What is a 'Structured Investment Vehicle - SIV'

A structured investment vehicle (SIV) is a pool of investment assets that attempts to profit from credit spreads between short-term debt and long-term structured finance products such as asset-backed securities (ABS).

Structured investment vehicles are also known as conduits.

BREAKING DOWN 'Structured Investment Vehicle - SIV'

A structured investment vehicle (SIV) is a type of special purpose fund that borrows for the short-term by issuing commercial paper in order to invest in long-term assets with credit ratings of between AAA and BBB. Long term assets frequently include structured finance products such as Mortgage-Backed Securities (MBS), Asset-Backed Securities (ABS), and the less risky tranches of Collateralized Debt Obligations (CDOs). Funding for SIVs comes from the issuance of commercial paper that is continuously renewed or rolled over; the proceeds are then invested in longer maturity assets that have less liquidity but pay higher yields. The SIV earns profits on the spread between incoming cash flows (principal and interest payments on ABS) and the high-rated commercial paper that it issues. For example, an SIV that borrows money from the money market at 1.8% and invests in a structured finance product with a 2.9% return will earn a profit of 2.9% - 1.8% = 1.1%. The difference in interest rates represents the profit that the SIV pays to its investors, part of which is shared with the investment manager.

In effect, the commercial paper issued matured sometime within 2 to 270 days, at which point, the issuers simply issue more debt to repay maturing debt. Thus, one can see how structured investment vehicles often employ great amounts of leverage to generate returns. These financial vehicles are typically established as offshore companies specifically to avoid regulations that banks and other financial institutions are subject to. In essence, SIVs allow their managing financial institutions to employ leverage in a way that the parent company would be unable to do due to capital requirement regulations set by the government. However, the high leverage employed is used to magnify returns which when coupled with short-term borrowings exposes the fund to liquidity in the money market.

Structured investment vehicles are less regulated than other investment pools, and are typically held off the balance sheet by large financial institutions such as commercial banks and investment houses. This means that its activities does not have an impact on the assets and liabilities of the bank that creates it. SIVs gained much attention during the housing and subprime fallout of 2007; tens of billions in the value of off-balance sheet SIVs was written down or placed into receivership as investors fled from subprime mortgage related assets. Many investors were caught off guard by the losses since little was publicly known about the specifics of SIVs, including such basics as what assets are held and what regulations determine their actions. Toward the end of 2008, no SIVS remained in operation.

  1. Structured Finance

    Structured finance is a highly involved financial instrument ...
  2. Capitalization Structure

    Capitalization structure refers to the proportion of debt and ...
  3. Structured Note

    A structured note is a debt obligation that contains an embedded ...
  4. Asset-Backed Commercial Paper - ...

    An asset-backed commercial paper (ABCP) is a short-term investment ...
  5. Paper Dealer

    A market maker that buys and sells extremely short-term corporate ...
  6. Financial Structure

    The specific mixture of long–term debt and equity that a company ...
Related Articles
  1. Investing

    Asset-Backed Commercial Paper Carries High Risk

    Asset-backed commercial paper can be much more risky than traditional commercial paper.
  2. Personal Finance

    Even Medical Residents Make Student Loan Mistakes

    Most medical students incur a large amount of student debt that needs to be managed wisely.
  3. Managing Wealth

    4 Structured Product Types Wealthy Clients Love

    High-net-worth investors find structured products appealing for a variety of reasons. Here's a look at four types.
  4. Trading

    An Introduction to Structured Products

    Learn a simple way to bring the benefits of derivatives into your portfolio.
  5. Investing

    Asset-backed and mortgage-backed securities: An introduction

    Learn more about the structure of asset-and mortgage-backed securities, along with some examples of ABS, MBS and their valuations.
  6. Investing

    Commercial Paper

    Commercial paper is a short-term debt security issued by financial companies and large corporations. The corporation promises the buyer a return, or profit, for making the loan. The return is ...
  7. Investing

    An introduction to commercial paper

    Commercial paper is a short-term instrument that can be a viable alternative for retail fixed-income investors looking for a better rate of return.
  8. Investing

    UPS Stock: Capital Structure Analysis

    Analyze UPS' capital structure to determine the relative importance of debt and equity financing. Identify the factors influencing financial leverage trends.
  1. What is the difference between a collateralized debt obligation (CDO) and an asset ...

    Discover the relationships between asset-backed securities (ABS), collateralized debt obligations (CDOs) and mortgage-backed ... Read Answer >>
  2. What does it signify if the term structure of an interest rate's curve is positive?

    Understand what the term structure of interest rates is used to measure. Learn what a positive term structure signifies to ... Read Answer >>
  3. How does a company's capitalization structure affect its profitability?

    Learn about capitalization structure and how the combination of debt and equity a company uses to fund operations can affect ... Read Answer >>
  4. Why is term structure theory of importance to economists?

    Understand more about the term structure of interest rates and what it is used to measure. Learn what the term structure ... Read Answer >>
  5. What is securitization?

    Securitization involves taking an illiquid asset, or group of assets, and transforming it into a security. A typical example: ... Read Answer >>
Hot Definitions
  1. Liquidity

    Liquidity is the degree to which an asset or security can be quickly bought or sold in the market without affecting the asset's ...
  2. Federal Funds Rate

    The federal funds rate is the interest rate at which a depository institution lends funds maintained at the Federal Reserve ...
  3. Call Option

    An agreement that gives an investor the right (but not the obligation) to buy a stock, bond, commodity, or other instrument ...
  4. Standard Deviation

    A measure of the dispersion of a set of data from its mean, calculated as the square root of the variance. The more spread ...
  5. Entrepreneur

    An entrepreneur is an individual who founds and runs a small business and assumes all the risk and reward of the venture.
  6. Money Market

    The money market is a segment of the financial market in which financial instruments with high liquidity and very short maturities ...
Trading Center