Contents

Investors

Alternative investment?

Transition emerges between playing direction as a trade versus picking exposure as an investment

With investment grade index tranches currently offering limited relative value, investors are increasingly looking to high yield and LCDX tranches for information and potential returns. However, the move has highlighted a transition in the market between playing direction as a trade versus picking exposure as an investment.

IG tranches currently offer limited relative value opportunities, according to Credit Derivatives Research senior research analyst Byron Douglass, because flow is so technical and one-way due to continuing bespoke unwinds. "The return in IG tranches has less to do with fundamentals, whereas the names in the high yield index are more prone to defaulting, so it is possible to put on trades that take into account views on underlying credits, for example. Looking across high yield tranches as well as LCDX tranches should therefore allow for more opportunities to trade across markets," he says.

For instance, at end-December LCDX super-seniors tightened relative to high yield super-seniors, with high yield tightening by 200bp shortly afterwards. "These are big moves to potentially take advantage of," Douglass notes. "In any case, there isn't much appetite for taking new risk on in IG tranches, so the future for the sector is uncertain at the moment. By trading high yield tranches against LCDX tranches or IG versus LCDX, as examples, not only can investors glean significant amounts of information, but it is also possible to generate interesting returns."

One CSO manager agrees that following HY and LCDX tranche activity is a good way of extracting information, but he is less convinced about buying into such trades. "This is still a very uncertain world. I think IG actually has a better chance of coming back to liquidity," he notes.

Jason Pratt, md at Peritus Asset Management, says that he's generally cautious regarding the activity in high yield-related tranche product because the focus historically has not been on the underlying names but rather a directional bet. These indices are not representative of the broad HY market and reflect more of the fallen angel activity of the past 12-18 months. Similarly, activity in LCDX-type product provides some theoretical comfort regarding recovery and seniority, but there is a possibility that if correlation is utilised in this asset class recovery performance may be watered down.

However, he notes: "I see the argument that some are making to playing the right tranches in the high yield/LCDX space: the underlying seems to have stabilised and the overhang in the leveraged loan market is much reduced. Our focus is on the cash side, so we see a fundamental yield opportunity and very real unlevered cashflow in the form of the accompanying coupon, if you can pick credits that withstand the current environment. Providing you can survive the lack of liquidity, the discount associated with the market provides a sense that we are as close as you can get to investing confidently in an asset class regarding your principal investment." Historically, focusing on picking the right names has often been overlooked in tranche product.

Lack of liquidity in the high yield and leveraged loan markets is expected to result in significant refinancing risk for issuers this year and beyond, with debt-for-equity swaps in subordinated classes already taking place or being discussed among participants. As such, HY/LCDX tranche activity is being viewed as a directional relative value opportunity rather than being based on fundamental credit expectations.

The focus on this area therefore begs the question as to who the real buyers of HY/LCDX product are these days. The natural buyers historically - such as large financial institutions - have suffered significant write-downs and so aren't seemingly able to take on risk as in the past, while hedge funds that have survived generally no longer have access to leverage to make these trades attractive.

"Those with money to put to work may be seeking real compensation for their exposure given what happened to IG over the past year," suggests Pratt. "But from a practical standpoint taking on exposure to high yield product may still be a tough sell - how many investors who were big players in synthetic product truly have the capability to take on the higher yielding risk regardless of how attractive the maths is today?"

He adds that the economy keeps getting in the way and that is where the value of the manager comes into play. "Playing the direction as a trade versus picking exposure as an investment is the transition we are seeing presently. Clearly our expectation is that investors see value in our efforts versus buying a trend."

CS

Operations

Unintended consequences

Accounting board seeks clarification of IAS 39 amendments

Accounting standards boards went into overdrive in the final weeks of 2008, publishing for public comment a number of draft proposals for amendments to rules on fair value accounting and the reclassification of financial assets. The proposals, issued with unusually short comment periods, are set to tackle unintended consequences that have arisen from the amendments to IAS 39, which were pushed through in October 2008 (see SCI issue 111).

One such amendment currently under discussion is the IASB's proposal to clarify the accounting treatment for embedded derivatives. At round-table discussions organised by IASB and FASB in December, members requested that the board clarify the requirements in IAS 39 in order to prevent any diversity in practice developing as a result of the amendments made to the standard to permit the reclassification of certain financial assets.

The exposure draft proposes amendments that would require an entity to assess whether an embedded derivative is required to be separated from a host contract when the entity reclassifies a hybrid (combined) financial asset out of the fair value through the profit or loss category. A second proposal requires the assessment to be made on the basis of the circumstances that existed when the entity first became a party to the contract. Finally, a third proposal requires that, if the fair value of an embedded derivative that would have to be separated cannot be reliably measured, the entire hybrid financial instrument must be marked at fair value through the profit or loss category.

According to Martin Knocinski, regulatory and accounting specialist at UniCredit, the first of the proposed amendments appears adequate in order to avoid fair value accounting for embedded derivatives from being circumvented, as it simply harmonises the newly amended IAS 39 and IFRIC 9. However, the third proposal may be more problematic, he says. "Notwithstanding the fact that there have been some clarifications to the assessment of the fair value of instruments for which no active markets exist, the recent past has shown that fair value measurement under current market conditions remains a complex issue."

IASB has proposed an effective date of annual periods on or after 15 December 2008. "Due to the urgency of the clarifications provided in the Board's exposure draft, the usual effective date of new IFRS and amendments to IFRS of 6-18 months from the date of issue would clearly not be appropriate in this case," adds Knocinski.

However, he suggests that - as the amendments of IAS 39 regarding reclassifications were published on 13 October 2008 - there is a "window" of slightly more than two months before the application of the proposed new rules would be required. "In other words, entities that applied the new rules on reclassification for hybrid instruments that have initially been designated as trading assets and whose annual reporting period ends before 15 December had the chance to avoid fair value accounting for derivatives embedded in hybrid instruments to a certain extent."

Meanwhile, a vote is expected today, 7 January, on FASB's proposed change to the rules on guidance for certain beneficial interests in asset securitisations. FSP EITF 99-20-a proposes to amend rules for 'Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitised Assets' (see News Round Up for more).

AC

Structuring/Primary market

Carving out value

CDO retranching gains momentum

Interest among arrangers and investors in retranching CDOs - in particular ABS CDO super-senior tranches - appears to be increasing, driven by the desire to elevate the rating on a smaller portion of a security and reduce potential loss exposure. Given that the trend reflects the wholesale downgrades in US sub-prime RMBS, there is some speculation that CRE CDOs could become the next area of focus for retranching activity.

