Securitization

This chapter provides an overview of the securitization process, describing several specific early securitized products that define the structured credit market. Securitization structures not only involve the reapportionment of the credit risk of the underlying assets into tranches that back new securities, but securitization may itself create new risks. To the extent the structuring agent and/or sponsor decides that external risk finance and/or risk transfer is required as a part of the securitization structure, firms that act as counterparties to external risk transfer and risk finance will play a role in the securitization. The issue of risk management in a securitization structure is also discussed in the chapter. In order to realize the benefits of securitization, the assets being used to collateralize the issuance of ABSs must truly be sold; this is known as “true sale” for legal purposes. In addition, a securitization usually needs to satisfy accounting for true sale treatment, which is also associated with the need for the SPE transferee to be a nonconsolidated independent entity relative to the sponsor and/or originator.