What is securitisation? What is its history, how has it evolved, and what are the types of transactions? What is the difference between true sales and synthetic risk transfers?
Securitisation is the process of creating a marketable financial instrument in order to invest in a defined asset or asset pool.
These transactions gained particular attraction in the 1970s, starting with the financing of mortgage pools. From this point on, securitisation has evolved to include a more diverse array of underlying assets. These can be as varied as receivables, debt, shares, commodities or intellectual property, or real assets like art, infrastructure projects or real estate. Today, securitisation transactions have not only grown massively in developed markets, but also have evolved to become an important part of the global capital markets, particularly in the European and US markets.
During the late 1970s, depository banks were facing difficulties with securing short-term funding, facing a higher interest-rate demand and longer horizons from depositors and low mortgage rates. This combination of factors motivated the banks to reduce their mortgage portfolios, which in turn led to a slower rate of mortgage issuances, which ultimately depressed the housing market. With this situation at hand, Lewis Ranieri from Salomon Brothers came up with an innovative solution where he created 5- and 10-year bonds from 30-year mortgages. These bonds or mortgage-backed securities (MBS) helped both Ranieri and Salomon Brothers attract a larger crowd of investors, who purchased these MBS and took the mortgages off the bank‘s balance sheet. This transfer allowed the bank’s to issue fresh mortgages as the existing ones were repackaged and sold off.
Different criteria can be applied to distinguish between different types of securitisation transaction. The list is not exhaustive, but the following criteria should help to quickly distinguish and understand the two main categories.
Depending on what the securitised asset is and on whether derivative products are used, securitisation is categorised either as “true sale” or “synthetic sale”.
Within the scope of a “true sale” transaction, the originator sells the ownership in a pool of assets to a securitisation vehicle.
Examples of “true sales” Risk Transfer - Securitisation:
Balance Sheet of SPV
However, within the scope of a “synthetic sale” transaction, the originator does not transfer the ownership of the underlying asset. The originator only transfers the Risk of the Underlying asset. This Risk Transfer can be done through a simple Loan Agreement or through a series of credit derivatives, total return swaps, guarantees or similar.
Examples of “synthetic” Risk Transfer:
• Performance of Assets
• Stock Index Performance
• Obligation of Third Parties
• Whole Business Securitisation
• Activities of Third Parties
• Securitisation of Future Claim
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