Lapo Guadagnuolo, analyst at S&P, confirms that a handful of ABS CDO notes have been retranched recently. "Rather than selling the position and crystallising a loss, some senior noteholders impacted by severe downgrades are choosing to split the note so that the 50%-100% portion, for example, can achieve a better rating," he explains.

He adds: "They can then present a higher rating internally and achieve the requisite capital relief. For example, when an asset that was previously rated triple-A is downgraded to triple-B one could argue that the top half of it can possibly retain its high creditworthiness."

One structured credit player indicates that, given most ABS CDOs have already been sold off, the remaining exposure is largely with investment banks. "As such, the CDO retranching trend is largely being driven by banks tidying up their balance sheets," he says. "The newly created senior tranche should be money-good and so the investor can continue holding it, while potentially selling on the junior piece."

A retranched transaction involves the sale of one or more securities issued by an existing deal to a new SPE that will then issue one or more new notes. The new notes are backed by the same collateral that supports the retranched deal.

Retranching can also be undertaken within an existing structure by carving new senior and subordinated tranches out of an existing tranche. The process aims to create structural and/or legal subordination within an existing tranche, and to reclassify the different credit risk levels.

According to Guadagnuolo, in a full retranching the transaction documentation would have to be amended because it essentially involves issuing a new deal. However, in particular if it's just a single noteholder looking to re-evaluate their position, the retranching exercise could occur simply via writing a new CDS on the position. In this case, the documentation of the underlying deal wouldn't be affected.

A retranched security typically has a smaller par balance than the existing CDO tranche, with interest and principal proceeds being passed through to repay the principal and interest due to the retranched security.

Due to the sector's volatile performance, individual retranched ABS CDOs with substantial exposure to downgraded collateral are generally not eligible to receive a triple-A rating. Typically, the highest rating that S&P, for example, will assign to retranched securities is single-A.

The genesis for cash CDO retranching was in the restructuring of SIV portfolio vertical slices into term deals, although this typically only involved AAA/AA assets. Sources suggest that CRE CDOs could also see retranching activity in the future, given potential ratings volatility in the CMBS sector.

CS

Investors

F# - towards a sustainable benchmarking of investment risk

Stefan Wasilewski, ceo of Contingent Capital Corporation, aims to create better performance metrics for investors by identifying practical recursive boundaries in the credit/capital markets

"I made a mistake": Alan Greenspan (Financial Times: Alan Beattie and James Politi, Washington, 23 October 2008). Such are the words of great men, for even in troubled times their self-effacing manner proves useful guidance. While Greenspan may feel this way, he is a product of his environment - one that has seen the cumulative development of financial instruments and strategies that have not been thought through as to their impact on a complex economy, mainly because risk is thought discrete and the methods used to price it flawed.

To an engineer the control of a machine is built-in and, although the economy is not a machine but an intensely connected complex of ever-emerging businesses, the process of control needs to be structured likewise. Pricing investment risk in this environment should never have been left to opaque institutions, or processes, which do not recognise the co-dependences of business and systemic functionality.

To do so is to ignore the correlation of events in a highly connected world, that these are dynamic and conditional, whose outcomes are unknowable. This does not mean unmanageable, but that the control process be built-in to businesses and government in a consistent manner - transparent yet using different parameters.

Transparent means that data, assumptions and processes need to be monitored and published in a timely fashion. As far as accounting for results is concerned, it should be recognised that budgeting and reporting to investors is founded on dynamic processes which are therefore changeable; usually out of date; and co-dependent upon others within a complex dynamic network (both internal and external to the business).

The works of Stafford Beer, Fredrick Vestor and others are examples of how to manage the internal dynamics of a business and point to a methodology that synthesises the approaches of investors such as Warren Buffett so that extreme outcomes such as the credit crunch 2008 are reduced in frequency but allow investors to 'take their risks freely'. This paper aims to compare the background processes to two extreme events in the financial arena - the 'Reinsurance Spiral of the late 1980s' and the '2008 Credit Crunch' show their commonalities - and propose methods that would improve governance.

It is believed the consequences would be that better and timelier data is created; liquidity flow is maintained in all but gross systemic failure; and investment risk more ably assessed and priced. The paper is not meant to be an exhaustive history but more a focus on the processes that brought about the current problem in both insurance and the capital markets, and how a solution may be found.

Dynamic, conditional and unknowable: a reasonable description of the management of a business?
At the heart of the capital markets, and especially credit, lies the measure of performance and longevity of earnings. The assumptions made in arriving at such 'risk prices' should therefore embody a measurement of management performance, with respect to local and regional markets.

But where is the data to support them? Time is a vital part of all pricing, regardless of contract type, but we benchmark it to a clock not the lifespan of a business.

It is not fashionable now, but it was a generally accepted belief that a business started, developed and then either morphed into another or died. During its life span the perturbations of the world would test viability, whether these are nature, accident or economic. Success or failure would be measured by its sustaining existence and cumulative growth.

We could therefore argue that a business is dynamic because it is subject to the changes wrought in production and environment; conditional because it is dependent upon structure and boundary parameters; and unknowable because the size and impact of any change cannot be foreseen, as the conditions that spawn the change operate outside of the businesses view.

No differentiation of type of business is made at this time, as the primary goal is to define an optimised business. Therefore widget manufacturers sit alongside bankers in functional and process terms: i.e. the objective of a business is to take certain resources and change and/or combine them into others for onward use.

Time plays an important part in business, being essential in the acquisition of resources, the length of time a reaction/process takes to complete or the delay in obtaining a decision through information exchange or management direction. A good business is said to exist when each component knows its place and the time it has to be there - and because most of a business consists of human components these comprise the better part of management's considerations.

A bad business may still make a profit, but the length of time it exists is directly related to how much effort it takes to recognise realities and how long this is sustained. In between, the spectrum of performance varies, but essentially the comparison will be stakeholder satisfaction and the longevity of the business. Investors will stay with a successful business, even if returns are lower, if they see it is sustainable.

In designing the Viable System Model Stafford Beer showed that all businesses have a common set of functions (as separate to processes), even though the products and their production processes may change. Essential within the model were the control and communication functions designed to learn, then cope, with events as they occurred within the whole. The absence or weakness of any component or function would have a direct effect on the rest of the business.

