Citigroup is preparing to start quoting derivatives on different portions of a derivatives index tracking 50 municipal issuers, the MCDX, The Wall Street Journal reports. The move would lets investors speculate on the possibility of municipal defaults by taking on the risk of a wave of losses in the underlying portfolio in return for a high premium.
Investors can bet on the relative value between the loss scenarios, or “tranches,” in the structure. The muni tranche market will have two layers - a senior tranche for 15-100% of losses, and a low-rated, “equity” layer of 0-15% of losses.
Click here for the story from The Wall Street Journal.