Derivatives Foundation interview preparation

Questions

100

Traced to a firm

29

Firms

19

Updated

September 2026

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All firmsMSMorgan Stanley4Nomura4Akuna Capital2Amundi2HSBC2PIMCO2Bank of America1Barclays1Citadel1DRW1Goldman Sachs1Jane Street1Millennium Management1Mizuho1Old Mission Capital1RCRBC Capital Markets1Scotiabank1UBS1Wells Fargo Securities1

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1. 062What section of the indenture deals with payment waterfalls, and how does cash actually move through a structured credit deal?Credit derivativesHardsuperdayNomuraStructured Products · New York · 2026

   Say this

   The priority of payments section of the indenture, usually Article 11 in a CLO indenture, with the interest and principal waterfalls set out separately. Cash from the loan portfolio is collected in interest and principal accounts and then paid out strictly in seniority order, subject to coverage tests that can divert cash upward if the deal is underperforming.

   Then walk it

   1. Two waterfalls, kept separate by design. Interest proceeds pay fees, then senior note interest, then down the stack. Principal proceeds are used during reinvestment to buy more loans, and after that to amortise notes top-down.
   2. The accounts matter and this is what the operational question is really about: a collection account split into interest and principal, an unfunded amounts or ramp-up account at new issue, an expense reserve, and often an interest reserve for the first payment date before the portfolio is fully ramped.
   3. The tests are the teeth. Overcollateralisation and interest coverage tests are measured at each payment date, and a failure diverts cash that would have gone to the junior tranches into paying down the senior notes until the test is cured. That is the structural protection the AAA buyer is paying for.
   4. There is usually also a reinvestment overcollateralisation test which, if failed, sends a portion of equity distributions to buy more collateral rather than pay the equity — a softer version of the same mechanism.
   5. At new issue settlement the account structure is what trips people up: the ramp-up account holds undrawn proceeds, loans settle over weeks with delayed compensation, and the first payment date often needs an interest reserve because the portfolio has not been earning for a full period.
   6. The honest framing: the waterfall is the product. Credit analysis of the underlying loans matters, but the reason the AAA has performed through two cycles is the diversion mechanics, and the reason equity returns are volatile is that it sits last in both waterfalls and absorbs every test failure first.

   Where candidates lose it

   Waving at 'senior gets paid first'. This question is asked to find out whether you have read a document. Name the priority of payments section, name the interest and principal waterfalls separately, and name the overcollateralisation test diversion — that is the mechanic that defines the product.

   Expect next

   • What happens to equity distributions when the overcollateralisation test fails?
   • Which accounts exist at a new issue settlement and why?
   • Why has the CLO AAA performed so well through credit cycles?

   Reported by candidates at Nomura (Structured Products, New York, 2026). Source: Wall Street Oasis.

Firm tags come from public, anonymous candidate reports on Wall Street Oasis: strong signal, not sworn testimony. Firms are named as the places a question was reported, not as partners of Fin Maverick. Answers are written for this page to show how to think out loud; they are not scripts to recite.