Interest for CDO reference obligations only
AUG Floating Amount vents
± Interest S ortfalls
± rincipal S ortfalls
± =ritedown Amounts

_ rotection Buyers typically ave an option w et er to call a credit event or a

floating amount event

ððð
 
  #
/
"001023%24c
)*)

AUG Settlement
± T e secondary market for structured finance securities is not liquid and
t erefore valuation procedures are not applicable
± Floating payments are designed to replicate t e actual loss amounts
± If a credit event occurs t en t e rotection Buyer as t e option to
p ysically deliver all or part of t e notional amount to t e Seller
_ If t e entire notional is p ysically settled t en t e CDS is terminated
_ If a portion of t e notional is settled t en t e CDS continues on t e
remaining amount

ððð
 
  .
/
"001023%24c
)*)

Interest S ortfalls
± RMBS reference obligations are called AFC s ortfalls
± CMBS reference obligations are called =AC s ortfalls
± CDO reference obligations are called IK-ing s ortfalls

Interest S ortfall Cap Options

± Fixed Cap: Floating payments are limited to t e amount of t e CDS premium
± Variable Cap: Floating payment are limited to LIBOR + premium
± No Cap: No limit to t e floating rate payments
_ Completely replicates t e payments of t e cas bond or total return swap
_ May require principal to be liquidated to pay interest s ortfall

ððð
 
  (
  $
 

_ Available Funds Cap (AFC) Risk

± RMIC law limits a floating rate RMBS bond pass-t roug rate to t e
lesser of:
_ Bond spread plus some index (typically 1 mont LIBOR), or
_ Underlying mortgage collateral pool¶s weig ted average coupon, net
of expenses (Net =AC).
± AFC Risk varies by RMBS transaction based on:
_ Actual prepayment speeds of underlying mortgages
_ ffectiveness of interest rate edges in t e RMBS structure
_ S ort-term interest rate increases before
ybrid ARM mortgages
switc to floating interest rate payments

ððð
 
  +
   $
 

_ Unrecovered ?FC Interest S ortfalls can be prevalent by vintage

_ Unrecovered ?FC Interest S ortfalls can be present across all rating categories



 7    
$
5   

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  6 6 

6
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6  ,6


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6  6


  6  
6  ,6  6



  6 
6

6



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ððð
 
  ,
 8" 9 $
 

_ Unrecovered ?FC Interest S ortfall amounts ave been small

_ Difference in CDS premium required for No Cap protection may exceed t e
actual unrecovered ?FC interest s ortfalls experience in t e cas bond market

 
  
$
5    

6  



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ððð
 
  *
   
  

Structured Finance CDOs 101

ABX.
 and TABX.
 101
  
$

/')*)

_ Generic Types of SF CDOs

± Cas SF CDOs
± Bespoke SF CDOs
±
ybrid SF CDOs

ððð
 
  
  
$

/')*)

Sample Cas SF CDO Structure

/'
/'

/' 
c  

RMBS RMBS RMBS RMBS RMBS
Bond 1 Bond 2 Bond 3 Bond 4 Bond 5
RMBS RMBS RMBS RMBS RMBS
Bond 6 Bond 7 Bond 8 Bond 9 Bond 10
Note Coupon
RMBS RMBS RMBS RMBS RMBS (L + bps)
Bond 11 Bond 12 Bond 13 Bond 14 Bond 15 µAAA¶
CDO
RMBS RMBS RMBS RMBS RMBS Bond Coupons
Bond 16 Bond 17 Bond 18 Bond 19 Bond 20 (L + bps) roceeds
RMBS RMBS RMBS RMBS RMBS Special ($)
Bond 21 Bond 22 Bond 23 Bond 24 Bond 25 urpose
Ve icle
RMBS RMBS RMBS RMBS RMBS roceeds (CDO
Bond 26 Bond 27 Bond 28 Bond 29 Bond 30 ($) Trust) µAA¶
RMBS RMBS RMBS RMBS RMBS CDO
Bond 31 Bond 32 Bond 33 Bond 34 Bond 35
µA¶
RMBS RMBS RMBS RMBS CDO

Bond 36 Bond 37 Bond 38 Bond 80
µBBB¶
CDO CDO CDO CDO CDO CDO
Bond 1 Bond 2 Bond 3 Bond 4 Bond 5
CDO CDO CDO CDO CDO referred S ares
Bond 6 Bond 7 Bond 8 Bond 9 Bond 10 or quity

ððð
 
  
  
$

/')*)

_ Cas SF CDO Asset ortfolio
ig lig ts

± ortfolios contain between 60 and 140 bonds
± Assets may be diversified by market sector, owever recent vintage SF
CDOs ave been concentrated in subprime RMBS
± Assets may be diversified by risk profile (intial ratings)
± Assets may be diversified by vintage
± Asset acquisition and selection
_ Asset manager ware ouses bonds prior to issuing CDO notes
_ CDO notes typically issued w en asset manager as accumulated
approximately 60-80% of t e target portfolio
_ Initial portfolio is typically fully ramped wit in 6 mont s of CDO note
issuance

ððð
 
  !
  
