CDO-Squared is a collateralized debt obligations backed primarily by the tranches issued by other CDOs. These instruments became popular before the financial crisis of 2007–08. There were 36 CDO-Squared deals made in 2005, 48 in 2006 and 41 in 2007. Merrill Lynch was a big producer, creating and selling 11 of them.

How does CDO squared work?

A CDO-squared is another structured product structured where a bank takes their collateralized debt obligations and structures them into tranches with different maturity and risk profiles. These tranches then fund the payments to the investors in the CDO-squared special purpose vehicle.

What is a CDO in simple terms?

A collateralized debt obligation (CDO) is a complex structured finance product that is backed by a pool of loans and other assets and sold to institutional investors. A CDO is a particular type of derivative because, as its name implies, its value is derived from another underlying asset.