structured investment vehicle

structured investment vehicle (SIV)

United Kingdom

A special purpose vehicle set up to buy highly rated debt securities (debt security) (such as mortgage-backed securities). Complex computer software is used to create models that predict cashflow from the debt securities in a variety of market circumstances. This software is used to predict and help control the risks assumed by the SIV. The SIV is usually funded by a combination of investment by the original investors (also called capital note holders) and by issuing short-term debt called commercial paper. The profits are made from the difference between the interest a SIV pays on its short-term borrowing and the interest they receive on their long-term investments. The profits are shared between the capital note holders and the investment manager (the entity that administers the SIV, in many cases a bank).

The risks faced by SIVs include:

• First, insolvency if the value of the SIV's investments fall.

• Second, lack of liquidity if investors are scarce.

SIVs grant security over their asset portfolios and substantially all of their other assets in favour of a security trustee for the benefit of the investors and any third parties who have an interest in the SIV (for example, the providers of credit support). They are structured to be insolvency remote so that if they do become insolvent the original investors in the SIV will not be liable for the SIV's debts. In addition they are structured so as to benefit from the capital markets exemption in section 72B Insolvency Act 1986 so that the security trustee can block the appointment of an administrator by appointing an administrative receiver if and when they face difficulties.