UNIVERSITY OF QUEENSLAND

T C BEIRNE SCHOOL OF LAW

NEW APPLICATIONS FOR CREDIT DERIVATIVES∗

PAUL USMAN ALI

Postdoctoral Research Fellow
T C Beirne School of Law
University of Queensland

Principal
MFAS Investment Advisors

Working Paper: June 2001

This paper can be downloaded from the

Social Science Research Network Electronic Paper Collection:
http://papers.ssrn.com/paper.taf?abstract_id=272379

∗
The author would like to thank Marie B Stewart and Douglas J Lucas of J P Morgan, New York
and Linda A Mead of J P Morgan, Sydney for providing information on synthetic credit-linked
structures.
 1

The Australian credit derivatives sector continues to experience strong growth,

with credit derivatives having an aggregate notional value of $18.43 billion being
transacted in the domestic OTC markets during the 1999-2000 financial year.1 In
addition, AUD-denominated credit derivatives were transacted within these
markets for the first time in 2000 (AUD-credit derivatives accounted for over 80%
of credit derivative transacted during 1999-2000, by notional value).2 Moreover,
Australian fund managers have begun to view credit derivatives as a distinct
asset class. During the same period, fund managers invested in credit
derivatives (mainly credit-linked notes) with an aggregate notional value of $945
million.3

This is consistent with the trends in the global credit derivatives market.
Worldwide, the aggregate notional value of credit derivatives outstanding was
US$810 billion (as at 31 December 2000).4 It is estimated that this figure will
reach US$1.97 trillion this year and US$2.55 trillion in 2002.5 Table I sets out a
breakdown of the credit derivatives outstanding worldwide as at the end of 2000,
while Table II provides a breakdown of worldwide credit derivatives transactions
for the calendar year 2000.

Credit derivatives are chiefly used by financial institutions to unbundle and lay-off
the relatively static credit risk on their loan portfolios (including residential
mortgage loans, commercial loans, car loans, credit card receivables, and margin

1
Australian Financial Markets Association, 2000 Australian Financial Markets Report: Overview
(2001), p 28.
2
Ibid, pp 27-28.
3
Id.
4
Sources: Risk Waters Group; British Bankers’ Association.
5
Source: Lehman Brothers. This growth is likely to be assisted by the increase in default rates
due to the present economic slowdown in the United States: “Derivative Trades rise with
Defaults”, CreditRisk, March 2001. See also “The Swaps Emperor’s New Clothes”, Economist, 10
Feb. 2001.
 2

lending receivables), and manage syndication and subparticipation risks.6

However, with the maturation of the credit derivatives market, new applications
for credit derivatives have been developed.

This latter point is exemplified by the breakdown of transactions in Tables I and

II. The most common form of credit derivative continues to be the “vanilla” credit
default swap, but the market has now shifted decisively towards more “exotic”
credit-linked notes.7 Credit-linked notes (comprising credit-linked structured
notes and synthetic credit-linked notes) were the dominant type of credit
derivative transacted during 2000, accounting for 59% of all transactions, by
notional value.

This article examines how credit derivatives can be used to:8

6
G R Duffee and C Zhou, “Credit Derivatives in Banking: Useful Tools for Managing Risk? (Haas
School of Business, University of California, Berkeley and Anderson Graduate School of
Management, University of California, Riverside, 1999). Credit derivatives are also used by
monoline insurers to lay-off the static credit risk on credit-wrapped bonds: Standard & Poor’s,
“Bond Insurers and Credit Default Swaps” (Nov. 2000).
7
See further “Credit Derivatives: Vanilla Volumes Challenged”, Risk, Feb. 2001.
8
For a discussion of the different types of credit derivatives (viz, credit default products, credit
spread products, total rate of return swaps, and credit-linked notes) and the regulation of credit
derivatives in Australia, see P U Ali, “Unbundling Credit Risk: The Nature and Regulation of
Credit Derivatives” (2000) 11 JBFLP 73. See also F Iacono, “Credit Derivatives” in R J Schwartz
and C W Smith (eds), Derivatives Handbook: Risk Management and Control (John Wiley & Sons,
1997); PricewaterhouseCoopers, The PricewaterhouseCoopers Credit Derivatives Primer (1998),
pp 6-40; Deutsche Bank, Credit Derivatives and Structured Credit: A Survey of Products,
Applications and Market Issues (1999), pp 9-16 and 19-22; J P Morgan Chase, The J P Morgan
Guide to Credit Derivatives (Risk, 1999), pp 12-23; S Das, “Credit Derivatives – Products” in S
Das (ed), Credit Derivatives and Credit Linked Notes (2nd ed., John Wiley & Sons, 2000), pp 10-
39; Citigroup, “A Banker’s Primer on Credit Derivatives” (June 1999); G Dufey and F Rehm, “An
Introduction to Credit Derivatives” (University of Michigan Business School, 2000); P J
Schonbucher, “Credit Risk Modelling and Credit Derivatives” (University of Bonn, 2000), pp 60-
65; UBS, “Isolated Transfer of Default or Spread Risk” (June 2000).
 3

