Broad Index Synthetic Trust Offering (BISTRO)

A broad index synthetic trust offering (BISTRO) is a proprietary name used by J.P. Morgan for creating collateralized debt obligations (CDOs) from credit derivatives. BISTRO was introduced in 1997 and was the predecessor of the synthetic collateralized debt products that grew in popularity. These debt products were credited with contributing to the 2007-2008 financial crisis.

A broad index synthetic trust offering (BISTRO) was considered a landmark financial instrument at the time of its launch. BISTRO is believed to be one of the first synthetic collateralized debt obligation (CDO) instruments ever created. As such it helped transform the modern banking industry. The finance industry had used synthetic currency swaps, which are agreements to exchange debt obligations and future cash flow in different currencies and swaps of bonds and interest rates since the early 1980s. BISTRO represents an evolution of this idea. 

Rather than swapping currency or bond income, J.P. Morgan proposed exchanging the risk of default. The swaps would be synthetic, or artificially simulated. The bank would pool several different debt obligations of loans and bonds, then allow investors to invest in bundles of credit-default swaps. The structure allowed the bank to shift risk to the investors while also generating income from selling that risk.

The initial broad index synthetic trust offerings came to market in December 1997 and referenced an underlying portfolio of 307 commercial loans, as well as corporate and municipal bonds. The U.S. Federal Reserve permitted J.P. Morgan to secure regulatory capital for its BISTRO deals. BISTRO was extremely popular with investors, and four more broad index synthetic trust offerings followed over the course of the next 12 months.

Initially created as a way for J.P. Morgan to hedge its credit risk BISTRO ultimately opened up a large new market in the financial industry. Following the introduction of BISTRO, other financial institutions offered similar products and developed copycat structures.

BISTRO has been credited with ushering in the era of synthetic collateralized debt obligations CDOs, which used credit derivatives to transfer credit risk in a portfolio. The market for synthetic CDOs grew substantially, rising from $10 billion in 2000 to $105 billion in 2007. Some financial institutions began to create synthetic CDOs that included real estate assets, such as subprime mortgages, in their underlying reference pools. In the wake of the 2007-2008 financial crisis, experts argued that by allowing banks to shift risk, synthetic CDOs contributed to the crash.