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Friday, 14th August 2020
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SIVs, ABCPs and conduits unmasked Back  
With structured finance continuing to dominate the headlines, in the midst of the credit and liquitidy crisis, FINANCE presents an overview of some key terms.
Arbitrage CDO: A CDO transaction based on assets whose aggregate yield is less than the aggregate yield for which the securities issued in connection with the transaction can be sold or funded.

Asset-backed commercial paper: CP whose principal and interest payments are designed to be derived from cash flows from an underlying pool of assets.

Asset-backed securities: Bonds or notes backed by pools of financial assets, typically with predictable income flows, originated by banks and other credit providers.
Collateralised debt obligation: A security backed by a pool of various types of debt, which may include corporate bonds sold in the capital markets, loans made to corporations by institutional lenders, and tranches of securitisations.

Commercial mortgage backed securities: Securities that are backed by one or more pools of mortgage loans. CMBS are backed by one or more loans secured by commercial properties.
Commercial paper: Short-term promissory notes. The maturity of most CP is less than 270 days, with the most common maturities ranging from 30 to 50 days or less.

Conduit: A legal entity that purchases assets from several sellers and funds these purchases either through term securitisations or through the issuance of ABCP.

Credit default swap: A contract whereby the protection seller agrees to pay to the protection buyer the settlement amount upon the occurrence of certain credit events.

Credit derivatives: Capital market instruments designed to transfer credit risk from one party to another.

Interest rate swap: A binding agreement between two coutnerparties to exchange periodic interest payments on a predetermined principal amount, which is referred to as the notional amount.

Listing agent: The agent responsible for carrying out the procedures required to have securities listed on the appropriate stock exchange.

Medium-term note: A corporate debt instrument that is continuously offered over a period of time by an agent of the issuer. Investors can select from maturity bands of 9-12 months, 12-18 months,18 months to two years, etc up to 30 years.

Monoline insurer: An insurance company that is restricted, by the terms of its charter, to writing insurance policies related to a single type of risk. The monoline insurer unconditionally guarantees the repayment of certain securities issue in connection with specified types of transactions.
Mortgage-backed securities (MBS): MBS include all securities whose security for repayment consists of a mortgage loan or a pool of mortgage loans secured on real property.

Residential mortgage-backed securities: RMBS are the most fundamental form of securitisation. These securities involve the issuance of debt that have been secured on residential properties.
Structured Investment Vehicle: A type of SPE that funds the purchase of its assets, which consist primarily of highly rated securities, through the issuance of both CP and MTNs. In the event of a default by a SIV, its pool of assets may need to be liquidated.

SIV-lite: SIV-lites are essentially CDOs which pool together bonds backed by mortgages and other asset-backed debt.

Sub-prime: A first or second lien residential mortgage loan made to a borrower who has a history of delinquency or other credit problems.
Source: Standard & Poor’s; The Financial Times

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