BCBS/Joint Forum: Report on Special Purpose Entities
30 September 2009
This paper serves two broad objectives. It provides background on the variety of special purpose entities (SPEs) found across the financial sectors and it suggests policy implications for consideration by market participants and the supervisory community.
The number and complexity of special purpose entity (SPE) structures, in conjunction with the growth of markets for securitisation and structured finance products, increased significantly in the years before 2007, but since then they have declined considerably.
It must be emphasised that the usage of SPE structures is not inherently problematic in itself. SPEs have been used for many years and have contributed to the efficient operation of the global financial markets by providing financing opportunities for a wide range of securities to meet investor demand. In instances where parties to an SPE possess a comprehensive understanding of the associated risks and possible structural behaviours of these entities under various scenarios, they can effectively engage in, and benefit from using, SPEs.
The current market crisis that began in mid-2007, however, essentially “stress tested” these vehicles. As a result, serious deficiencies in the understanding and risk management of these SPEs were identified. While recent market events have resulted in a dramatic reduction in issuance of securities using SPEs, we expect that SPEs will continue to be used for financial intermediation and disintermediation going forward. These structures provide institutions and investors with a variety of uses and benefits.
This paper is intended to meet two broad objectives. First, it is meant to serve an informational purpose by describing the variety of SPE structures found across the financial sectors, the motivations of market participants who rely on them, and how effectively certain structures achieve the transfer and management of risks (eg credit risk, interest rate risk, liquidity risk, market risk and event risk). A second objective is to suggest policy implications and issues for consideration by the supervisory community and market participants. Recent regulatory reform proposals under discussion (eg relating to accounting and capital adequacy frameworks) will likely affect how future SPEs are structured and used.
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