In very simple words, structured finance can be said a tool to reduce the risk from the assets kept under borrowers hand and also to regenerate the money from the same.
It can also be said that in order to use the money which is not with lender in order to lend it again so that money circulation in the market is increased. The structuring of such cash flow to the institution and the market can be said structured finance. In this way the assets or loans are not only securitized but also it provides the desirable return which helps the essential users like mutual fund, pension fund and others to keep their portfolio return maintained and attractive in the market.
Now a day, structure finance is termed more as CMO (Collateralized Mortgage Obligation), ABS (Assets Backed Securities), MBS (Mortgage Backed Securities), CDO (Collateralized Debt Obligation) or CLO (Collateralized Loan Obligation) instead collectively called structured finance.
The important part of structured finance is Securitisation, which can be described as the pooling of the bundle of assets of same class under different category to make them more transparent in terms of return and risk related to such kind of assets.
Securitisation is done through tranching the assets or mortgages. The main purpose behind this is to categorise the assets with different return and risk which suits and fulfil the investor’s purpose. This also allows the cash flow from the underlying assets to divert to the tranche having the priority for the unharmed tranche from the risk.
These tranches are then rated by the public and private rating agencies, which increases the investor confidence and provide them options according to their risk bearing capability. In that way if investors want more security on their invested money, they will go for higher rated tranches with less return.
The Assets backed securities are more risky than the others to reduce the risk and securitize them credit enhancement tools are used. It provides support to prioritise and superior tranches in terms of risk absorption. There are few techniques which are used as a credit enhancement. They are:
Over collateralization
Excess interest
Subordination
Insurance
Excess spread
It can also be said that in order to use the money which is not with lender in order to lend it again so that money circulation in the market is increased. The structuring of such cash flow to the institution and the market can be said structured finance. In this way the assets or loans are not only securitized but also it provides the desirable return which helps the essential users like mutual fund, pension fund and others to keep their portfolio return maintained and attractive in the market.
Now a day, structure finance is termed more as CMO (Collateralized Mortgage Obligation), ABS (Assets Backed Securities), MBS (Mortgage Backed Securities), CDO (Collateralized Debt Obligation) or CLO (Collateralized Loan Obligation) instead collectively called structured finance.
The important part of structured finance is Securitisation, which can be described as the pooling of the bundle of assets of same class under different category to make them more transparent in terms of return and risk related to such kind of assets.
Securitisation is done through tranching the assets or mortgages. The main purpose behind this is to categorise the assets with different return and risk which suits and fulfil the investor’s purpose. This also allows the cash flow from the underlying assets to divert to the tranche having the priority for the unharmed tranche from the risk.
These tranches are then rated by the public and private rating agencies, which increases the investor confidence and provide them options according to their risk bearing capability. In that way if investors want more security on their invested money, they will go for higher rated tranches with less return.
The Assets backed securities are more risky than the others to reduce the risk and securitize them credit enhancement tools are used. It provides support to prioritise and superior tranches in terms of risk absorption. There are few techniques which are used as a credit enhancement. They are:
Over collateralization
Excess interest
Subordination
Insurance
Excess spread
