Commerzbank signs up for CDOSheet in NY

New York, 1 July 2005

Commerzbank's market risk group in New York has started using CDOSheet from London-based vendor CDO2 to price its collateralised debt obligations (CDOs) and CDOs of CDOs (CDOs-squared).

The tool uses a Monte Carlo-based simulation to calculate deltas, a measure of the sensitivity of the price of the CDO to movement in the underlying bonds, and the risk of default in the CDO, on a daily basis.

"Our main requirement is from a regulatory standpoint: to be able to price and be able to measure what the underlying corporate exposures are and this program does that," says Michael Lundquist, vice-president of market risk at Commerzbank in New York. He adds that CDOSheet won out over other products because of its cost-effectiveness, accuracy and speed.

Gary Kendall, director and founder of CDO2 in London, says buy-side clients such as Commerzbank's market risk group are increasingly moving away from relying on their counterparties to value trades. This comes partly in response to regulatory pressure, such as accounting standards IAS 39 and FAS 133, which require firms to show they have valued investments using independent systems. Previously, a client would have relied on the bank that had sold it the CDO to price it as well.

"Very few people have software that lets them price the CDO-squared transaction," says Kendall. "Commerzbank is right in front of the buy side in this."