Are we only as good as our weakest link? Beer did not think so, for we could optimise performance if we planned ahead to compensate for most eventualities.

Therefore audit and learning; planning and control; along with production are linked together by a communication network that would ideally overcome delays in decisions as long as the founders and then managers of the business have the vision to establish them.

Embedded within this system is a reporting process that must be clear and concise, timely in communication and held accountable at each level of operation. If the reports only reveal good news, there's a problem. All businesses have difficulties and delays; how you overcome them is the essential part.

If this self-similar functionality exists and we are in a business with several divisions spread over different geographical locations, then we say there is a 'recursive' nature to the business with each area and layer having its own set of dependencies, boundaries and parameters.

Dynamic? Yes. Conditional? Yes. Unknowable? Yes. But manageable? Yes. Only when the perturbation event is catastrophic in size would the system breakdown. But it is within the hands of management to set the boundaries at which a catastrophe is determined to exist, and it is up to management to maintain a constant awareness of the state of the business (system) in order to know whether a catastrophe looms.

The research objectives
To understand the solution we must first recognise the problem and its genesis. But why should we consider the whole, not just the capital markets? So why include insurance, as well as structured finance?

It is because structured finance uses insurance products/processes learned from insurance companies to separate and off-set component risks, often at prices that enhance the returns for the original capital market investors. Before we investigate this relationship and the end result in the credit markets, a short journey through history may help.

The second objective is to discover what the practitioners of the business think their world view is and how they go about proving it. This may be a classic approach to the ontology and epistemology of the participants in a system, but in a straw poll of senior UK banking and capital markets executives the first agreement was that there is no consensus of time, morality doesn't exist in trading and trust was the first thing out of the window in a financial crisis (as Francis Fukuyama¹ has tried to tell us time and again).

If there is no consensual perspective as to time in financial circles, we have a major problem because it is the core element in all financial calculations. In a natural financial order 'derivatives' are based upon the 'underlying instrument' and no matter what the 'greed' imperative may be, inverting the pyramid of total contract values in favour of 'derivative trades' not only destabilises the system but also removes any hope of the time element of money working.

While the capital markets, accountants and regulators continually refer to 'The System', if the above is true, then they cannot have a real view of 'a system' because their divergent views of timeframe and values put boundaries around each department - indicating that they only see emergent sub-systems unconnected to the broader economy. Communication, a vital part of any meta-system such as the economy, has been sacrificed for cost reasons and perhaps some inconvenient truths.

To have any chance of solving the credit crunch (which is badly named because it is really a leverage crisis), the participants need to recognise how the components are connected and why self-similar processes have repeated mistakes of the past. A good example in the UK is that whenever the Bank of England is removed from the trading floor, the regulatory function becomes chaotic².

To be effective: top-down and bottom-up
While we need to appeal to the senior governors of the market, we also need to get buy-in from the next generation of practitioners who have not had the experience of managing a crisis but need to know what the consequences of their actions will be. Therefore this should be a 'top-down' and 'bottom-up' approach.

The only problem here is resources. Why? It is because the people who contributed to the straw poll above have already outlined what is needed and the education of the 'credit crunch' has already begun³.

The result we aim for is a dynamic map of the various levels of marketplaces and the sustainability of a business within its marketplace, that marketplace within the economy and how resources can be dynamically allocated. We do not aim to remove existing credit and performance metrics; just augment them to account for the proper use of time.

Now we need some artists, graphic designers and a small amount of resources donated by someone with the gravitas that will open the door to those in power to listen. Volunteers, please, and be brave!

Why the title?
It is said that the natural resonant frequency of the planet is F# and that, as any musician would understand, the next thing you need to do to create good music is establish the tempo; hence the title. The natural resonant frequency will establish your key and finding out how we interlink in time to create that frequency will benchmark the tempo. You can have all forms of jazz, classic or rap, but don't disturb the beat!

Footnotes

¹Trust: Human Nature and the Reconstitution of Social Order
²Stafford Beer: A regulator must be part of the system it regulates
³George Soros: The Credit Crisis of 2008 and What it Means, Alan Greenspan: The Age of Turbulence, I.O.U.S.A: Addison Wiggen & Kate Incontrera

Firm hires structured credit pro

The latest company and people moves

Firm hires structured credit pro
M.D. Sass Investors Services, a New York-based investment management firm, has hired Russ Andrews as svp of marketing. He was previously md of alternative investments at Wachovia, where he held several senior positions since 1997.

Most recently, Andrews created and managed a team that originated and distributed alternative investment funds globally. His team raised 20 funds that invested in a variety of credit instruments, including leveraged-loans, commercial real estate, ABS, CDOs, distressed debt and hedge funds.

Broker hires for distressed trading
Cantor Fitzgerald has hired Martin Teevan for its debt capital markets team as part of its push to build out its leveraged finance sales and trading platform. He will be responsible for growing high yield and distressed debt sales and trading. Teevan reports to Shawn Matthews, executive md and head of debt capital markets.

Teevan joins Cantor from Goldman Sachs, where his focus was in distressed trading. Previously, he served as head of distressed trading at UBS and as head of European high yield trading for ING. He also worked for Schroder Wertheim in MBS trading.

The firm has also hired an additional 33 fixed income veterans, bringing the total new hires in its fixed income sales and trading group to 84 since the beginning of 2008.

CDO trader hired
Anshul Rustagi, formerly of Deutsche Bank's CDO trading team, has joined alternative investment firm Stark Investments.

Highland reshuffles staff
Highland Capital Management has made changes to the portfolio management teams of Highland Credit Strategies Fund and Highland Distressed Opportunities. Highland Credit Strategies Fund will be managed by Brad Borud and Brad Means. Borud is currently a member of the portfolio management team for Highland Credit Strategies Fund, and Means is a senior portfolio manager at Highland.

Highland Distressed Opportunities will be managed by Brad Borud and Greg Stuecheli. Borud and Stuecheli are currently members of the portfolio management team for Highland Distressed Opportunities.

Alternatives manager adds five partners
Marathon Asset Management, an alternative asset manager focused on global credit investment opportunities, has appointed five new partners: Andrew Rabinowitz as coo, Richard Ronzetti as global investment management & head of research, Jon Halpern as head of real estate, Steve Kim as cio of Asia and Adam Phillips as cio of Europe.

