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Structured Credit Products: Credit Derivatives and Synthetic Securitisation, 2nd Edition by Moorad Choudhry

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CHAPTER 12

An Introduction to Securitisation

The second part of this book examines synthetic securitisation. This is a generic term covering structured financial products that use credit derivatives in their construction. In fact another term for the products we discuss in Part II could be ‘hybrid structured products’. However, because the economic impact of these products mirrors some of those of traditional securitisation instruments, we use the term ‘synthetic securitisation’. To fully understand this, we need to be familiar with traditional or cash flow securitisation as a concept, and this is what we discuss now. Readers who are familiar with the subject may wish to proceed directly to Chapter 13.

The motivations behind the origination of synthetic structured products sometimes differ from those of cash flow ones, although sometimes they are straight alternatives. Both product types are aimed at institutional investors, who may or may not be interested in the motivation behind their origination (although they will—as prudent portfolio managers—be interested in the name and quality of the originating institution). Both techniques aim to create disintermediation and bring the seekers of capital, and/or risk exposure, together with providers of capital and risk exposure.

In this chapter we introduce the basic concepts of securitisation and look at the motivation behind their use, as well as their economic impact. We illustrate the process with a brief hypothetical case study. ...

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