Hedge credit risk in M&A transactions;

Hedge currency convertibility risk;

Hedge dynamic credit risk;

Create leveraged positions;

Enhance investment returns;

Exploit credit arbitrage opportunities; and

Create synthetic assets.

Hedging credit risk in M&A transactions

Credit derivatives are typically used by financial institutions, in M&A transactions,

to hedge the credit exposure on the funding of an acquisition, under bridging
finance and syndicated loans. In addition, credit derivatives – in particular, credit
spread put options – are increasingly being used by financial institutions with
existing credit exposures to the bidder or fund managers holding debt securities
issued by the bidder to protect themselves from the consequences of a potential
credit ratings downgrade, where the bidder is acquiring a target of a lower credit
quality.9

A financial institution or fund manager that holds a credit spread put option is
entitled to sell the spread on a reference credit (eg a loan to the bidder, or debt
securities issued by the bidder) to the writer of the option, for the amount by
which the actual spot spread exceeds the strike price of the option. The amount

9
S K Aggrawal, “Credit Derivatives move beyond Plain Vanilla” The Stern Journal, Spring 2000,
at 51.
 4

received from the exercise of the option therefore compensates the holder for
any loss of value on the reference credit, due the ratings downgrade of the
merged entity and the consequent widening (ie deterioration) of the spread on
the reference credit.

Hedging currency convertibility risk

In contrast to conventional foreign exchange instruments (such as forward

foreign exchange contracts, currency swaps and quanto derivatives), credit
derivatives can be customised to hedge currency convertibility risk.10 Currency
convertibility risk is the risk that a sovereign may impose controls restricting the
convertibility of its currency or remittances of foreign currency to offshore parties.

In a typical structure, the party subject to currency convertibility risk (eg an

investor in local equities) enters into a total rate of return swap whose pay-out is
linked to the credit quality of a proxy asset, usually debt securities issued by the
sovereign. Under the swap, the investor is obligated to pay the derivatives
dealer, an amount equivalent to the return on the proxy asset in exchange for the
payment of an amount referable to the investor’s cost of carrying its local
investment. If an appropriate proxy asset has been selected, the imposition of
currency controls should lead to a fall in the value of the proxy asset. The
consequent reduction in the investor’s swap obligations and the concomitant
increase in the dealer’s net obligations should thus compensate the investor for
any fall in the value of its investment, due to the currency controls.

Hedging dynamic credit risk

As noted above, credit derivatives are mainly used to manage static credit
exposures, exemplified by the credit risk on bank loans. Now, however, financial

10
See further P U Ali, “Cross-Border Finance and Hedging Currency Convertibility Risk” (2001)
29 ABLR 162.
 5

market participants have begun to use credit derivatives to manage the dynamic
credit risk on market instruments, primarily other OTC derivatives.11 Market
instruments are marked-to-market on a regular basis, meaning that not only the
level of credit exposure but also which of the counterparties is obligated to the
other may change from valuation to valuation (in contrast to, say, a commercial
loan where the loan balance and the roles of creditor and debtor do not change
as a result of changes in the value of the funded asset).

A derivatives dealer can protect itself from a ratings downgrade of its

counterparty or other credit events, by entering into a credit default swap with a
third party, where the pay-out to the dealer under the swap is linked to the mark-
to-market value of the market instrument at the time of the occurrence of the
credit event. Credit derivatives thus provide an alternative to unwinding
derivatives positions where a credit event such as a ratings downgrade has led to
an increase in the dealer’s credit exposure and caused the dealer to breach its
internal risk management guidelines (eg counterparty exposure limits, risk
concentration limits).