Departures at Deerfield
Deerfield Capital president Robert Grien and director of portfolio management John Brinckerhoff are leaving the firm, according to a regulatory filing.

Bank quits structured credit prop trading
As part of Natixis' refocusing of its corporate and investment banking business, it is ending its credit and structured credit proprietary investment activities. The bank will also be halting more complex capital market activities, such as complex equity derivatives, complex fixed income derivatives and fund derivatives.

The changes will result in a 40% staff cut in its more complex capital market activities (i.e. 15% fewer employees in CIB). Total headcount will decrease from 5,700 employees in March 2008 to 4,860 at the end of 2009, according to Natixis.

CLO collateral manager replaced
The ratings of Versailles CLO M.E. 1 have been affirmed by Moody's following a deed of novation executed on 15 December, whereby BNP Paribas - acting through its leveraged funds group - replaced Calyon (acting through its business unit CLO Management Europe) as collateral manager. The decision to replace Calyon with BNP Paribas was voted on in November by the senior noteholders of the deal.

CLO dispute settled
Kohlberg Capital and its wholly-owned portfolio company Katonah Debt Advisors have entered into a settlement and termination agreement with JPMorgan with respect to loan warehouse credit facilities originally provided by Bear Stearns Investment Products Inc. These warehouse facilities were established to fund the initial accumulation of assets for CLO funds that Katonah had planned to complete in 2008.

Katonah had agreed to reimburse JPMorgan in certain circumstances and if these CLO funds failed to close for a portion of the losses (if any) on the resale of the warehoused asset. The two parties have agreed to terminate all obligations and liabilities of Katonah and of JPMorgan under the existing agreements relating to the proposed CLO funds, with payment by Katonah of an aggregate of US$6m in installments over a period of one year and the forfeiture by Katonah of the net interest income earned to date on the warehoused assets.

Structured credit lawyer promoted
Cadwalader, Wickersham & Taft has elected seven new partners to the firm's New York office. Among them is Ivan Loncar, who represents dealers, banks and other financial institutions in fixed income, credit derivatives and structured financial products that combine securitisation techniques and derivative products. He also has extensive involvement in the development and use of derivatives and financial products in the primary and secondary municipal markets.

Structured finance lawyers snapped up
Some 100 lawyers from Thacher Proffitt & Wood - including 40 partners - have joined Sonnenschein. The groups from Thacher Proffitt are comprised of prominent attorneys and counselors in structured finance, corporate, banking, real estate and regulatory law, as well as a strong team of litigators, ERISA and employee benefits and tax lawyers. Critical groups are staying together, Sonnenschein says.

Thacher Proffit & Wood has filed for administration following unsuccessful attempts to find a firm with which to merge.

Asset management business sold
Société Générale Asset Management (SGAM) is to sell its London-based asset management subsidiary (SGAM UK), which manages US$8.2bn dollars of assets - or around 2.5% of overall assets managed by SGAM - to GLG Partners. This transaction will be achieved through the sale to GLG of SGAM's shares in SGAM UK and is expected to be finalised during the first half of 2009, subject to regulatory approval. SGAM and GLG have also agreed various business co-operation agreements as part of the transaction.

Through this acquisition GLG intends to increase its traditional investment offering to clients and strengthen its activity in the UK. The firm says it will ensure the continuity of the funds and mandates delegated to SGAM UK.

Law firm takes on CRAs
Keller Rohrback is investigating Moody's, S&P and Fitch regarding losses suffered by retirement savings or pension plans, which have lost a significant portion of their value as a result of the credit rating agencies' failure to accurately and appropriately value the credit risk of ABS and MBS.

Keller Rohrback's investigation involves concerns that the CRAs contributed significantly to the recent market turmoil by underestimating the credit risk of sub-prime RMBS and other structured products, notably ABS CDOs. Plan fiduciaries have reported that in the absence of high credit ratings by the CRAs they would not have invested in certain securities that have decimated plan assets.

New strategic fund to consider structured finance
T. Rowe Price has launched a new Strategic Income Fund. Investments will include corporate bonds issued in the US and abroad, high yield bonds and loans, MBS, CMBS, ABS, emerging market debt, convertible bonds, preferred stock and government debt. The allocation to each asset class will vary depending on market conditions.

The fund's management team is led by Steve Huber, who has over 18 years of investment management experience. Currently, he leads a team that manages T. Rowe Price's Core and Core Plus Strategies. Joining him on the management team are T. Rowe Price fixed-income portfolio managers Mike Conelius, Andrew McCormick, Mike McGonigle and David Stanley.

AC

Sub-prime ABS overweight recommended

A round up of this week's structured credit news

Sub-prime ABS overweight recommended
Structured finance analysts at JPMorgan are recommending an overweight of the sub-prime ABS sector, as they expect (formerly) triple-A prices to at least stabilise and possibly even rally significantly going forward. "We see substantial evidence that the policy environment has shifted in a meaningful way, and in a way that should achieve what we think should be the number one policy objective: stabilising home prices as quickly as possible, and avoiding a further overshoot of the price correction that was initially required," they note.

A rapid pace of conforming mortgage rate declines, along with some more price declines, will help push US home affordability to record highs. Under this scenario, home prices could bottom sooner than initial expectations of early 2010. December's action to extend the TALF loan term to three years from one year, as well as the TARP loans to GM and Chrysler, are further steps in the right direction, according to the JPMorgan analysts.

"The heavily discounted ABX prices do not currently capture the potential upside. We recommend buying 07-1 and 07-2 AAA and PEN.AAA with the low prices and best potential for realising higher yields. Start to accumulate late-2006 or early-2007 cash sub-prime RMBS," they suggest.

Fed begins MBS purchase programme
The US Federal Reserve began its MBS purchase programme on 5 January, having selected BlackRock, Goldman Sachs Asset Management, PIMCO and Wellington Management Company to act as its agents in implementing the programme. Thirty-year US RMBS spreads tightened by 18bp from the previous Friday by Monday's close to a mid-level of 190bp over Treasuries on the back of the move.

Only fixed-rate MBS securities guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae are eligible for purchase under the programme. Transactions will be conducted in the form of TBA, specified pool or via dollar roll, with purchased securities being held on the Fed's balance sheet (and not lent out through the TSLF or daily securities lending programmes).

