The French have a deserved reputation for philosophical and mental agility. So it is not entirely surprising that, when it comes to innovation in the complex world of structured credit, French banks are often at the front of the pack. While these derivative-based products grow no less complicated, some of them – thanks to structuring teams like the one at BNP Paribas – are becoming more flexible and easier to manage.
Though investors have for some time been able to use collateralised debt obligations (CDOs) to customise their credit exposure, credit default swaps (CDSs) have transformed the market. By making it possible to take short as well as long positions, CDSs have enabled more sophisticated credit trading strategies and opened the gates to the creation of synthetic CDOs and related forms of structured credit. These have proved so popular that the size and number of synthetic deals has now overtaken those in the cash market. And while central bankers continue to worry about the spreading of submerged credit risk, banks such as BNP Paribas continue to innovate.
