Of Synthetic Finance by Lozano Benjamin

Author:Lozano, Benjamin
Language: eng
Format: epub
ISBN: 9781317652823
Publisher: Taylor and Francis

Let us consider the distribution of risks and cash flows to the parties involved in this synthetic financial exchange.

First, let us consider the SIV.

We will recall that, materially speaking, the SIV is an empty vehicle, a rhizome, whose sole purpose is the distribution of cash flows. But it is also to begin with technically the property owner of the synthetic assets – albeit the assets have metamorphosed into securities, and as such, have been divided up among the various CLN investors. This means that the SIV has been used to synthetically replicate property ownership among the CLN investors, yet without any ownership of property changing hands. Who owns the securities, and thus the risks and cash flows derived from the physical assets to which their value corresponds? The CLN investors do. The SIV has merely mediated the transaction.

The SIV receives cash flows from both the originator and the CLN investor alike: the originator is an unfunded protection buyer, who pays the agreed-to protection premium to the SIV. But the SIV in turn also buys funded protection from the CLN investors, receiving from them prefunded, up-front protection payments through a one-time sale of the notes, and from whose proceeds the SIV has used to invest in low-yielding, low risk securities, which are held as collateral. It is therefore meaningless to say that the SIV either stands to ‘benefit’ or ‘lose’ anything in the transaction, insofar as the SIV is a vacuous vehicle for the becoming of the distribution of risks and cash flows of the transaction, yet without ever fixing on a being of value for itself, per se.

Figure 2.4 Synthetic CDO

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