Complex Securities

In Thrift Bulletin 13a, The Office of Thrift Supervision defines a "complex security" to include any collateralized mortgage obligation, real estate mortgage investment trust, callable mortgage pass-through security, stripped mortgage-backed security, structured note, and any security not meeting the definition of an "exempt security." An exempt security includes non-callable, "plain vanilla" instruments such as mortgage pass-through securities, fixed rate securities, and floating rate securities.

Complex securities also include securities such as Collateralized Bond Obligations (CBOs) or Collateralized Loan Obligations (CLOs). The cash flows from the asset pools are divided into several tranches that have different repayment and collateral coverage and investment ratings, or that demonstrate other nonstandard features such as having acceptable investment ratings for the principal part of the investment, but are unrated as to the payment of interest. Because of this complexity, a high degree of technical expertise is required to understand how these securities might behave under various interest rate, prepayment, and economic conditions. Moreover, because the market for many of these instruments is thin, it may be difficult to liquidate them at a price that reasonably reflects their fair value, should the need arise.

Complex securities, including Trust Preferred Securities (TPSs), have unique features that merit further discussion; however, we will first discuss what the Office of Thrift Supervision (OTS) expects of thrift institution management when investing in securities.