"How to Get Swap Counterparty Investment Discretion in CAT Bond Transactions"

In catastrophe bond (CAT bond) transactions, the bondholders' credit risk, as opposed to the catastrophe risk, is often shifted to a swap counterparty under a total return swap contract that is purchased by the special purpose entity reinsurer (SPE) of the catastrophe risk.  For most CAT bond transactions, although the credit risk for timely payment of interest and ultimate payment of principal on the notes is borne by the swap counterparty, it is not given investment discretion over the SPE's assets.

This article explains why this restriction has traditionally been placed on the swap counterparty and suggest a mechanism that may allow the swap counterparty to have that investment discretion.