BIS Releases Report on Special Purpose Entities

The Bank for International Settlements has released its Report on Special Purpose Entitites. Section I is the Executive Summary & Overview:

Section II provides a summary of market developments that contributed to the growth of the securitisation markets that relied heavily on the use of SPEs. Also described is the confluence of factors that played a part in the market crisis that began in mid-2007.

Section III focuses on the motivations of sponsoring firms and investors for employing SPEs. For originators and sponsors, these may include risk management, funding, accounting, or regulatory capital considerations.

Section IV describes the potential for informational asymmetries and problematic incentives to hamper the use of SPEs, examines potential issues and deficiencies in risk management, and explores ways in which risk transfer can potentially be over- or underestimated by both originators and investors.

Section V presents a series of policy issues and recommendations for consideration.

Appendix 1 is a primer on common types of SPE structures and programs, such as RMBS, CMBS, CDOs, ABCP conduits, structured investment vehicles (SIVs), repackaging vehicles, and transformer structures.

Appendix 2 continues with a more technical discussion of common features of SPEs. Legal forms, methods of achieving asset transfer, and accounting and regulatory capital considerations are discussed. Additionally, the roles of key parties to SPEs (eg the sponsor, originator, and servicer) are described, as well as issues related to the control and management of these entities.

Appendix 3 explores how the risk and return of assets in SPEs can be allocated among various parties and counterparties. Different forms of exposure can result from holding certain tranches and residual interests or from providing liquidity and credit guarantees. This section also includes a discussion of triggers, where the cash flows are redirected should a particular event occur.

Appendix 4 provides global data on the use of SPEs by financial institutions according to vehicle type and geography.

Appendix 5 provides the list of members of the Joint Forum Working Group on Risk Assessment and Capital.

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