Introduction to Structured Finance

CHAPTER 1

Introduction

The definition of structured finance is broad, and not everyone agrees on exactly what it is. This introductory chapter begins with our working definition of structured finance and then follows with views and opinions from a variety of experts. It concludes with a case study of how the boundaries of structured finance were tested by the Enron debacle.

DEFINITION OF STRUCTURED FINANCE

There is no universal definition of structure finance. It is apparent from the way that structured finance teams are organized in banks that the term covers a wide range of financial market activity. We believe a good working definition for structured finance is the following:

… techniques employed whenever the requirements of the originator or owner of an asset, be they concerned with funding, liquidity, risk transfer, or other need, cannot be met by an existing, off-the-shelf product or instrument. Hence, to meet this requirement, existing products and techniques must be engineered into a tailor-made product or process. Thus, structured finance is a flexible financial engineering tool.

We believe one or more of following elements generally characterize a structured finance transaction:

• a complex financial transaction that may involve actual or synthetic transfer of assets or risk exposure, aimed at achieving certain accounting, regulatory, and/or tax objectives;
• a transaction ring-fenced in its own special purpose vehicle;
• a bond issue that is asset-backed and/or external ...