In December 1997, JP Morgan chase introduced the term BISTRO – Broad Index Synthetic Trust Offering for its collateralized debt obligation (CDO) structure.
According to BISTRO – the originating bank buys credit protection with a Credit default swaps (CDS) that absorbs all credit losses above the threshold.
For example: 1.3% so bank absorbs first 130 million USD of loss.
JPMC securitized a portfolio of more than 300 corporate with 700 million USD. Thus the holders of BISTRO did not take credit loss until it exceeds $830 million.
BISTRO not only hedge economic risk but also regulates capital. Banks use BISTRO to hedge their balance- sheets.
Advantages of BISTRO –
• High Implementation Speed
• No need to fund super-senior elements
• Low transaction costs
• Greater flexibility to provide tailor-made solution for credit risk requirements
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