Their status as independent third parties makes trustees a logical choice to act as collateral administrators on CDOs. Traditionally, the servicer – who is sometimes the originator – has acted as collateral manager in structured finance deals. But the growth of the synthetic CDO market has involved trustees running concentration tests and portfolio profiles, supplying data for rating agency models and monitoring subordination levels.
Moody’s has criticized trustees’ failure to oversee servicers in some US asset-backed securitization deals. Trustees argue that if they are paid a low fee, they should only be expected to perform their basic administrative functions.
Enhancement
Giving corporate trustees the collateral administration role helps resolve this argument. “There is no ambiguity as to who is watching the shop,” says Jocelyn Lynch, vice-president, global trust services, The Bank of New York. “Every time a trade is proposed, we run the models and stress tests. We know within an instant if there is any additional element of risk in a transaction. Although it isn’t acknowledged by the rating agencies, we can effectively provide credit enhancement.”
And trustees can charge separate rates for their different functions to reflect the more demanding nature of their work on CDOs.