The Servicer’s Role in Managing Complex Structured Transactions

Abstract

The more complicated structured transactions, such as collateralized debt obligations (CDOs) and net interest margin securities (NIMs), come with structural requirements that go beyond the defined job description of most servicers and trustees. That’s why CDOs tend to have a manager assigned, outside of the trustee’s responsibility, to ensure that the underlying loans and securities are tracked, reported, and compiled properly, and, specifically, to monitor the sophisticated structural features of the securities. While servicers and trustees are attempting to adapt and meet today’s challenges, investors by and large must recognize that they are trusting organizations to do a job they lack the manpower, technology, and experience to do. Investors must take the lead in understanding these complex instruments and take responsibility for protecting their investments. Passive management of these instruments, now that they have seasoned and in light of high defaults, is a high-risk approach.

TOPICS: CLOs, CDOs, and other structured credit, manager selection