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I study a CDO which are composed of 6 CDOs, MS promotes cross-subordination in this deal. However, I don't know the exact mechanism in this concept. I don't really see the differences between this and bundling 6 into 1 CDO. MS people cannot provide concrete/explicit examples to us. It's very tricky, seems very good to investors, but in fact we really don't know in what scenarios, this type of deal can benefit us.Some benefits are listed in brochure:Cross subordination allows full sharing of subordination for all the inner CDOs- effectively the Innter CDO subordination cna be viewed as a collective pool- This enhancement makes the transaction more stable and further reduces the risk of idiosyncreatic credit risk. - Cross subordination has a directly observable effect on the number of defaults required to cause a first loss of the outer CDO tranche- In a CDO of ABS/CDOs without cross subordination, relatively few defaults concentrated in a few CDOs could lead to losses on the outer tranche (inner subordination is wasted in these scenarios), such wastage of inner subordination is removed wiht cross subordination.I hope some of the smart guys here, like u, can enlighten me on this topic. Thanks a lot.

Cross-subordination makes a CDO^2 or CDO of ABS effectively behave like a vanilla CDO with one exception. Once the subordination in the inner CDO is completly wiped out losses will occur much faster than in a vanilla CDO because of the overlaps of single names in the inner CDO. One default can hit you in more than one inner CDO and thus there will be a higher loss in the outer CDO.Regards