$

/')*)

_ Managed vs Static ortfolios

± Static portfolios are typically fully ramped at closing and principal proceeds
are used to amortize t e senior notes
± Managed portfolios are typically partially ramped at closing and principal
proceeds are typically reinvested for a finite period between 3 and 6 years
_ If t e portfolio experiences negative credit migration t en discretionary
trading is limited to ³maintain or improve´ credit quality
_ If t e portfolio significantly under performs t en t e transactions may
s ift to a static portfolio

ððð
 
  #
  
$

/')*)

_ Cas SF CDO Note
ig lig ts

± Credit en ancement comes from subordination and excess spread
± Interest is paid sequentially to note olders
± Overcollateralization (OC) and Interest Coverage (IC) performance tests
are c ecked prior to distributions to subordinate notes
± xcess interest may be used to:
_ If tests are passing t en distributed to referred S ares or quity
_ A portion may be used to repay mezzanine notes
_ If tests are failing t en distributions may be used to cure t e tests
± urc ase new assets
± ay down senior notes

ððð
 
  .
   
$

/')*)

Sample Bespoke SF CDO Structure

/'
/'
  
c    
RMBS RMBS RMBS RMBS RMBS
Bond 1 Bond 2 Bond 3 Bond 4 Bond 5
RMBS RMBS RMBS RMBS RMBS
Bond 6 Bond 7 Bond 8 Bond 9 Bond 10
RMBS RMBS RMBS RMBS RMBS Unfunded
Bond 11 Bond 12 Bond 13 Bond 14 Bond 15 CDS Super-Senior Unfunded
remium Special Revolver CDS
RMBS RMBS RMBS RMBS RMBS
CDS Swap urpose
Bond 16 Bond 17 Bond 18 Bond 19 Bond 20
Counterparty Ve icle
RMBS RMBS RMBS RMBS RMBS (CDO
rotection
Bond 21 Bond 22 Bond 23 Bond 24 Bond 25 Trust) Note
ayments
RMBS RMBS RMBS RMBS RMBS Coupon
Bond 26 Bond 27 Bond 28 Bond 29 Bond 30 (L + bps)
µAAA¶
RMBS RMBS RMBS RMBS RMBS Note
Bond 31 Bond 32 Bond 33 Bond 34 Bond 35 roceeds
($) Unfunded
RMBS RMBS RMBS RMBS First Loss
 CDS
Bond 36 Bond 37 Bond 38 Bond 80

roceeds
LIBOR
($)
(L)

Collateral or
ligible
Investments

ððð
 
  (
  
$

/')*)

_ Bespoke SF CDO Asset ortfolio
ig lig ts

± ortfolios reference between 60 and 100 securities
± Assets may be diversified by market sector but typically ave a
concentration in subprime RMBS
± Assets may be diversified by risk profile (initial ratings
± Assets may be diversified by vintage
± Asset selection
_ ortfolio is negotiated between t e Bespoke CDO note older and t e
CDS Swap counterparty

ððð
 
  +
  
$

/')*)

_ Bespoke SF CDO Note
ig lig ts

± Attac ment points define t e amount of portfolio losses t e structure
needs to sustain before a protection payment would be made
± Detac ment point defines t e maximum amount of protection payments
t at t e notes could be required to make
± Credit en ancement comes solely from subordination

ððð
 
  ,
  
$

/')*)

Sample
ybrid SF CDO Structure

/'
/'

/ 
c    
RMBS RMBS RMBS RMBS RMBS
CDS 1 CDS 2 CDS 3 CDS 4 CDS 5
RMBS RMBS RMBS RMBS RMBS
CDS 6 CDS 7 CDS 8 CDS 9 CDS 10 CDS remium CDS remium
RMBS RMBS RMBS RMBS RMBS Unfunded
CDS 11 CDS 12 CDS 13 CDS 14 Bond 15 Unfunded
Super-Senior
CDS
RMBS RMBS RMBS RMBS Super-Senior Revolver
 rotection
CDS 16 CDS 17 CDS 18 CDS 20 ayments rotection
ayments
CDO CDO CDO CDO CDO
CDS 1 CDS 2 CDS 3 CDS 4 CDS 5 Special
urpose
Note Coupon
Ve icle

  (CDO
(L + bps)
µAAA¶
Trust) CDO
RMBS RMBS RMBS RMBS RMBS
Bond 1 Bond 2 Bond 3 Bond 4 Bond 5 µAA¶
Bond Coupons CDO
RMBS RMBS RMBS RMBS RMBS
(L + bps)
Bond 6 Bond 7 Bond 8 Bond 9 Bond 10 µA¶
CDO Funded
RMBS RMBS RMBS RMBS RMBS Notes
Bond 11 Bond 12 Bond 13 Bond 14 Bond 15 µBBB¶
roceeds CDO
RMBS RMBS RMBS RMBS
 ($)
Bond 16 Bond 17 Bond 18 Bond 20
referred S ares
CDO CDO CDO CDO CDO or quity
Bond 1 Bond 2 Bond 3 Bond 4 Bond 5 roceeds
($)

