Law: Securitisation

In the diagram who is the Originator?

Usually a bank giving loans in the form of mortages to people

What happens to the loans the Bank gives out

Sells them to a SPV for cash ASAP

Where the SPV owns all future payments of those mortgages

What does the SPV do with the loans

Turns them into securities for investors to buy

Who services the securities

Often the origonal bank who handles all admin involved.

What is the role of the rating agency

Gives investments a risk score based on how risky they are.

What is the role of a trustee

Makes sure all parties follow the rules

What is a bankrupcy remote entity

Usually a SPV designed to isolate assets and risk in case of bankrupcy assets within SPV are protected due to its seperate legal personality

What does a Jam jar/ sinking funds do

Basicially a savings pot in case of times of uncertainty with cash flows. Ensures investors still get paid.

It is controlled by a 3rd party to protect it and ensure its only used for its purpose.

What is securitisation

Process where loans, receivables and other financial assets are pooled together

Funtion of securitisation

Lower cost of funds through isolating risk.

Enables investors to buy a specific set of receivables with a known risk.

Qualities of cash flows:

Need to be homogenous, stable and predictable and its legal right to be assigned to a 3rd party.

What is a risk of default

Probability that the borrower will failt to meet repayment obligations.

What does a higher basis point spread entail

Higher risk

How to lower basis point spread

SPV, lower risk, controlled by 3rd party