Corporate Bonds and Structured Financial Products

To the extent that hybrid capital securities are issued out of a special purpose vehicle where the cash flow from a pool of self-liquidating financial assets supports payments on those securities, they in all likelihood would constitute structured finance products under the proposed definition. For example, payments on trust preferred securities are primarily supported by junior subordinated debentures of the issuer that are sold to, and held by, the issuing trust.

Another form of hybrid capital could involve a standby capital facility where the issuing trust invests the issuance proceeds in high grade assets, such as U. Treasuries, and agrees to purchase junior subordinated debentures from an entity in exchange for a commitment fee.

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Unlike an asset-backed security, which is a security that is primarily serviced by the cash flows of a discrete pool of receivables or other financial assets that by their terms convert into cash within a finite time period, a structured finance product need only be a security collateralized by any pool of self-liquidating financial assets, the payments on which depend on the cash flow from those financial assets. As such, arguably fewer assets in the collateral pool need to support only a portion of pass-through payments to the investors under the proposed definition of structured finance product in contrast to the asset-backed security definition.

This implies that vehicles with more diverse asset combinations, and thus fewer assets that generate a cash flow for the securities, could be captured by the proposed definition of structured finance product. Accordingly, it is possible that the broad language of the proposed definition of structured finance product would apply to money market funds, fixed income funds, certain hedge funds, and other pooled investment vehicles.

It is also likely that clause b of the proposed definition would apply to repackaged products, such as those products that involve the repackaging of corporate bonds or corporate bonds and derivatives. For example, an investor may be precluded by its constituent documents from entering into derivatives and want to purchase floating rate debt of a company that only issues fixed rate debt. As a solution, the investor could purchase securities of a trust that contains fixed rate debt of the company and an interest rate swap. Arguably, those repackaged securities would be covered by the proposed definition of structured finance product.

To the extent that a security constitutes a structured finance product under the proposed definition, the Disclosure Rules for Private Offerings and their increased notice and disclosure requirements would apply to private offerings and resales of those securities under Rules , A, and However, the Disclosure Rules for Private Offerings would not apply to all safe harbors for private placements and exempt offerings.

In an ironic twist, the uncertainty surrounding the proposed definition of structured finance product may result in issuers relying less on clear, regulatory safe harbors and more on the traditional statutory private placement and resale exemptions for U.

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Register now for your free, tailored, daily legal newsfeed service. On the other hand, the goal for investment banks was to increase profit margins since the newer products with added features were harder to value, and thus harder to gauge bank profits.

Interest in these investments has been growing in recent years, and high-net-worth investors now use structured products as way of portfolio diversification. Nowadays the product range is very wide, and reverse convertible securities represent the other end of the product spectrum yield enhancement products.

Structured products are also available at the mass retail level—particularly in Europe, where national post offices, and even supermarkets, sell investments on these to their customers. Structured products aspire to provide investors with highly targeted investments tied to their specific risk profiles, return requirements and market expectations. Historically, this aspiration is met with an ad hoc approach: Within this approach it can be difficult to articulate the precise problem the product is designed to solve, let alone to claim the product as optimal for the client.

Nevertheless, this approach is still widely used in practice.

A more advanced mathematical approach to product design has been proposed. This approach demands higher proficiency from both the structurer who designs the product and the client who needs to understand the proposal.

Once the product is designed, it is manufactured through the process of financial engineering. This involves replicating the product through a trading strategy involving underlyings like bonds , shares , indices , commodities as well as simple derivatives like vanilla options , swaps and forwards. The market for derivatives has grown quickly in recent years because they perform an economic function by enabling the risk averse to transfer risk to those who are willing to bear it for a fee.

Disadvantages of structured products may include: Structured products are not homogeneous—there are numerous varieties of derivatives and underlying assets—but they can be classified under the following categories:. From Wikipedia, the free encyclopedia. Its modern setup [3] requires comprehensive understanding of: Manufacturing and Managing Customer-Driven Derivatives.

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