Restructuring the "one-way CSA" counterparty risk in a CDO

Abstract

We show how to restructure the counterparty risk faced by the originator of a securitization or covered bond arising from an interest rate hedging swap assisted by a "one-way" collateral agreement. This risk emerges when the swap is negotiated between the special purpose vehicle and a third party that covers itself through a back-to-back swap with the originator. We show that the counterparty risk of the originator may be removed by adding a chain of back-to-back credit derivatives between the three parties (originator, counterparty and vehicle).