Report on Special Purpose Entities

September 2009

The number and complexity of special purpose entity (SPE) structures increased significantly over the prior several years through 2007 in conjunction with the growth of markets for securitisation and structured finance products, but have declined since then. It must be emphasised that the usage of SPE structures is not inherently problematic in and of 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 behaviors 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.

We offer the observations in this document at a time when international financial sector policymakers are discussing how best to reform the regulatory and supervisory processes relating to how firms use SPEs. 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.