Are mortgage derivatives or CDOs the same as CDS?
No. CDS, like all privately negotiated derivatives, differ in important ways from other financial products. Some collateralized debt obligations (CDOs) are sometimes called ‘mortgage derivatives,’ but they are very different from CDS. CDO are securities issued to raise cash and are subject to relevant securities laws. They are created by combining mortgage backed, or other asset-backed, securities into pools, then issuing new securities which are backed by those pools of MBS or ABS. In addition, CDOs are a type of debt security and represent a legal claim on assets which underlie the credit instrument. A CDS is a bilateral contract whose key terms are negotiated between two counterparties. A CDS does not convey ownership of underlying assets, and is not a security. A CDS is created to shift risk, not raise cash. The two parties to each deal can custom-tailor the contract in a private negotiation, with more flexibility than trading on the securities or futures markets.
