A financial structure whose building blocks are credit default swaps (CDSs) or, in the case of mortgages, asset-backed credit default swaps (ABCDSs) instead of real assets. In a CDS-based structure, a counterparty (protection buyer) pays a periodic fixed premium in return for protection (insurance) on a given entity (name) or credit (a reference bond). If the underlying entity or credit misses interest or principal payments, the protection seller pays a specific amount of compensation to the protection buyer.
The structure may terminate immediately or after a given number of protection payments. In general, no funding is required in synthetic structures (funding refers to upfront payment of protection compensation). A synthetic structure also eliminates the need and expense of transferring assets from an originator to a special purpose vehicle (SPV).
