Guarantees vs. Collateral: Risk in ABCP, Collateralized Commercial Paper and New Structured Products

September 2015

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A new report from Finadium looks at the risk profiles of Asset-backed Commercial Paper (ABCP), Collateralized Commercial Paper and short-term products with new names but similar economic outcomes. Investors must consider two at least levels of risk when considering collateralized products: these are collateral quality and bank guarantees.

The risk profile of structured investment products is changing. ABCP will soon have standardized meanings in the US and Europe; this ABCP is arriving on a fast train, which means that investing in these products will take on a much reduced set of risk and reward characteristics than in 2008. This is good news for investors and for banks looking to fund high quality assets. Meanwhile, Collateralized Commercial Paper agreements can vary substantially on default terms, guarantees and collateral backing the paper.

New definitions for ABCP raise the question as to how and whether lower quality assets will be funded. There is still sizeable need for banks to finance less liquid assets as well as investor demand. We look to new product categories including Special Purpose Vehicles, Funding Notes, Business Development Companies and Total Return Swaps to see how funding for less liquid assets can be obtained. These products serve the same economic purpose as ABCP but under a different wrapper, and with different risk and return characteristics.

This report is part of the Finadium Executive Briefing series, providing briefings and analysis to the financial markets industry.

This report is 20 pages with 7 exhibits.

■ Executive Summary

■ What Risks Matter?

■ Regulations and Market Sizing
– The US Market
– The European Market

■ Money Fund Participation in ABCP and Collateralized CP

■ Implications for Other Bank and Non-Bank Collateralized Products
– The Value of Collateral
– ABCP and the Ratings Agencies

■ About the Author

■ About Finadium


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