Structured MTNs and Special Purpose Vehicles

CFA Level I
#1

The two seem to be the great tools for some companies/funds to maneuver around regulations. Structured MTNs are considered as “Rule Busters”. Institutional investors such as pension funds forbidden to use derivatives can play with structured MTNs - which might be part of the market hedging or speculation. So what do you think of the ethnic implications behind? Yes, it’s a detour but in essence the asset managers mentioned above violated the rules in my opinion. Special purpose vehicles are referred as “bankruptcy remoted” entities. Through this entity, companies is almost given a perfect exit to dodge its financial obligations in case of being default/bankrupt. The issue holders are instead left in limbo. Isn’t it somewhat an unfair system for the general investors? And CDOs can be issued by using another CDO as collateral? How bizarre?! At least the collateral of CMO is a real property - something tangible and relatively easier to evaluate. With the financial assets as collateral, it’s liquid; intangible and somewhat illusive. So do you think this part might be biggest trouble maker…

#2

hyang Wrote: ------------------------------------------------------- > So what do you > think of the ethnic implications behind? I think it’s the fault of the Chinese. Could be the Koreans.

#3

Maybe, but nearly everyone learned bad behavior from the Brits first.

#4

It the existing financial system has all these loopholes, then what’s the point to let us learn by heart those ethical rules?

#5
  1. There is no point in learning CFAI’s arbitrary ethical rules except to pass CFA exams. They are completely inconsistent, idiotic, and poorly conceived. 2) The “Rule Busters” thing is probably overblown. There is no doubt that some people will go out and buy structured notes that embed oil options (or whatever) to get around proscriptions about derivatives. They are self-important jerks who think they are more clever than they are. In situations where a lot of money is at stake there is an investment committee, compliance officer, etc who oversee investments and make sure that people can’t be doing questionable end runs by buying embedded derivatives. 3) There are end-runs around virtually any proscription that says “you can’t buy a security of [blah] type” For example, I’ve managed risk on a portfolio containing at least 30,000 corn futures when contract limits were 6,000 (I think). The law says you can’t own more than 6000 but the swaps market is wide open and not included.