What's Structured Finance?

Securitization (securitisation) is the core of structured finance. It is the method by which those in structured finance create asset pools and ultimately form complex financial instruments that are useful to corporations and investors with special needs.  The specific reasons why securitization is valuable include alternative funding formats and a reduction of credit risk via portfolio diversification.

Tranching is then used to create different classes of securities (typically with different credit ratings) from the same pool of assets. Tranching allows the cash flow from the underlying pool of assets to be diverted to various securities (or instruments within TAO’s software). The Bank for International Settlements Committee on the Global Financial System explains tranching as follows: "A key goal of the tranching process is to create at least one class of securities whose rating is higher than the average rating of the underlying collateral pool or to create rated securities from a pool of unrated assets. This is accomplished through the use of credit support (enhancement), such as prioritization of payments to the different tranches."

Credit enhancement is key in creating a security that has a higher rating than the underlying asset pool. Credit enhancement can be created, for example, by issuing subordinated securities. The subordinated securities are allocated any losses from the collateral before losses are allocated to the senior securities, thus giving senior securities structural credit enhancement.  Over-collateralization is also used whereby the balance of the underlying assets is greater than the balance of the outstanding debt, thus creating excess interest in the deal which acts as a "cushion" against reduction in value of the underlying assets. Excess interest income can be used to offset collateral losses before losses are allocated to noteholders, thus providing another credit enhancement. 

TAO Solutions uses its proprietary software solutions to undertake financial modeling of structured finance transactions, including the pooling of assets, the tranching of financial assets and the required credit enhancements and trigger events.  It does this in a manner that is auditable, controlled and introduces industry best practices.

Benefits of Structured Finance

Structured financing and securitization are used by corporations, governments, and the financial services industry to manage risk, obtain alternative sources of funding, achieve lower costs of funding and develop financial markets.  TAO Solutions software can be used by these market participants to automate the administration of structured finance activities and the interaction between the various market participants.

Securitization is the method through which a money instrument is made by combining money assets and sold  to investors. Securitization, very like structured finance, promotes liquidity, a more cost-effective supply of funding and higher use of capital.

Types of Structured Finance Transactions

The types of structured finance transactions supported by TAO Solutions software include:

• Asset-backed securities or ABS represents pools of assets or collateralized by the money flows from a selected pool of underlying assets.
• Mortgage-backed securities or MBS are backed by the principal and interest payments of a collection of mortgage loans
• Residential mortgage-backed securities subsume residential homes, typically single family.homes and apartments, both owner-occupied and for investment (buy-to-let) purposes
• Commercial mortgage-backed securities square measure for business assets, like malls or workplace complexes.
• Commercial assets collateralized debt obligations square measure collateralized debt obligations backed primarily by business assets loans