Structured Investment Vehicles – The Cayman Perspective

Introduction

A structured investment vehicle or "SIV" is a finance company which engages in market arbitrage by purchasing financial assets in the market (such as medium and long term fixed income bonds) and funding itself with cheaper senior debt instruments such as commercial paper and medium term notes. Typically a SIV will be capitalised with either a mix of equity and subordinated debt or, increasingly, subordinated debt only. Equity investors in SIVs therefore have the benefit of leverage on their exposure to the underlying assets. The economic incentives behind the establishment of SIVs has been the generation of management fees for the financial institution managing the SIV and the generation of significant, consistent returns for equity investors. This article examines the use of SIVs in the Cayman Islands and explores the reasons why Cayman has always been and continues to be the jurisdiction of choice for the incorporation of such companies.