Up to US$500bn in agency MBS is expected to be purchased by the end of June 2009, thereby potentially taking down most of the 2009 supply. Structured finance analysts at Barclays Capital note that the programme stands to drive mortgage rates lower, possibly to 4.5%. "Consequently, refinancing activities should pick up, although a 2003-style refinancing wave seems unlikely - unless mortgage underwriting standards are also relaxed," they comment.

The Fed is expected to adjust the pace of the purchases based on input from the investment managers about market conditions and the effect of the programme.

CDS CCP launches gather pace
Liffe and LCH.Clearnet have launched CDS index contracts on the Bclear platform, becoming the first venture to offer clearing of such contracts. At the same time, CME Group announced that it has passed two key regulatory hurdles to commence clearing OTC CDS through CMDX, its joint venture with Citadel Investment Group. The move comes amid reported accusations from the EU that the industry is dragging its feet on the issue.

The Bclear contracts reference ISDA 2003 Credit Derivative definitions, are settled via credit event auctions, and will initially cover the Markit iTraxx Europe, iTraxx Crossover and iTraxx Hi-Vol indices. CDS contracts on Bclear will combine the security of central counterparty clearing with the flexibility that OTC market participants demand, Liffe notes. The contracts are negotiated and agreed away from the exchange before being processed through Bclear and cleared through LCH.Clearnet.

The exchange expects to offer more CDS products later in the year.

Meanwhile, CME confirms that regulatory reviews with the New York Fed and the Commodity Futures Trading Commission (CFTC) are complete. It also says that it has had extensive discussions with the SEC and is progressing the SEC review process.

The moves follow the finalisation of CME Group and Citadel's definitive agreement for a joint-venture company. An open solution for CDS products, CMDX combines CME Group's proven central counterparty clearing, settlement and risk management capabilities with Citadel's state-of-the-art technology.

CME Group will provide clearing services for CMDX's migration utility, trade booking facility and trading platform. It will also provide CDS clearing services to market participants submitting trades directly for clearing. CMDX says it plans to provide the most comprehensive product offering in the marketplace, launching with all major CDX and iTraxx indices, as well as their single name constituents, covering more than 90% of the CDS index and single name market.

The CME Group Risk Committee has approved the US$7bn combined guarantee pool for the trading of CDS products, thereby ensuring maximum risk protection and capital efficiency for the exchange's clearing member firms and customers.

First sovereign credit event called
ISDA is set to launch a CDS auction protocol to facilitate the settlement of credit derivatives trades referencing Ecuador, the South American country that is in default for the second time this decade. The 2008 Ecuador CDS Protocol will be the first protocol published by the Association with regards to the settlement of a sovereign credit event.

Ecuador's government did not make a US$30.6m interest payment within the 30-day grace period that started after the country failed to make its payment for the original due date, which was 15 November. Ecuador, which also defaulted in 1999, owes approximately US$10bn to bondholders, multilateral lenders and other countries.

Tribune Company ...
Creditex and Markit, in partnership with major credit derivative dealers, have announced the results of the credit event auctions conducted to facilitate settlement of credit derivative trades referencing Tribune Company bonds and loans. This marks the first time that auctions were run to settle both CDS and LCDS contracts in connection with a single reference entity default. The final price of Tribune bonds was determined to be 1.5%, while the final price of Tribune loans was determined to be 23.75%.

... and Hawaiian Telcom results in
Markit and Creditex, in partnership with 10 credit derivative dealers, have announced the results of the credit event auction that determined a price to facilitate settlement of credit derivative trades referencing Hawaiian Telcom Communications loans. The final price was determined to be 40.125% for the purpose of settling LCDS transactions.

IASB/FASB update on G20 recommendations ...
As part of its response to the global financial crisis, IASB and FASB have updated the market on the actions it has taken to address recommendations made by the G20 leaders. The actions include improving accounting for off-balance sheet items, new impairment disclosure requirements, the acceleration of efforts to address broader issues of impairment and ensuring embedded derivatives are assessed and separated if financial assets are reclassified (see separate article for more on this).

IASB published proposals on 18 December to strengthen and improve the requirements for identifying which entities a company controls. Further proposals on off-balance sheet items, covering the derecognition of assets and liabilities, are due to be published towards the end of Q109, consistent with the G20 target date of 31 March 2009.

Meanwhile, IASB and FASB are both proposing changes in disclosure requirements for impairments to arrive in a common outcome. The proposals will enable companies to disclose the profit or loss that would have been recorded if all financial assets (other than those categorised at fair value through profit or loss) had been measured using amortised cost (i.e. using an incurred cost model) or all had been measured using fair value.

The boards have published their exposure drafts and are asking for comments by mid-January. This will enable any possible change to take effect for 2008 year-end accounts.

The IASB proposals - in the form of proposed amendments to IFRS 7 'Financial Instruments: Disclosures' - would require an entity to state in tabular form the fair value, amortised cost and amount at which the investments are actually carried in the financial statements.

FASB's proposed EITF 99-20-a would amend the impairment guidance in EITF Issue No. 99-20, 'Recognition of Interest Income and Impairment on Purchased Beneficial Interests and Beneficial Interests That Continue to Be Held by a Transferor in Securitized Financial Assets'. It is intended to reduce complexity and thus achieve more consistent determinations of whether other-than-temporary impairments of available-for-sale or held-to-maturity debt securities have occurred.

In addition, the proposed FAS 107-a would amend the disclosure requirements in FASB Statement No. 107, 'Disclosures about Certain Financial Instruments', to increase the comparability of certain financial instruments that are economically similar but have different measurement attributes. FASB says that a further two projects are also in the works: 'Clarification of the Embedded Credit Derivative Scope Exception in Paragraph 14B of Statement 133' and 'Recoveries of Other-Than-Temporary Impairments (Reversals)'.

Both IASB and FASB, whose respective standards have different impairment requirements, have also asked their staff to consider together how existing requirements relating to reversals of impairment losses might be changed. Additionally, the boards will address the whole question of impairment as part of an urgent broader project in 2009, and this will also be a topic for consideration by the Financial Crisis Advisory Group (FCAG).

Some stakeholders have called for the need to clarify any possible difference in the accounting treatment between IFRS and US GAAP, meanwhile. FASB is planning to issue mandatory implementation guidance, and will publish the draft guidance shortly. The guidance will ensure consistency between IFRS and US GAAP - an objective supported by G20 leaders.