Creating leveraged positions

Credit derivatives, such as total rate of return swaps, can be used to create
leveraged positions.12 In a total rate of return swap, one of the counterparties is
obligated to pay the other amounts equivalent to the return on a reference credit,
in exchange for periodic interest payments referable to the first counterparty’s
cost of funds in respect of the reference credit. The first counterparty is

11
These swaps are known as “credit intermediation swaps”. See further J P Morgan Chase, op cit
n 8, pp 17-19; S Das, “Credit Derivatives – Applications” in Das, op cit n 8, pp 196-200; Prebon
Yamane, “Using Credit Derivatives to manage Dynamic Market Contingent Risk” (Jan. 2000).
12
Ali, op cit n 8, at 77. See also Prebon Yamane, “Using Credit Derivatives to achieve Leverage”
(Jan. 2000).
 6

consequently able to lay-off the credit risk on the reference credit via the receipt,
from the second counterparty, of a guaranteed minimum rate of return.

However, the total rate of return swap can also be characterised as a leveraged
financing of the reference credit – the first counterparty has, in effect, funded the
acquisition by the second counterparty of the reference credit. During the term of
this in-substance loan, the second counterparty makes interest payments on the
loan to the first counterparty. The second counterparty also bears all the risks
associated with ownership of the reference credit ie it is entitled to all income and
any upside performance but also bears the full risk of downside performance.
The loan is discharged through the “sale” of the reference credit on maturity, with
the second counterparty retaining any increase in value or absorbing any fall in
value. Indeed, in practice, total rate of return swaps are more often used to
create leveraged exposure to reference credits, rather than to hedge the credit
risk on such credits.

Enhancing investment returns

Fund managers seek to enhance the investment returns on their portfolios,

typically by purchasing relatively high-yielding, undervalued debt securities. This
objective can also be achieved by transacting a credit default swap linked to a
basket of debt securities (identical to, or with the same tenor and credit-rating as,
the above debt securities), without the fund manager having to bear the up-front
cost of actually acquiring the securities.13

Basket-linked credit default swaps are generally structured on a first-to-default

basis, where the occurrence of a credit event in respect of any one of the basket
securities leads to the unwinding of the swap and a reduction in the value of the

13
Das, op cit n 11, pp 214-215. For a discussion of more complex yield enhancement structures
involving credit spread products and credit exchange swaps, see Prebon Yamane, “Using Credit
Derivatives for Yield Enhancement” (Jan. 2000).
 7

redemption payment by either a fixed amount or the fall in the value of the
defaulted security. The attractiveness of these swaps to investors is increased
by the fact that they pay an enhanced coupon, in excess of the coupon on the
underlying basket securities. This enhanced coupon compensates for the fact
that, because of their first-to-default structure, such swaps are of a lesser credit
quality than the individual basket securities.

Exploiting credit arbitrage opportunities

Credit derivatives can also be used to exploit funding and capital arbitrage
opportunities.14

Funding arbitrage

Lower-rated banks have a higher cost of funds than more highly-rated banks.
This makes it difficult for the former to achieve positive spreads on loans to
highly-rated corporations. Such banks are faced with two unpalatable
alternatives – that is, making sub-economic loans to highly-rated borrowers, or
exiting the highly-rated segment of the corporate market and risking a
deterioration in their loan portfolios through a greater concentration on lower-
rated borrowers.

Credit derivatives, however, offer a straightforward means of resolving this

dilemma, by enabling such banks to arbitrage the funding differential between
differentially rated banks.

A lower-rated bank can, by selling protection under a credit default swap,

assume the credit risk on a loan to a highly-rated corporation made by a more
highly-rated bank. This has significant benefits for both banks. The credit default

14
Das, ibid, pp 200-206; Prebon Yamane, “Using Credit Derivatives for Capital and Funding
Arbitrage” (Jan. 2000).
 8

swap, in contrast to a loan, does not need to be funded, thus minimising the
impact of the lower-rated bank’s unfavourable cost of funds. Moreover, the
assumption, under the swap, of an exposure to a high quality credit should
enhance that bank’s loan book as well as its risk-return profile. In addition, the
highly-rated bank is able to diversify its portfolio (by reducing its aggregate
exposure to that corporation or to a particular industry or geographic region) and
may also be able to maximise its relative funding advantage where the fee paid
by it for protection under the swap is less than the spread on the loan.

