Structuring-the art of making the 'impossible' into reality

People managing the Sales & Distribution functions in a complex indirect tax environment (like India) like India, have long known that sometimes you sacrifice commercial rationale to achieve the most efficient post tax outcome. Luckily, such sub optimal structures are less common in financial structuring, where the client and bank jointly work to tailor existing products to the client needs. To use an analogy, a structurer does not create value out of thin air, he merely stitches the threads of accounting, legal, tax, financial, capital etc together to obtain a structured product. While structured products were blamed for the financial crisis, and are still accused as being too complex(and thus hard to value), we should note that their purpose is to solve a client problem. And that basic need does not change even for structures aimed at regulatory arbitrage.

So how does the impossible become possible? Lets see some examples

1. You are a mutual fund prohibited from investing in certain asset classes, which would aid your strategy. Try investing in a structured note(seemingly debt) that mirrors your investment view. The payoff diagram would then hopefully achieve what was earlier prohibited
2. As an investor, you cannot exceed your ownership limits in listed securities without making an open offer. Try a total return swap to get economic ownership without the hassle of legal title
3. You want principal protection yet need a good upside-which conventional debt products do not permit. Take a principal protected note which is a zero coupon bond(or variants) with the balance invested in very risky instruments to achieve the upside for the entire amount
4. You would like to participate in a derivative product but the dealers will only deal with other banks/or margin requirements may be too high. The bank would therefore package this into a structured note.
5. As a bank/private company, you want to reward your top people with market linked incentives but cannot/do not want to issue shares. Offer performance shares/restricted stock etc

 I can go on and on but the message is clear. The job of Structuring is to design a way for an investor to express his investment view. Where restrictions/internal issues do not permit for conventional products, then structured products prevail. Some of them get internalized into every day jargon like convertible bond, repo etc.