Handbook of Finance: Investment Management and Financial Management

Chapter 77. Operational Issues in Securitization

VINOD KOTHARI

Independent Financial Consultant and Visiting Faculty, Indian Institute of Management, Kolkata, India

Abstract: Securitization is all about isolation of assets that would liquidate investors' claims. Assets, however, are inanimate. The process of transforming assets into cash flows, and transmitting those cash flows to investors needs the interference of one or more entities. The originator, in a servicer role, would quite often be the main entity engaged in this process of transformation. Operations hold the key to the efficiency of the transaction, and in the absence of operational strength, the legal health of the transaction has no meaning. Operational issues relate to the role of these entities, and the attendant risks.

Keywords: securitization, asset-backed securities, operational risk, Basel II, servicing function, servicing risk, backup servicer, subservicer, servicer reporting, Regulation AB, fraud risk, trustees, true sale

Operational risk in securitization transactions has been the highlight of attention in recent years, and clearly operational risks are more significant than the risks of legal structure. Challenges to legal structure of the transaction happen only in remote contingencies such as bankruptcy. However, if there is an operational hiccup, it may affect the cash flows immediately.

Operational risk refers to the risk that any of the agents responsible for the various operations or processes that lead ...