Overview
Structured securities represent one of the more complex topics in finance. There are obth complex legal and operational issues that need to be dealt with.
Legal Issues
A key aspect of creating a structured security is the use of a legal entity separate from the issuing firm. This entity is often referred to as a special purpose vehicle or SPV. The SPV is created to be a bankruptcy remote entity. That is, if the SPV goes bankrupt, the owners and creditors of the SPV cannot go after the assets of the issuing firm.
An SPV is created as an LLC or a limited partnership (typically). The SPV then issues a set of bonds (tranches) to investors, and it then uses the money from that issue to purchase the assets from the company that created the SPV. The assets are purchased in what is known as a true sale. That is, the selling company does not retain any further right to the assets sold to the SPV.
As a security, the structured security generally must register with the Securities and Exchange Commision (SEC) (see US Securities Law)
Operational Issues
When an SPV is created, it is usually done in conjunction with an investment bank, who then markets the securities to its clients. A servicer is an entity that is responsible for collecting the cash flows from the SPVs assets. The trustee is then responsible for reporting to the bond holders and sending out the contractual payments.
Credit Ratings
A key element to being able to market the structured securities is a rating from one of the credit rating agencies.