At a recent series of round tables in London, New York and Tokyo, participants supported reconsideration of the fair value option alongside a broader reconsideration of the classification categories. At the same time, almost all the users of financial statements at the round tables said that permitting reclassification out of the fair value option now, without proper consideration of all the issues, would not improve financial reporting or enhance investors' confidence in financial markets - reclassifications out of the fair value option would permit losses to be hidden. Both boards confirm that they find the views of those user participants compelling and believe that any change in the fair value option should be made only as part of a broader examination of accounting for financial instruments.

IASB and FASB say that they have agreed to fast-track a broader examination of the role of fair value measurement for financial instruments - including the issues of improving the impairment requirements, classification issues, the fair value option and transfers between the categories - which could involve significant changes to IAS 39 and the relevant US standards. Given the urgency of the matter, the boards' intention is to work to finish this project in a matter of months rather than years.

... while SEC reports on accounting standards
The SEC on 20 December delivered a report to Congress mandated by the Emergency Economic Stabilisation Act of 2008 that recommends against the suspension of fair value accounting standards. Rather, the document - put together by the SEC's Office of the Chief Accountant and Division of Corporation Finance - recommends improvements to existing practice, including reconsidering the accounting for impairments and the development of additional guidance for determining fair value of investments in inactive markets.

As mandated by the Act, the report addresses the following six key issues:

• the effects of such accounting standards on a financial institution's balance sheet;
• the impacts of such accounting on bank failures in 2008;
• the impact of such standards on the quality of financial information available to investors;
• the process used by FASB in developing accounting standards;
• the advisability and feasibility of modifications to such standards; and
• alternative accounting standards to those provided in FAS 157.

The report notes that investors generally believe fair value accounting increases financial reporting transparency and facilitates better investment decision-making. It also observes that fair value accounting did not appear to play a meaningful role in the bank failures that occurred in 2008. Rather, the report indicates that bank failures in the US appeared to be the result of growing probable credit losses, concerns about asset quality and, in certain cases, eroding lender and investor confidence.

The Emergency Economic Stabilisation Act of 2008 directed the SEC, in consultation with the US Federal Reserve and the Secretary of the Treasury, to study mark-to-market accounting standards as provided by FAS 157. While the report does not recommend suspending existing fair value standards, it makes eight recommendations to improve their application, including:

• Development of additional guidance and other tools for determining fair value when relevant market information is not available in illiquid or inactive markets, including consideration of the need for guidance to assist companies and auditors in addressing:
• How to determine when markets become inactive and whether a transaction or group of transactions are forced or distressed
• How the impact of a change in credit risk on the value of an asset or liability should be estimated
• When observable market information should be supplemented with and/or reliance placed on unobservable information in the form of management estimates
• How to confirm that assumptions utilised are those that would be used by market participants and not just a specific entity
• Enhancement of existing disclosure and presentation requirements related to the effect of fair value in the financial statements
• Educational efforts, including those to reinforce the need for management judgment in the determination of fair value estimates
• Examination by the FASB of the impact of liquidity in the measurement of fair value, including whether additional application and/or disclosure guidance is warranted.

The report also recommends that FASB reassess current impairment accounting models for financial instruments, including consideration of narrowing the number of models under US GAAP.

ISDA sets new date for hardwiring
ISDA has announced that the incorporation of the CDS settlement auctions into the 2003 ISDA Credit Derivatives Definitions - the hardwiring process - will be completed by mid-March 2009. The publication date has been pushed back from 31 December 2008, following the major market disruptions of September and October last year. ISDA will publish the auction supplement and a 'big-bang' protocol at the beginning of March 2009, which will become effective after a two-week adherence period.

The auction supplement will amend the CDS Definitions to incorporate the CDS settlement auction terms that are currently included in the auction protocols. It will also include provision for the ISDA Determinations Committee, which will make binding determinations for issues such as whether a credit event has occurred; whether an auction will be held; and whether a particular obligation is deliverable. The ISDA Determinations Committee will be an entirely new element in the hardwired structure and will play a central role in the market.

The amendments made by the supplement will apply to transactions entered into after the effective date, while the protocol will facilitate the amendment of existing transactions to reflect the new terms.

Earlier in 2008, as the first stage of preparing a draft auction supplement, ISDA and the CDS dealer community identified the key issues that needed to be addressed and divided the work up into four dealer working groups: decision-making and dispute resolution; loan settlement; FX issues; and relationship between senior and subordinated auctions. ISDA also established a dealer decision-making group to make decisions on behalf of the other parties and a group for discussion amongst representatives of buy-side firms.

AIG terminates further CDS
Maiden Lane III, the financing entity recently created by the Federal Reserve Bank of New York (FRBNY) and AIG, has purchased an additional US$16bn in par amount of multi-sector CDOs. As a result, the associated CDS contracts and similar instruments written by AIG Financial Products have been terminated.

ML III's purchases of CDOs, in conjunction with the termination of related CDS, have mitigated AIG's liquidity issues in connection with its CDS and similar exposures on multi-sector CDOs. To date, ML III has purchased approximately US$62.1bn in par amount of CDOs. The associated notional amounts of AIGFP CDS transactions have been terminated in connection with all of these purchases.

The purchase of the additional US$16bn of multi-sector CDOs was funded by a net payment to counterparties of approximately US$6.7bn and the surrender by AIGFP of approximately US$9.2bn in collateral it had previously posted to CDS counterparties in respect of the terminated CDS. In accordance with an agreement with ML III, AIGFP received payments aggregating approximately US$2.5bn from ML III in connection with the November and December purchases of such CDOs.

S&P to amend CSO ...
S&P is proposing to amend its CSO rating criteria around a number of key risks it has identified for the sector, including collateral performance (such as default/credit events, rating transition, sector correlation and recovery rates), counterparty jump-to-default risk and widening CDS spreads. The agency believes that the worsening credit climate and resulting continued downgrades may impair the return of interest and principal for some transactions.

S&P will likely look for more credit enhancement for all rating categories and adjust outstanding corporate synthetic CDO ratings. The outcome of these rating reviews will depend on the agency's view of the credit quality of each portfolio.

As a first step in the process, S&P has reviewed the CSOs that it rates to identify any systemic concentration risks in this sector. The sector as a whole generally appears to have considerable exposure to 100 corporate issuers. While the high rate of name overlap among these portfolios does not make any individual portfolio riskier, if these 100 names experience negative rating migration, this sector could see an increase in downgrades, the agency warns.