Risk capital arbitrage

Banks can also use credit derivatives to arbitrage the different risk capital
requirements applicable to their banking and trading books.

Where, for instance, an Australian bank makes an on-balance sheet loan to a

corporation, it will be required to include the loan in its banking book and hold risk
capital equal to 8% of the balance of the loan.15 However, the same credit
exposure, if assumed by selling protection under a credit default swap, will be
subject to less stringent risk capital requirements where the swap qualifies for
inclusion in the bank’s trading book.16

15
APRA, APS 110.6; APS 112.3; AGN 112.1.29.
16
APRA, AGN 113.1.1; AGN 113.4.2, 113.4.14 and 113.4.18.
 9

Creating synthetic assets

Synthetic assets – tailored to meet the needs of fund managers and other
investors – can be created by securitising credit derivatives. These synthetic
assets, called “credit-linked notes”, fall into two categories:

Credit-linked structured notes, which are created by embedding credit

derivatives in debt securities; and

Synthetic credit-linked notes, which are created by issuing debt securities

against credit derivatives.

Credit-linked structured notes

The most common form of credit-linked structured notes is a debt security in

which a credit default swap has been embedded (called “credit default-linked
notes”).17 An investor who holds such notes will receive an enhanced coupon
during the term of the notes. If no credit event (eg a payment default, a cross-
default or cross-acceleration, an insolvency event, a restructuring event, or a
credit ratings downgrade) has occurred before or at the maturity of the credit
default-linked notes, the notes will be redeemed by the issuer for their face value.
If, however, a credit event does occur, the notes will be immediately redeemed
for their either face value less a fixed amount or the then market value of the
reference credit.18

17
Deutsche Bank, op cit n 8, p 15; Moody’s Investors Service, “Understanding the Risks in Credit
Default Swaps” (March 2001), at 1. The Moody’s paper contains a detailed discussion of the risks
associated with credit default swaps embedded in credit default-linked notes and backing
synthetic credit-linked notes. Recent examples of credit default-linked notes include: Enron Credit
Linked Notes Trust; Freddie Mac’s MODERNs (Mortgage Default Recourse Notes); Lehman
Brothers’ RACERS (Restructured Asset Certificate with Enhanced Returns). See also KBC
Derivatives, “Take More Equity for Credit” (Feb. 2001).
18
S Das, “Credit Linked Notes – Structured Notes” in Das, op cit n 8, pp 85-87.
 10

The two other main types of credit-linked structured notes are:

Total return credit-linked notes (debt securities in which a total rate of

return swap has been embedded); and

Credit spread-linked notes (debt securities in which a credit spread

forward contract has been embedded).

Both these types of credit-linked structured notes, like credit default-linked notes,
pay an enhanced coupon. In the case of total return credit-linked notes, the
notes will, on maturity or following the occurrence of a credit event, be redeemed
for the market value of the reference credit. Investors holding such notes thus
participate fully in any upside or downside performance of the reference credit.19
Alternatively, credit default-linked notes and total return credit-linked notes may
be physcially-settled – where the notes are redeemed by the delivery to the
investors of a rateable share of the securities or other assets comprising the
reference credit.

In the case of credit spread-linked notes, the notes will, on maturity or following
the occurrence of a credit event, be redeemed for an amount adjusted to take
account of the then spread on the reference credit. The investor thus gains if the
spread has narrowed (ie improved) but loses if the spread has widened (ie
deteriorated).20

19
Ibid, pp 73-76. The pay-out under a total return credit-linked note may also be leveraged, with
the investor receiving a multiple of the positive or negative change in value of the reference credit
at the time the note is redeemed (called “leveraged total return credit-linked notes”): ibid, pp 76-
78.
20
Ibid, pp 80-83.
 11

Principal-protected credit-linked notes

Credit-linked structured notes may also incorporate a principal-protection feature,

under which the repayment of the principal amount is guaranteed.21 An investor
in these notes will receive an enhanced coupon (although the rate of return on
the notes will, all other things being equal, be less than the rate of return on
credit-linked notes without principal protection). So long as no credit event
occurs before or at maturity of these principal-protected credit-linked notes, the
notes will be redeemed for their face value on maturity. If, however, a credit
event does occur, the coupon on the notes will terminate and the notes will
generally be redeemed immmediately for the principal amount.22

Alternatively, the terms on which the notes have been issued may provide that
the notes will be redeemed for their face value only on maturity, notwithstanding
the earlier occurrence of a credit event. Such notes will, however, usually also
provide that the investor will, if no credit event has occurred, receive a boosed
principal amount (eg 120% of the face value of the notes) or the face value of the
notes plus an amount reflecting a share of the upside performance of the
reference credit.

