This is an emerging sector in the world of finance, mainly consisting of financial institutions that are looking for ways to mitigate risk. Generally, traditional assets that appear on a balance-sheet are not very fungible. They can not be hedged or re-financed. Structured finance overcomes this limitation by using off-balance sheet assets, such as credit derivatives (mainly traditional asset classes with contingent claims) and a vast pool of asset-backed securities such as credit cards and Collateralized Debt Obligations (CDOs) as part of the firms financial products.

This research report is to highlight the use of CDOs as a financial product and their fast emergence in the global market during 2006.

Before going further, here are some generic terms used while talking about CDOs :

Collateralized debt obligations (CDOs): This is a kind of asset- backed security. In broader terms it can be described as a mode of investment financing undertaken by leading financial institutions by issuing debts against a portfolio. Today there are various kinds of CDOs that are emerging, such as :

The CDO sector has maintained its steady growth rate in year 2006 as well; tightening spreads has continued this year too with the introduction of New Cash and Synthetic CDOs.

Their emergence has been considered region wise:

• US CDO Issuance:
  The market saw a tremendous growth in Cash Side and Synthetic CDOs which was followed by Collateralised Loan Obligations and investment-grade. This year also saw the innovation of new collateral types such as commercial mortgage B-notes, mezzanine loans and whole loans in commercial real estate CDOs. The market also saw the launch of the first Real Estate Investment Trust (REIT) preferred securities-backed CDOs.
• European CDO Issuance:
  The European market was dominated by Asset-Backed Securities CDOs. The gainers this year once again were CLO issuers. However anomalies were caused by new short term opportunistic products that exploited the market. The European market has seen a number of new products such as equity debt obligations, long/short CDOs, leveraged super senior structures with spread and/or loss triggers, constant proportion portfolio insurance and forward-starting CDOs.
• Asia Pacific CDO ("APCDO") market
  The Asia Pacific region has seen a number of credit transactions. China has introduced their first ever CLO - the China Development Bank (CDB) CLO - in their pilot securitisation program. The new issues in China are attracting a number of global investors in a year that also saw stupendous performance by SME CDOs.
  

Global cash CDOs have also increased credit default swaps .These cash CDO transactions have provisions to include synthetic securities up to 30 per cent. Asset managers have strategically followed this credit default swap market to add exposure to credits which they can not enjoy in the cash debt markets. Indeed, the synthetic market saw several creative developments with the growth of managed structures. In addition, the launch of the International Swaps and Derivatives Association's documentation template for credit default swaps referencing asset-backed securities (CDS on ABS) led to the growing issuance of synthetic CDOs referencing ABS, and is paving the way for further structural innovations, such as hybrid CDOs that blend both cash and synthetic CDO technologies.

With the economic expansion underway and to ensure that inflation and inflationary expectations are checked, the European Central Bank and US Fed Bank are continuously raising the interest rates by 25 basis points. Future direction of rates, along with maintaining the current growth trend, will be a factor in the issuance growth outlook.
These together ensure that the structured finance markets will grow rapidly worldwide and will bring along with it a heightened demand for supporting research, data and analysis.