S&P lowered 594 ratings in 376 synthetic CDO transactions on 18 December, following their placement on credit watch negative (see SCI passim). To date, 238 outstanding transactions have at least one tranche rating on credit watch negative.

... SF CDO ...
S&P has begun a comprehensive review of all the assumptions and methodologies it uses to assign ratings to CDOs of structured finance securities, including asset recoveries, default rates and correlation. Any consequent changes may lead to an increase in the credit enhancement levels the agency will look to for all rating categories, thereby resulting in an adjustment to some outstanding CDO ratings. The effect of these changes on the ratings of existing transactions will depend on the final criteria adopted, S&P's analysis of the credit quality of the portfolio, structural features and investment guidelines.

Defaults and expected losses projected in the sub-prime RMBS sector show how high default correlations may potentially reach, S&P notes. It also appears that recoveries on defaulted structured finance assets, especially those lower in the capital structure, will likely be significantly lower than the original assumptions the agency used.

S&P says it has put increased weight on qualitative considerations in its ongoing process of improving analytics based on new information and forward-looking perspectives. These qualitative judgments, in addition to the agency's standard assumptions, have been determined on a case-by-case basis based on an in-depth asset-by-asset analysis of the proposed portfolio.

... and MV CLO assumptions
S&P has begun a comprehensive review of all the assumptions and methodologies it uses to assign ratings to market value CLOs, including asset-specific advance rates, asset-specific secondary market liquidity, the impact of industry and obligor diversification, and the liquidation horizon for these structures. The agency says that the review will likely result in changes to its assumptions and methodologies, which may have the effect of raising the overcollateralisation levels it considers for all rating categories and which may lead to an adjustment to some outstanding market value CLO ratings.

The effect of these changes on the ratings of any particular existing market value CLO will depend on the final criteria to be adopted, S&P's analysis of the credit quality of its portfolio of underlying securities, its structural features and its investment guidelines.

New Canadian restructuring plan backed
The Governments of Québec, Ontario and Alberta - together with certain participants in the Canadian ABCP restructuring plan - are to provide C$4.45bn of additional margin facilities to support the plan. Changes to the plan include:

• The provision of an additional margin funding facility to rank senior to all other previously agreed margin funding facilities.
• An initial moratorium period during which the ability to make margin calls on Master Asset Vehicle I or Master Asset Vehicle II will be limited.
• A widening of spread loss triggers that will become relevant upon the expiry of the moratorium period, rendering the triggering of margin calls more remote.

DBRS has re-assigned lower provisional ratings of single-A (rather than double-A) to the Master Asset Vehicle I Class A-1 and Class A-2 notes and the Master Asset Vehicle II Class A-1 and Class A-2 notes.

CRE CDO closed
NIBC has closed and retained a €750m balance sheet CRE CDO - Panorama Alpha. The two-tranche structure comprises a single-A rated senior tranche and an unrated junior tranche.

Backing the deal are seven Dutch RMBS and 11 senior/whole loan CRE loans secured on a diversified pool of pan-European real estate assets. The deal has been rated by S&P.

OCC Q3 figures released
The Office of the Comptroller of the Currency has released its Q308 report on bank trading and derivatives activities. The figures show that the notional value of credit derivative contracts increased by 4% during the quarter to US$16.1trn, with CDS accounting for 99% of credit derivatives. Net current credit exposure increased 7% from Q2 to US$435bn, a level of 73% more than the US$252bn exposure of a year ago.

Contracts referencing investment grade entities with maturities from one to five years represent the largest segment of the market at 43% of all credit derivatives notionals. Contracts of all tenors that reference investment grade entities are 70% of the market.

The notional amount for the 34 commercial banks that sold credit protection was US$7.9trn, an increase of US$0.3trn from Q2. The notional amount for the 38 banks that purchased credit protection was US$8.3trn, an increase of US$0.4trn.

Overall, US commercial banks reported US$6bn of trading revenues in cash and derivative instruments in Q308, compared to US$1.6bn in Q208 and a US$2.2bn average over the past eight quarters. The notional value of derivatives held by commercial banks decreased by US$6.3trn in Q3, or 3%, to US$175.8trn.

Derivatives activity in the US banking system is dominated by a small group of large financial institutions, according to the OCC. Five large commercial banks represent 97% of the total industry notional amount and 87% of industry net current credit exposure.

S&P downgrades 10 SIVs ...
S&P has taken rating actions on its issuer credit ratings (ICRs) on and its ratings on the CP and MTNs issued by Links Finance Corp, Parkland Finance Corp, Nightingale Finance, Beta Finance Corp, Centauri Corp, Dorada Corp, Five Finance Corp, Sedna Finance Corp, Zela Finance Corp and Harrier Finance Funding.

The ICR and senior MTNs of Links and Parkland have been lowered to the same ratings as their sponsor Bank of Montreal (BMO), following the continuing deterioration in the market value of the SIVs' portfolios. The ICR and senior MTNs of Nightingale have been lowered to the same ratings as AIG Financial Products, which provides full support to the SIV via a combination of repurchase and note purchase commitments.

Meanwhile, the ICR and senior MTNs of the six Citi-sponsored SIVs have been lowered to the same ratings as Citi, following its downgrade on 19 December. Finally, the ICR and senior debt ratings on Harrier have been lowered to the ratings on WestLB and remain on credit watch negative. The downgrade reflects WestLB's 100% liquidity support to the SIV, of which the cash collateralisation in favor of non-affiliated investors is no longer fully segregated.

... while Moody's downgrades five
Moody's has downgraded the senior debt and capital note ratings of Links Finance, Parkland Finance, Carrera Capital Finance (keeping its capital notes on review), Harrier Finance Funding and Kestrel Funding. The rating actions on the affected SIVs were prompted by the continued deterioration in market value of their asset portfolios.

Links' portfolio market value declined to 75% of par as of 28 November 2008 from 84% on 12 September 2008 and 95% on 29 February 2008. Parkland's portfolio market value declined to 82% of par on 28 November 2008 from 91% on 12 September 2008 and 96% on 29 February 2008.

Carrera's portfolio market value declined to 77% of par as of 21 November 2008 from 87% on 12 September 2008 and 98% on 2 November 2007. The capital note ratings benefit from the issuer's strategy of holding assets to maturity, since liquidation would otherwise crystallise losses for this class of investors.

