Termination of Swaps for Lehman Minibond
The Monetary Authority of Singapore (MAS) announced that actions have been taken to terminate the swap agreements in the Underlying Securities of Minibond series 1 to 8. No such move is needed for series 9 and 10 as the underlying securities are corporate bonds and not Synthetic Collateral Debt Obligations (Synthetic CDO).
The main structure of the Lehman-linked Structured Notes has been briefly explained in the post How Lehman-linked Minibond, High Note, Jubilee Structured Note work. The portion in question here is related to the Underlying Securities. which is the red box in the figure below.
Key Terms to Know
- Special Purpose Vehicle – Also known as Special Purpose Entity. A limited liability body created to undertake some specific or short term objective
- Originator - The party that is ’selling’ the underlying assets. In a Synthetic CDO, there is no real transfer of assets
- Synthetic CDO- A Credit Default Swap in actual fact. The undertaking of credit risk is not through the real transfer of assets but created synthetically through providing insurance against the default of the CDOs. Thus the term Synthetic CDO
AT ISSUANCE OF NOTE
What is achieved by terminating the swap agreement?
Terminating the swap agreement effectively ended the CDS. This protects the initial investment (High Quality Assets) from the any more defaults of the CDOs and thus helps preserve the prinicpal.
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