Inventors: Jonathan Lai (New York, NY); Jeong Gu Lee (Guttenberg, NJ)
This patent application describes a single tranche synthetic asset backed securities product designed to replicate economics returns of structured finance collateralized debt obligations (SF CDO) securities and allow parties to express a leveraged and/or correlation view on a custom ABS portfolio by transferring a credit risk of a particular transacted tranche of a portfolio in swap format. According to the inventors, the invention accounts for an available funds cap risk of the ABS securities within the underlying portfolio in a manner equivalent to a cash analog based on the same underlying portfolio with sequential pay structure. Claim 1 of the application is a method claim and states as follows:
1. A method comprising: providing a single tranche derivative transaction, wherein the derivative transaction relates to a reference portfolio, and wherein the single tranche derivative transaction relates to a single transacted tranche within a capital structure including a plurality of reference tranches; allocating an available funds cap risk in the reference portfolio in reverse sequence, the reverse sequence beginning with a most subordinate reference tranche; determining an incurred interest shortfall amount for each of the reference tranches; allocating one or more interest shortfall reimbursements sequentially beginning with a most senior reference tranche that has incurred an interest shortfall and ending with a subordinate tranche; and determining an incurred interest shortfall reimbursement amount for each of the reference tranches.