The manager is exploring remedial steps to address potential portfolio credit deterioration, as well as any resulting losses given default. Moody's review will take into consideration any actions implemented by the manager.

Harrier's portfolio market value declined to 72% of par as of 21 November 2008 from 81% on 12 September 2008 and 97% on 2 November 2007. Finally, Kestrel's portfolio market value also declined to 72% of par as of 21 November 2008 from 80.4% on 12 September 2008 and 95.8% on 2 November 2007. As the capital notes of both vehicles do not benefit from sponsor support, Moody's view is that the declines in portfolio market value are likely to lead to losses to capital notes for both vehicles that are commensurate with a rating of single-C.

Valuation service launched
Moody's Analytics Consulting Services has launched a structured finance valuation, risk assessment and stress testing service that provides detailed forecasts on the expected performance of an institution's investment portfolio under various macro-economic scenarios. Moody's says its unique and tailored consulting service helps clients in making more informed business decisions regarding the impairment, provisioning and sale of their assets. The service can be conducted either as a one-off assessment or on an ongoing basis and can support audit and regulatory requirements.

"This unique service combines macro-economic models with the very specific waterfall rules that govern cashflows in securitised transactions to provide an assessment of the risks to their holdings - whether these are due to economic factors, the underlying assets or the specific structural characteristics of the securities in the portfolio," says Praveen Varma, global md for Moody's Analytics Consulting Services. "Unlike other approaches, our approach shows the potential for losses and the impact on value for holders of structured securities under different scenarios in housing, credit and business cycles."

The approach provides a complete solution that leverages:

• Macro-economic forecasting and scenario analysis to provide the basis for portfolio- and security-level stress tests
• Deal-specific cashflow waterfalls that accurately represent the structure of securitised transactions
• Extensive proprietary databases on global collateral performance
• Advanced models that combine macro-economic scenarios and performance data to produce default, loss, prepayment, interest rate and discount rate vectors.

Smoothed spread values analysed
In a December Risk and Performance Monitor, Fitch Solutions took an in-depth look at the benefits of smoothed spread values for forecasting future events. Specifically, the report demonstrates the additional prediction power that smoothed spreads hold over spot CDS spreads.

Highlights of the research include:

• Smoothed spreads are significantly more predictive of future rating agency actions than spot spreads
• A case study on how false signals from spot-spread based implied ratings can lead to poor investment and risk management decisions
• Examples of how spot and smoothed spreads can be used together to improve decision-making
• A list of 10 entities with the greatest potential for future rating agency actions, based on the notch-differential between the agency rating and Fitch CDS-implied rating.

Further declines for troubled company index
Kamakura Corp's index of troubled public companies showed strongly deteriorating global credit quality in December, the 16th such decline in the last 17 months. The Kamakura global index of troubled companies increased to 24% of the public company universe from 22.6% of the universe in November.

Kamakura defines a troubled company as a company whose short-term default probability is in excess of 1%. The all-time high in the index was 28%, recorded in September 2001.

Among rated public companies, the companies showing the sharpest rise in short-term default risk for December were US Shipping Partners, Rotech Healthcare and YRC Worldwide. The percentage of the global corporate universe with default probabilities between 1% and 5% decreased by 0.1% to 13.2% for the month. The percentage of companies with default probabilities between 5% and 10% was up 0.2% to 4.4% of the universe in December.

The percentage of the universe with default probabilities between 10% and 20% rose 0.3% to 3.1% of the universe. Finally, the percentage of companies with default probabilities over 20% was up a sharp 1% to 3.3% of the total universe in December.

Basel consults on stress testing
The Basel Committee on Banking Supervision on 6 January issued a consultative paper entitled 'Principles for sound stress testing practices and supervision'. The report presents sound principles for the governance, design and implementation of stress-testing programmes at banks.

It addresses weaknesses in stress testing exposed by the financial crisis, including the underestimation of the potential severity and duration of stress events and the insufficient identification and aggregation of risks on a firm-wide basis. The paper sets expectations for the role and responsibilities of supervisors in reviewing firms' stress-testing practices and emphasises that a sound stress-testing programme should:

• be directed by the board and senior management,
• provide forward-looking assessments of risk,
• complement information from models and historical data,
• be an integral part of capital and liquidity planning,
• guide the setting of a bank's risk tolerance, and
• facilitate the development of risk mitigation or contingency plans across a range of stressed conditions.

The consultative paper responds to one of the key risk management actions required by the G20 leaders in their 15 November 2008 'Declaration of the Summit on Financial Markets and the World Economy'.

CLO OC ratio test guide published
S&P has published a guide to overcollateralisation (OC) ratio tests for US CLO transactions, together with an interactive illustrative tool designed to show the impact of various haircuts on a hypothetical OC ratio test. The spreadsheet allows investors to evaluate the sensitivity of the calculation of OC tests to changes in securities that are subject to a haircut, the size of the haircut, the position of the OC test in the capital structure of the CLO and the threshold at which the test is considered breached.

The current market dislocation has increased the size of the OC ratio test haircuts and, consequently, the likelihood that CLOs may breach their OC ratio tests, S&P says. The agency believes that investors in certain classes of a CLO may be particularly interested in a breach of an OC ratio test that would lead to an event of default.

However, there are many transaction-specific factors that influence the likelihood that a CLO will breach this test, including:

• The existing OC test cushion relative to the threshold for a breach;
• The position of the test in the priority of payments;
• The calculation method for the test and its haircuts;
• The credit quality of the underlying collateral;
• The amount of assets available to support senior liabilities upon the breach of a junior OC ratio test;
• The level and direction of credit migration in the assets supporting the rated liabilities;
• The market prices of the assets subject to a haircut;
• The number of rating agencies that rate the transaction; and
• The collateral manager's asset selection and trading activities.

S&P's illustrator provides an example for calculating certain results of a hypothetical OC ratio test by allowing users to enter different hypothetical values for the following four parameters of the calculation:

• The percentage of the transaction's assets that are subject to a haircut;
• The weighted average haircut applicable to the securities subject to a haircut;
• The ratio of the par value of the class or classes included in the test to the par value of the transaction's total assets, expressed as a percentage; and
• The OC threshold for breaching the test.

New MBS index postponed
Markit has confirmed that, following extensive discussions with major market participants, plans to launch a synthetic US prime MBS index (Markit ABX.PRIME) have been put on hold. The potential benefits of the proposed index will be re-assessed in 2009, the firm says.

CS & AC