Collateralized Loan Obligation

CLO is a structured financial product that pools together cash flow-generating assets and repackages this asset pool into discrete tranches that can be sold to investors.  The tranches in a CDO vary substantially in their risk profile. The senior tranches are relatively safer because they have first priority on the collateral in the event of default. As a result, the senior tranches of a CDO generally have a higher credit rating and offer lower coupon rates than the junior tranches, which offer higher coupon rates to compensate for their higher default risk.


The total assets always exceed the liability issues, sometimes by over 30% to 50%.  This allows for some of the collateral to default without the integrity of the deal structure being affected. 

A collateralized loan obligation (CLO) is structured with the asset pool primarily consisting of secondary bank loans, which serve as the debt obligations of the CLO.

A collateralized debt obligation (CDO) is structured with the asset pool primarily consisting of asset-backed securities (ABS) or residential mortgage-backed securities (RMBS), which serve as the debt obligation of the CDO (if the asset pool primarily consists of CDOs then this is called ‘CDO Squared’ or a ‘CDO of CDOs’)


The CDO/CLO deals are issued with a set of rules (compliance rules, payment rules, business rules, rating notching rules, etc.), guidelines, roles & dates (determination period/dates, payment dates, CDO/CLO Lifecycle dates, etc.). The deal’s indenture is considered as the ‘bible’ to the deal and has final say as to all activities within the deal (ex - how and when to start paying down the liabilities).

Trade Flow

To make changes to the deal’s collateral inventory the collateral manager proposes trades to the deal to see what the effect on compliance will be.  This is called hypothetical or what-if trading.  A hypothetical trade can be a single trade (buy or sell one security) or a combination of trades (buy or sell multiple securities). The collateral manager informs the trustee which proposed scenarios to actually trade. When the trustee receives the trading scenario they re-run compliance to make sure the scenario still fits within the deal. Once compliance is satisfied the trade is settled.

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Wirehouse vs RIA vs Broker Dealer


A Wirehouse is a large integrated broker with a national, as opposed to regional business.  Wirehouses once collected trade orders from branch offices in distant cities using dedicated telegraph lines, hence the term wirehouse .

Wirehouse now typically refer to full-service brokerages that offer investment advice, trading services and research all under one roof..

Examples of wirehouses include Morgan Stanley Smith Barney, Bank of America Merrill Lynch, Wells Fargo Advisors, UBS Wealth Management and Charles Schwab.

RIA (Registered Investment Adviser) and Broker-Dealers

All financial advisors fall into one of two broad categories: Registered Investment Advisors (RIAs) and broker-dealers. RIAs are fiduciaries, while broker-dealers aren’t.

Although it sounds like an individual job title, a Registered Investment Adviser (RIA) refers to a firm that is registered with the Securities and Exchange Commission (SEC) or a state’s securities agency. Now, an individual who works for a RIA is an Investment Advisor Representative (IAR).

Broker-dealers are held to what’s referred to as a suitability standard when offering financial and investment advice, rather than a fiduciary standard. This means that their advice must be “suitable” for the client’s needs at that particular time. The suitability standard is less stringent than the fiduciary standard in terms of the advisor’s obligation to make recommendations that are in the client’s best interest.

In addition to the fiduciary obligation, the other main difference between an RIA and a broker-dealer is in the way they are compensated. RIAs either charge their clients a percentage of assets under management or a fixed or hourly fee. Broker-dealers, in contrast, receive most of their compensation through commissions based on the investment products they recommend and sell.


WealthTech - Industry Trends

While the largest RIA custodians - SEI, Charles Schwab, TD Ameritrade, Interactive brokers and Fidelity - dwarf the smaller custodians by size, smaller custodians are targeting new market opportunities with specialized offerings such as alternative investments or targeting specific markets such as start-up RIAs.


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