Tullett Prebon and Calypso Technology believe that this is an important initiative, as it has the potential to recreate liquidity in a marketplace which has been starved of it in recent times.
Bespoke Synthetic CDOs are highly customizable collateralized debt obligations in which the underlying portfolio comprises credit default swaps. Counterparties typically exchange tranches of risk on agreed portfolios of credit default swaps and the tranches themselves are defined by the level of credit risk exchanged. They have been heavily used as investment and trading instruments over the last decade but the events of the credit crisis have led to dramatic reductions in liquidity and transparency as well as very large shifts in valuations. Many institutions who wish to provide liquidity and support the marketplace are finding current processes to be inadequate. As has been well documented, regenerating liquidity in Synthetic CDOs is something which will benefit the financial marketplace both by enabling short-term reduction of unwanted risk and also allowing a more general recovery.
Recognizing this opportunity, Tullett Prebon and Calypso's Galapagos unit have come together to develop a platform that will bring both operational and transactional efficiency to the process. Clients will be able to upload individual trading objectives and constraints to the highly secure and confidential Galapagos environment in which the platform's evolutionary algorithms will then identify the optimal risk reducing trades in the market at any one time. The service is due to be launched to clients in Q1 2010.
Mike Binns, MD, Credit & New Products, Tullett Prebon, noted, "Tullett Prebon and Calypso Technology have been working jointly to test this initiative with the main market participants in London and New York. Our clients indicated overwhelming support for this innovative approach which will attempt to solve one of the more intractable problems currently exercising the financial marketplace."
"This is another example of how we are responding to the aftermath of the crisis with innovation and agility," Charles Marston, Chairman and CEO, Calypso Technology, commented, "With Tullett Prebon, we identified a need and a solution, and then worked together to bring the market players together to make it happen, demonstrating both leadership and vision."
John Mooren, General Manager of Calypso's Galapagos business unit, added, "As the financial services industry continues to experience change, we are seeing a greater demand in specific areas of the credit markets and beyond. We are excited by the continued success of our Galapagos product and look forward to working closely with Tullett Prebon."