21
These credit-linked notes are analogous to capital-protected equity-linked notes: for example,
Solar protected notes where only the coupon is at risk (the coupon is linked to the price
performance of a basket of shares) and Neptune and Rainbow protected notes which do not pay
a coupon but where the investor shares in the upside price performance of a basket of shares.
See further Credit Lyonnais, “New Correlation Structures for Equity-Linked Notes” (Jan. 2001).
22
J M Tavakoli, Credit Derivatives: A Guide to Instruments and Applications (John Wiley & Sons,
1998), pp 206-207; Das, op cit n 18, pp 87-88. See also First Union Securities, “Maximizing
Return and Managing Risk with CLO Principal Protected Notes and Other Synthetics” (July
2000).
 12

Synthetic credit-linked notes

In a typical structure for the creation of synthetic credit-linked notes, a special

purpose vehicle (“SPV”) sells protection under a credit derivative (usually, a
credit default swap or, less commonly, a credit default-linked note or a total rate
of return swap) to a financial institution.23 The SPV then issues synthetic credit-
linked notes backed by that credit derivative to investors, thus passing the credit
risk assumed by the SPV to the investors. The structures under which these
notes are issued, are called “synthetic CLOs” (Collateralised Loan Obligations) or
“synthetic CDOs” (Collateralised Debt Obligations).

If no credit event occurs during the term of the notes, the notes will be redeemed,
on maturity, for their face value. If, however, a credit event does occur, the notes
will be immediately redeemed for their face value less the amount referable to
the SPV’s obligations to the financial institution under the above credit derivative.
Such notes pay an enhanced coupon (funded by the fee paid by the financial
institution under the credit derivative and the return of the investment of the
subscription proceeds of the notes).

Synthetic credit-linked notes are usually issued in multiple tranches, with the
above financial institution retaining the most junior tranche (called the “first loss
position” or the “equity piece”). In some structures, the financial institution may
also retain the most senior tranche (called the “super senior position”).24

23
See Ali, op cit n 8, at 77-78; P U Ali and M Tisdell, “Collateralised Debt Obligations, with an
Overview of the CONDOR Securitisation Programme” (2000) 18 C&SLJ 371, at 372. See also
Das, op cit n 11, pp 207-210; Prebon Yamane, “Using Credit Derivatives to create Synthetic
Assets” (Jan. 2000).
24
For a more detailed description of the various synthetic structures, see P U Ali, “The Future of
Loan Portfolio Management: An Overview of Synthetic Collateralised Loan Obligations” (2001) 12
JBFLP 58. See also Basel Committee on Banking Supervision, Consultative Document: Asset
Securitisation (Bank for International Settlements, Jan. 2001), pp 25-28.
 13

The vast majority of synthetic credit-linked notes have involved the securitisation
of the static credit risk on loan portfolios25 or debt securities portfolios (including
corporate bonds and asset-backed securities),26 although, in a small number of

