Derivatives & Structured Finance

Transactions involving derivatives and structured finance can be complex and often require specialized knowledge of experts deeply familiar with specific products and markets. Compass Lexecon economists offer that in-depth familiarity, knowledge, and experience. Our expertise involving derivatives, structured finance, and related financial instruments is helpful to clients in litigation, consulting, and regulatory contexts.

With a combination of academic and industry expertise, we have been involved in cases pertaining to the operation and structure of markets, valuation of financial instruments, disputes over the rights of different classes of securities holders and derivatives counterparties, disputes concerning credit assessments, cash flow waterfall modeling, and analyzing complex structured financial instruments.

Our expertise also includes assessments and analyses of how different market participants use derivatives and structured financing techniques. Clients have engaged Compass Lexecon in litigation and regulatory investigations involving internal controls and risk management processes related to the use of derivatives and structured finance. In addition, we have performed analyses of firms’ derivatives and structured finance activities involving hedging effectiveness, economic substance, tax, accounting, disclosure, and regulatory compliance.

Our vast warehouse of experience with and knowledge of products and markets, combined with our economic and accounting expertise, enables us to uniquely address problems in this area. We have deep familiarity with derivatives and structured products based on credit and interest-rate markets, foreign exchange, commodities, equities, and insurance-linked derivatives and securities. Our interdisciplinary approach can be deployed in engagements relating to any product or market.

Compass Lexecon has experience with derivatives product types and structured financing vehicles, including:

  • Futures, forwards, options, and swaps
  • Exotic and compound options
  • Collateralized debt and loan obligations (“CDOs” and “CLOs,” respectively), synthetics, and structured notes
  • Credit default swaps (“CDS”)
  • Securities loans and debt repurchase agreements
  • Broadly syndicated leveraged loans (as CLO underlyings)
  • Sovereign and corporate bonds (as securities loan and repo underlyings)
  • Structured credit, correlation, and relative-value trading practices
  • Mortgage-backed securities (“MBS”)
  • Asset-backed securities (“ABS”)
  • Insurance-linked securities and catastrophe (“cat”) bonds
  • Special purpose entities/vehicles (“SPEs”, “SPVs”)
  • Asset-backed commercial paper programs and structured investment vehicles (“SIVs”)
  • Auction rate securities (“ARS”) and contingent liquidity instruments
  • Financial guaranties and monoline bond insurance
  • Structured insurance and alternative risk transfer (e.g., buyouts, runoff solutions, finite risk and finite/financial reinsurance, captives, protected cell companies, dual-trigger insurance, multiline integrated cover)
  • Bulk annuity transactions, longevity/mortality trades, bank- and company-owned life portfolios (“BOLI” and “COLI,” respectively), and structured settlements
  • Trust-issued securities (e.g., trust-preferred stock and trust-issued contingent capital)

We offer expertise in the following areas:

  • Financial instrument valuation
  • Financial product design
  • Triggers and transactional default management
  • Assessments of the strategic uses of derivatives and structured finance by dealers, end users, and other market participants
  • Common market practices and trading conventions
  • Cash flow waterfall modeling for structured products
  • Risk management processes reviews:
    • Risk management policies, procedures, compliance, and reporting
    • Hedging effectiveness (specific portfolios or exposures and enterprise-wide)
    • Risk-adjusted capital allocation models
    • Property and casualty insurance/reinsurance
    • Risk management by risk-takers (e.g., insurance companies, hedge funds, and other asset managers)
  • Market, credit, liquidity, and operational risk measurement models
  • Derivatives clearing and settlement, including:
    • Central counterparty margin models
    • Central counterparty default adequacy and stress testing models
  • Analysis of the design and economic substance of financial products and structures
  • Accounting, tax, and disclosure issues
  • Regulatory compliance, including:
    • Internal investigations (e.g., rogue trading)
    • Regulatory investigations