SyntheticCDOs
type: Ontology
abstract: Synthetic collateralized debt obligations are instruments designed to provide the same kind of structure and returns as a CDO, but these are not backed by an actual pool of debt assets.
license: http://opensource.org/licenses/MIT
imports: LegalPersons
imports: CreditDefaultSwaps
imports: CreditRatings
imports: AccountingEquity
imports: Relations
imports: Analytics
imports: AnnotationVocabulary
imports: CollateralizedDebtObligations
imports: PoolBackedSecurities
imports: Funds
imports: Pools
has maturity level: Provisional
copyright: Copyright (c) 2015-2023 EDM Council, Inc.

arbitrage synthetic c d o
type: Class
subclass of: ArbitrageCDO
subclass of: synthetic c d o
subclass of: Restriction
  on property: assets managed by
  some values from: CDOPortfolioManager
subclass of: Restriction
  on property: issues
  some values from: synthetic c d o tranche
disjoint with: synthetic balance sheet c d o
definition: Arbitrage synthetic CDO deals are motivated by regulatory or practical considerations that might make a bank want to retain ownership of debt while achieving capital relief through CDSs. In this case, the sponsoring bank has a portfolio of obligations, called the reference portfolio. It retains that portfolio, but offloads its credit risk by transacting CDSs with the CDO.
explanatory note: For arbitrage synthetic deals, two advantages are - an abbreviated ramp-up period (for managed deals), and - the possibility that selling protection through CDSs can be less expensive than directly buying the underlying bonds. This is often true at the lower end of the credit spectrum.

synthetic amortizing security
type: Class
subclass of: synthetic structured finance instrument
definition: Security constructed to emulate an amortizing security.
scope note: Synthetic instruments can be created to mimic a wide range of debt instruments. These are not all shown here. This one is shown as an example

synthetic balance sheet c d o
type: Class
subclass of: BalanceSheetCDO
subclass of: synthetic c d o
subclass of: Restriction
  on property: issues
  some values from: synthetic c d o tranche

synthetic c d o
type: Class
subclass of: CDODeal
subclass of: Restriction
  on property: issues
  some values from: synthetic c d o tranche

synthetic c d o portfolio
type: Class
subclass of: Restriction
  on property: notionally holds
  some values from: synthetic c d o portfolio constituent
editorial note: Review notes: What real stuff is this made of? Would be the actual contracts (the Ref Obligation contracts or the CDS contract)? Buyer of protection is buying protection and paying a fee. Similar to shorting on a stock. Seller of the protection is the one creating the instruments. So the Protection Seller is using the synthetic CDO as some kind of synthetic vehicle. Inside the portfolio is the actual contract that generates the cash.

synthetic c d o portfolio constituent
type: Class
definition: An instrument which is defined as a constituent of a synthetic pool of instruments. These are not holdings because they are not held, but in all other respects they are the constituents of the portfolio.

synthetic c d o tranche
type: Class
subclass of: CollateralizedDebtObligation
subclass of: Restriction
  on property: is tranche of
  some values from: synthetic debt instrument pool

synthetic debt instrument pool
type: Class
subclass of: DebtPool
subclass of: Restriction
  on property: funded by
  some values from: synthetic debt instrument pool funding asset
subclass of: Restriction
  on property: has underlying contract
  some values from: CreditDefaultSwap
subclass of: Restriction
  on property: makes reference to
  some values from: synthetic c d o portfolio
definition: A cash flow structure which synthesizes the behavior of a portfolio of debt securities. For example a synthesized portfolio of CDO / Bonds / ABS using Total Returns Swaps and CDS. This does exist, it is just manufactured from different instruments.