25
Recent examples of such programmes include: Amstel (ABN-AMRO Bank); BAC (Bank of
America); Banco Santer Central Hispano; Bankgesellschaft Berlin; BISTRO (J P Morgan Chase);
Blue Stripe (Deutsche Bank); CAST (Deutsche Bank); Castle Harbour (Bank of America); CHLOE
(Credit Agricole Indosuez); Cygnus (KBC Bank); Eurohypo; Euroliberte (BNP Paribas); Europa
(Rheinische Hypothekenbank); Globe (Deutsche Bank); HAT (UBS); HIGHTS (Bank of America);
Hesperic (Banco Santander); HK Synthetic MBS (ABN-AMRO Bank); IGLOO (Natexis Banques
Populaires); IKB Deutsche Industriebank; Leonardo (Banca Commerciale Italiana); Lunar (Bristol
& West); Marylebone (Abbey National); NATIX (Natexis Banques Populaires); Neuschwanstein
(Bayerische Landesbank Girozentrale); Olan (BNP Paribas); Promise (Kreditanstalt fur
Wiederaufbau); Scala (Banca Commerciale Italiana); SERVES (Bank of America); Sherpas
(Provident Bank); Sirius (Credit Lyonnais); Silver Eagle (Dresdner Bank); Sundial (Rabobank).
See further B Masters and K Bryson, “Credit Derivatives and Loan Portfolio Management” in J
Francis, J A Frost and J G Whittaker (eds), The Handbook of Credit Derivatives (McGraw Hill,
1999), pp 77-80; S Das, “Credit Linked Notes – Credit Portfolio Securitization Structures” in Das,
op cit n 8, pp 144-159; Societe Generale, CBO, CLO, CDO: A Practical Guide for Investors
(2000), pp 5-8; S Henke, H P Burghof and B Rudolph, “Credit Securitization and Credit
Derivatives: Financial Instruments and the Credit Risk Management of Middle Market Commercial
Loan Portfolios (Ludwig-Maximilian University, Munich, 1998); O Melennec, “CBO, CLO, CDO: A
Practical Guide for Investors” (2000) 3 Securitization Conduit 21 (No. 3), at 26-29; C Smithson
and G Hayt, “Credit Derivatives: Implications for Bank Portfolio Management” (2000) J of Lending
& Credit Risk Management 42; R D Brown, “Managing Credit Risk with Synthetic Collateralized
Loan Obligations” (Federal Reserve Bank of Philadelphia, 2nd Qtr, 2000); “Synthetic Structures
drive Innovation”, Risk, June 2000; Moody’s Investors Service, “Synthetic CDO’s: European
Credit Risk Transfer ‘A La Carte’” (July 2000); “Squeezing the Balance Sheet from Both Sides”,
Euromoney, Sept. 2000; “CDO Market looks to New Structures”, Risk, Dec. 2000; Fitch IBCA,
Duff & Phelps, “Synthetic CDOs: A Growing Market for Credit Derivatives” (Feb. 2001), at 4-7.
26
Recent examples of such programmes include: Amadeus (Bank Austria); Blue Eagle (Barclays
Bank); Brooklands (UBS); CABRAL (ESAF and Investil); EPOCH (Morgan Stanley Dean Witter);
Equinox (Rabobank); European Dream (Westfalische Hypothekenbank); Fidex (BNP Paribas);
Padova (Banca Antoniana Popolare Veneta); Segesta (Banca 121); TORUS (Toronto-Dominion
Bank); Nerva (Barclays Bank); North Street (UBS); PARIS (Natexis Banques Populaires); Repon
(Deutsche Bank); Rivera (BNP Paribas). These programmes usually have the ability to securitise
 14

transactions, such notes have been issued in respect of the dynamic credit risk
on derivatives books.27

the credit risk in respect of both loans and debt securities, although they are heavily tilted towards
the latter.
27
Recent examples of such programmes include: Alpine (UBS); Europower (Morgan Stanley
Dean Witter); HAN (Korea Development Bank); Palmyra (Citigroup); Tagus (Banco Comercial
Portugues, ESAF and AF Investimentos). See further S Das, “Credit Linked Notes – Repackaged
Notes and Repackaging Vehicles” in Das, op cit n 8, pp 118-120; Fitch IBCA, Duff & Phelps, op
cit n 25, at 3-4.
 15

Table I: Breakdown of credit derivatives outstanding as at 31 Dec. 2000

Credit derivative type Percentage of all transactions

outstanding (by notional value)

Credit default swaps (including basket- 50%

linked credit default swaps)

Credit-linked notes: credit-linked structured 9%

notes (including principal-protected credit-
linked notes)

Credit-linked notes: synthetic credit-linked 26%

notes

Credit spread products (including credit 3%

spread options and credit spread forward
contracts)

Total rate of return swaps 12%

(source: Risk Waters Group)

 16

Table II: Breakdown of credit derivatives transactions for 2000 (by notional value)

Credit derivative type Percentage of transactions (by notional

value)

Credit default swaps (including basket- 32%

linked credit default swaps)

Credit-linked notes: credit-linked structured 28%

notes (including principal-protected credit-
linked notes)

Credit-linked notes: synthetic credit-linked 31%

notes

Credit spread products (including credit 1%

spread options and credit spread forward
contracts)

Total rate of return swaps 8%

(source: Risk Waters Group)