What is Structured Credit Trading

Описание: Structured credit trading involves the repackaging of financial assets into a new instrument. This creates a new source of liquidity and allows for the transfer of risk.

Unlike a standard loan, structured finance places less emphasis on the strength of the borrower, making it attractive for small businesses. It also offers lengthened payment terms and strategic procurement possibilities.

Definition
Structured finance is a sophisticated technique that offers advanced financial products to meet complex transactions servicing big financial needs. It involves the design of tailored instruments involving funding, liquidity and risk transfer. It is used by large corporations and other organizations with specialized financial requirements that conventional debt instruments cannot cover.

It allows a diverse range of security instruments to sit alongside a supply chain – for example, wheat trading can use advance payment structures, pre-export financing, warehouse financing and transit/port finance (including receivables financing) under one umbrella.

Types
Structured trade finance products are designed to fulfill complex financial needs of large corporations that can’t be met with traditional financial instruments. These include asset-backed securities and mortgage backed securities.

CDOs are an example of asset-backed securitization, where banks bundle loans and other assets into tradable capital market debt instruments. These bonds are then offered to investors in tranches, including junior, mezzanine and senior. This allows them to achieve off-balance-sheet securitization, risk diversification and regulatory capital requirements management goals.

Purpose
Structured trade finance (STF) uses a mix of financing instruments to mitigate country risk. Unlike conventional loans, which offer lump-sum funding, STF structures sit alongside the supply chain and pay themselves back through sale and export proceeds. This allows for a more resilient financing model that reflects the underlying trade cycle.

It’s used by large companies with complex financing needs that cannot be served by traditional debt instruments. It’s also used by financial intermediaries to manage risk and develop financial markets for complex emerging countries. A key example is collateralized debt obligations, which combines loans and mortgages into interest-bearing securities that are sold to investors. This reshapes cash flows and transfer risks from the issuer to investors. It can also free up balance sheet space and take advantage of regulatory capital arbitrage opportunities.

Risks
Structured finance instruments provide access to capital markets that might otherwise be unavailable to investors. They can be used to achieve a desired return, reduce risk exposure or capitalize on market trends.

In the years leading up to the financial crisis, securitization became a popular way for banks to increase their lending activity. However, these complex securities often shifted credit risks to institutions with less ability to bear them. They also used tools like credit enhancements that made certain tranches of a pool of loans less risky than the average of the overall pool.

Structured product traders and structuring roles typically require a STEM degree with strong math skills, similar to those of an actuary or data scientist. This skill set makes it difficult to transition into a field that requires modeling entire corporations or analyzing M&A deals, such as private equity.

Returns
The structured finance industry produces a wide variety of investment products that offer enhanced returns, improved liquidity and diversification for issuers and purchasers. These securities are designed to meet the capital needs of institutions, high-net worth individuals and other investors who desire differentiated investment holdings.

Structured credit involves banks pooling together loans into securities and using tools to make each tranche of a collateralized debt obligation riskier or less risky than the average loan in the pool. This type of activity is often cited as being responsible for the 2008 financial crisis, although critics have pointed to many other factors that contributed to the downturn.

If you want to work in structured finance, you can find positions in debt capital markets (ECM) and DCM teams, or you can apply for roles at a large bank that have a specialty in asset backed securities. Entry-level compensation is comparable to other capital markets teams.

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