Structured finance


Structured finance

Structured finance is a broad term used to describe a sector of finance that was created to help transfer risk using complex legal and corporate entities.

tructure

ecuritization

Securitization is the method which participants of structured finance utilize to create the pools of assets that are used in the creation of the end product financial instruments.

Tranching

Tranching is an important concept in structured finance because it is the system used to create different investment classes for the securities that are created in the structured finance world."Tranching allows the cash flow from the underlying asset to be diverted to the various investor groups." The Committee on the Global Financial System explained tranching succinctly:"A key goal of the tranching process is to create at least one class of securities whose rating is higher than the average rating of the underlying collateral pool or to create rated securities from a pool of unrated assets. This is accomplished through the use of credit support (enhancement), such asprioritisation of payments to the different tranches."

Credit enhancement

Credit enhancement is key in creating a security that has a higher rating than the issuing company.

Credit ratings

Ratings play an important role in structured finance.

tructure

Other structures

There are numerous structures which may involve mezzanine risk participation, Options and Futures within structuring of financing as well as multiple stripping of interest rate strips. There is no laid-out fixed structure unlike in Securitization which is only a subset of the overall structured transactions. Esoteric transactions often have multiple lenders and borrowers distributed by distribution agents where the Structuring entity may not be involved in the transaction at all.

Types

There are several main types of structured finance instruments.

*Asset-backed securities (ABS) are bonds or notes based on pools of assets, or collateralized by the cash flows from a specified pool of underlying assets.

*Mortgage-backed securities (MBS) are asset-backed securities whose cash flows are backed by the principal and interest payments of a set of mortgage loans.
**Collateralized mortgage obligations (CMOs) are securitizations of mortgage-backed securities.

*Collateralized debt obligations (CDOs) consolidate a group of fixed income assets such as high-yield debt or asset-backed securities into a pool, which is then divided into various tranches.
**Collateralized bond obligations (CBOs) are CDOs backed primarily by corporate bonds.
**Collateralized loan obligations (CLOs) are CDOs backed primarily by leveraged bank loans.

*Credit derivatives are contracts to transfer the risk of the total return on a credit asset falling below an agreed level, without transfer of the underlying asset.

*Collateralized Fund Obligations (CFOs) are securitizations of private equity and hedge fund assets.

External links

* [http://www.tpw.com/resources/documents/Thacher_Proffitt_SF_Common_Terms_Nov_07.qxd.pdf Thacher Proffitt & Wood LLP (2007). "Common Terms in Structured Finance"]
* [http://papers.ssrn.com/sol3/papers.cfm?abstract_id=832184 Jobst, Andreas A. (2007). "A Primer on Structured Finance" "Journal of Derivatives and Hedge Funds"]
* [http://www.businessweek.com/magazine/content/06_47/b4010107.htm Tergesen, Anne (2006). "Structured Notes: Quirkiest Vehicle on the Street", "Business Week"]
* [http://www.thestreet.com/pf/markets/matthewgoldstein/10174866.html Goldstein, Matthew (2004). "Post-Enron, Structured Finance Addiction Hasn't Ebbed" "TheStreet.com"]

ee also

*Pooled investment
*Securitization
*Thomson Financial League Tables.

References


Wikimedia Foundation. 2010.

Look at other dictionaries:

  • structured finance — See …   Law dictionary

  • Structured Finance — A service that generally involves highly complex financial transactions offered by many large financial institutions for companies with very unique financing needs. These financing needs usually don t match conventional financial products such as …   Investment dictionary

  • Structured Finance — Unter Strukturierten Finanzierungen (engl. structured finance) versteht man in der Bankpraxis die Zusammensetzung einer Finanzierung aus mehreren Elementen. Strukturierte Finanzierungen unterscheiden sich von der reinen Kreditvergabe durch… …   Deutsch Wikipedia

  • Structured Finance — Financial Engineering. Teilaufgabengebiet des Corporate Finance. Unter St.F. wird das Erstellen einer wirtschaftlichen Problemlösung eines finanzwirtschaftlichen Gesamtkonzepts meist durch die Hausbank eines Firmenkunden und die anschließende… …   Lexikon der Economics

  • structured finance — A general term used to describe either the practice or the result of creating securities by repackaging cash flows from financial contracts. Examples include MBSs, CMOs, ABSs, and CDOs. American Banker Glossary Often refers to a group within an… …   Financial and business terms

  • Structured Finance — (структурное финансирование) тип финансирования, при котором кредитное качество выпущенных долговых обязательств оценивается на основе прямой гарантии третьей стороны или на основе качества активов заемщика, а не на основе финансовой устойчивости …   Ипотека. Словарь терминов

  • structured finance — The creation of debt instruments by securitization or the addition of derivatives to existing instruments …   Big dictionary of business and management

  • structured finance: overview — See …   Law dictionary

  • Finance — For the Slovenian newspaper, see Finance (newspaper). Finance Financial markets …   Wikipedia

  • Structured product — A structured product is generally a pre packaged investment strategy which is based on derivatives, such as a single security, a basket of securities, options, indices, commodities, debt issuances and/or foreign currencies, and to a lesser extent …   Wikipedia


Share the article and excerpts

Direct link
Do a right-click on the link above
and select “Copy Link”

We are using cookies for the best presentation of our site. Continuing to use this site, you agree with this.