A bespoke CDO Tranche is a tranche of a collateralized debt obligation (CDO) for which terms and features can be customized. The CDO can also be based on a basket of names (obligations). It is a synthetic structure that consists of a single tranche. It is simpler than a standard synthetic tranche and can be customized to an investor’s preferences. With a bespoke tranche, only one tranche of the structure, usually a mezzanine tranche, is sold to investors, while the arranger becomes the direct counterparty to the transaction since the structure involves no special purpose vehicle (SPV). This allows the seller to meet investors’ needs in terms of customization and cost considerations.

With a bespoke CDO tranche, a market participant can specify both the components of the basket of names and the tranches within to accommodate its specific requirements. For example, an investor who is exposed to credit risk concentrated in a specific region could not be able to purchase a standard index CDO for a basket of regional companies (due to cost considerations). However, the investor may enter into a bespoke CDO tranche, whereby the components of the basket itself can be tailor-made, along with the tranches. The investor could purchase a 3-8% tranche in a bespoke CDO tranche, while selecting a basket of names that correspond to the exact risk exposure. The arrangement will be less expensive while providing a satisfactory level of protection (even if it may turn out to be less  than the optimal level in terms of tranche definition and basket composition.