Basics of Credit Derivatives

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Credit derivatives terminology

By Vinod Kothari

 

 

Special purpose vehicle: A corporate, trust or other legal entity, formed with a specific and limited purpose, essentially representing an incorporated form of assets, risks or corpus transferred to such vehicle. One of the uses of special purpose vehicles is in securitisation where specific assets, credit derivative contracts or bond portfolio is transferred to such vehicle, and the vehicle in turn issues its securities which implicitly represent the stake taken by the investors into such assets, credit derivative contracts or bond portfolio. A special purpose vehicle is debarred from engaging in any activity other than holding such assets or contracts, cannot incur liabilities, and is  legally structured as an independent to avoid any risk of consolidation.

 

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