synthetic debt instrument pool funding asset
type: Class
subclass of: Restriction
  on property: has investment grade
  some values from: InstrumentCreditRating
definition: An asset which provides the funding for a synthetic debt instrument pool, as used in a synthetic CDO.
definition: From April 28 review session: CDS mechanization: Q: Are the CDS taken out on the constituents of the (non owned) pool or on some other instrument? A: There is funding to underpin the pool. The funding may be high grade debt or may be low grade. There is an undedrlying source of funds. then you swap (using CDS) into other risks. so I might lend to a government institution, and then sell protection against a whole series of corporates. So I've taken the high quality portfolio and added other risks to it. Or the other way round. conclusions:

synthetic debt s p v
type: Class
subclass of: SpecialPurposeVehicle
subclass of: Restriction
  on property: holds
  some values from: synthetic debt instrument pool funding asset
definition: A Special Purpose Vehicle set up for the issuance of synthetics CDOs. This entity (like all SPVs) its itself registered as some kind of legal entity, distinct from the sponsoring organization. It becomes the Issuer of Synthetic CDO issues.
editorial note: REVIEW: Whether this is (or is ever) a separate SPV for Synthetics, as it is for Cash CDO and other Cash structured finance. If not, how to define the facts at the level of SPV without contradictions. Moving stuff off the balance sheet is involved in putting it into the SPV. So talking a bout balance sheet or off balanc sheet, this is about creating the pool which is going to be sold off. This applies whether hte pool is cash (real holdings) or synthetics. Either way ,the instruments are transferred into the CPV to sell them off. conclusion: applies to cash and non cash. In the old days there were all sorts of guarantees added to that SPOV. Now if you provide support to that =SPV it is no longer "Off balance sheet" froma regulatory point of view. Accounting rules refer.

synthetic pool asset
type: Class
subclass of: FinancialAsset
subclass of: Restriction
  on property: simulated by
  some values from: CreditDefaultSwap

synthetic structured finance instrument
type: Class
subclass of: StructuredFinanceInstrument
subclass of: Restriction
  on property: refersTo
  some values from: synthetic pool asset

assets managed by
type: ObjectProperty
domain: arbitrage synthetic c d o
range: CDOPortfolioManager

funded by
type: ObjectProperty
domain: synthetic debt instrument pool
range: synthetic debt instrument pool funding asset

has investment grade
type: ObjectProperty
domain: synthetic debt instrument pool funding asset
range: InstrumentCreditRating

has underlying contract
type: ObjectProperty
domain: synthetic debt instrument pool
range: CreditDefaultSwap
definition: The underlying CDS which is created to mechanise the cash flows in the synthetic portfolio.

holds
type: ObjectProperty
domain: synthetic debt s p v
range: synthetic debt instrument pool funding asset

is cash
type: DatatypeProperty
domain: synthetic c d o tranche
range: boolean
definition: Whether the CDO has an underlying pool of real assets. This is No: the CDO has a synthetic pool of underlying assets.

is tranche of
type: ObjectProperty
domain: synthetic c d o tranche
range: synthetic debt instrument pool

issues
type: ObjectProperty
domain: synthetic c d o
range: synthetic c d o tranche

makes reference to
type: ObjectProperty
domain: synthetic debt instrument pool
range: synthetic c d o portfolio

notionally holds
type: ObjectProperty
domain: synthetic c d o portfolio
range: synthetic c d o portfolio constituent

percentage of defaults this tranche
type: ObjectProperty
domain: synthetic c d o tranche
range: Percentage
definition: The percentage of defaults which holders of this are exposed to, that is the percentage of defaults that this tranche represents. Further Notes Review session notes 21 April: The first, second and so on, to stop paying out when there is a default. In each case you get the first, second etc. x% of defaults. Base underlying may be high or low quality. Create the pool by buying or selling protection depending on hich way you want to go, e..g. have high quality funds, (borrowers), would sell protection. If low quality, would buy protection to improve quality. So risk is no longer bound to the funding. REVIEW: More likely this is a band of percentages (from and to); review and formalize. See also note on attachment and detachment points.

simulated by
type: ObjectProperty
domain: synthetic pool asset
range: CreditDefaultSwap
definition: The underlying CDS which is created to mechanise the cash flows in the synthetic portfolio.

simulates
type: ObjectProperty
domain: synthetic pool asset

simulates
type: ObjectProperty
domain: synthetic debt instrument pool

tranche type
type: ObjectProperty
domain: synthetic c d o tranche
range: CDOTrancheSenioritySelection