ððð
 
  !*
  
$

/')*)

_
ybrid SF CDO Asset ortfolio
ig lig ts

± ortfolio assets may be in a cas or synt etic form
± ortfolios contain between 60 and 140 bonds or CDS
± Asset attributes similar to t e cas SF CDO portfolios
± ortfolios are typically managed
_ Asset managers can find relative value on t e same asset between
cas and synt etic markets
_ Asset managers can use t e synt etic market to access collateral
from vintages t at are not available in t e secondary market
_ Asset managers can use t e synt etic market to get full exposure to
cas bonds w ere t ey received a partial allocation

ððð
 
  !)
  -

c -
)*)

RMBS RMBS RMBS RMBS RMBS RMBS RMBS RMBS RMBS RMBS RMBS 
RMBS
1 2 3 4 5 6 7 8 9 10 11 20

µAAA¶ µAAA¶ µAAA¶ µAAA¶ µAAA¶ µAAA¶ µAAA¶ µAAA¶ µAAA¶ µAAA¶ µAAA¶  µAAA¶
RMBS RMBS RMBS RMBS RMBS RMBS RMBS RMBS RMBS RMBS RMBS RMBS  - 

µAA¶ µAA¶ µAA¶ µAA¶ µAA¶ µAA¶ µAA¶ µAA¶ µAA¶ µAA¶ µAA¶ µAA¶
RMBS RMBS RMBS RMBS RMBS RMBS RMBS RMBS RMBS RMBS RMBS
 RMBS
 - 

µA¶ µA¶ µA¶ µA¶ µA¶ µA¶ µA¶ µA¶ µA¶ µA¶ µA¶ µA¶  - 
RMBS

RMBS RMBS RMBS RMBS RMBS RMBS RMBS RMBS RMBS RMBS RMBS

µBBB¶ µBBB¶ µBBB¶ µBBB¶ µBBB¶ µBBB¶ µBBB¶ µBBB¶ µBBB¶ µBBB¶ µBBB¶ µBBB¶
RMBS RMBS RMBS RMBS RMBS RMBS RMBS RMBS RMBS RMBS RMBS

RMBS
 - 

µBBB-¶ µBBB-¶ µBBB-¶ µBBB-¶ µBBB-¶ µBBB-¶ µBBB-¶ µBBB-¶ µBBB-¶ µBBB-¶ µBBB-¶ µBBB-¶  - 0
RMBS RMBS RMBS RMBS RMBS RMBS RMBS RMBS RMBS RMBS RMBS  RMBS

Residual Residual Residual Residual Residual Residual Residual Residual Residual Residual Residual  Residual

ððð
 
  !
 -

c -
)*)

_ ABX.
 Asset ortfolio
ig lig ts

± ortfolios reference 20 bonds
± Assets are all subprime RMBS
± Assets are omogenous by risk profile (intial ratings)
± Assets are originated in a 6 mont time frame
± Asset selection
_ Aggregate a list of t e largest volume subprime RMBS issuers
_ Select two representative transactions from eac issuer
_ Index participants vote on transactions to be included in eac index

ððð
 
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c -  c - 

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 c

ABX.
.BBB ABX.
.BBB
06-2 ortfolio 07-1 ortfolio

µBBB¶ µBBB¶
RMBS 1 RMBS 1
µBBB¶ µBBB¶
RMBS 2 RMBS 2
µBBB¶ µBBB¶
RMBS 3 RMBS 3
µBBB¶ µBBB¶
35 ± 100%
RMBS 4 RMBS 4
µBBB¶ µBBB¶
RMBS 5 RMBS 5
µBBB¶ µBBB¶
RMBS 6 RMBS 6
µBBB¶ µBBB¶
RMBS 7 RMBS 7
µBBB¶ µBBB¶
RMBS 8 20 ± 35%
RMBS 8

12 ± 20%

7 ± 12%
3 ± 7%
µBBB¶ µBBB¶
RMBS 20 RMBS 20 0 ± 3%

ððð
 
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_ TABX.
 Asset ortfolio
ig lig ts

± ortfolios reference 40 bonds from two ABX.
 indices
± Assets are all subprime RMBS
± Assets are omogenous by risk profile (intial ratings)
± Assets are originated in a one year time frame

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_ T e ABX.
 as proven to be effective in providing market transparency in an

ot erwise opaque market
± Allows market participant to express market views
_ T e TABX.
 promises to provide similar benc marking and relative value
views for t e Bespoke SF CDO market
_ TABX.
 will be less effective in benc marking for cas and ybrid SF CDOs
± ortfolios ave significantly different portfolio c aracteristics
± ortfolios are typically managed in SF CDOs
± TABX.
 is equally weig ted by t e largest issuers w ereby SF CDOs
portfolios are typically selected by an asset manager

ððð
 
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xð1 
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