Resecuritization

Resecuritization is the practice of securitizing assets that have already been securitized, creating new securities whose cash flows are derived from the performance of underlying tranches of other securitized products. It often involves pooling senior or mezzanine tranches from existing securitizations or using synthetic exposures, and then issuing a fresh set of notes with its own credit structure and priorities.

Mechanically, a resecuritization is typically structured through a special purpose vehicle or trust. The SPV issues securities backed by a collateral pool that consists of the selected tranches from underlying securitized assets, possibly combined with additional credit enhancements. Cash flows from the collateral are directed through a waterfall to the new securities, with different tranches bearing different levels of risk and return. Resecuritizations can also use credit-default swaps or other derivatives to create synthetic exposure to the underlying securitized assets.

Types of resecuritization include CDOs of CDOs (often called CDO-squared), which stack one level of securitized instruments on top of another, and synthetic resecuritizations that rely on derivatives rather than physical assets. These structures can produce high leverage and complex risk profiles, appealing to investors seeking exposure to specific risk tranches or yield levels.

Risks and criticism focus on complexity, opacity, and amplification of losses during stress periods. Rese curitization can increase interconnectedness within the financial system and may pose liquidity and model risks. After the global financial crisis, regulation intensified, with rules on risk retention and increased disclosure for securitization and resecuritization activities in many jurisdictions.