Introduction to Securitization

KEY POINTS OF THE CHAPTER

• Technically speaking, the distinction between asset-backed commercial paper (ABCP) and asset-backed security (referred to as term securitization to distinguish it from commercial paper) is primarily one of the tenure of the paper.

• ABCP was primarily designed to acquire and fund trade receivables of larger corporations but the collateral composition shifted heavily into investing in financial instruments. Today, ABCP conduits invest in a wide range of financial instruments.

• The issuance of ABCP is a standard and ongoing feature, so banks mostly run ongoing programs for ABCP issuance on their balance sheet as a specific entity called a conduit.

• A conduit is a thinly-capitalized special purpose vehicle satisfying the general criteria for bankruptcy remoteness.

• There are different conduits based on different criteria: (1) liquidity support, (2) number of sellers, and (3) asset type,

• Depending upon whether the bank provides full or partial liquidity support to the conduit, ABCP can be either fully supported or partly supported.

• ABCP conduits can be either single-seller or multiple-seller conduits with the latter being the most common form.

• In a multiple-seller conduit, the credit enhancement (and/or liquidity enhancements) are found both at the level of transfer by each originator (originator-level enhancement) and at the program level.

• Conduits are classified based on their asset focus and include (1) arbitrage conduits, (2) hybrid conduits, ...