securitisation

Securitisation is a structured finance technique that pools financial assets with similar risk characteristics and repackages them into securities sold to investors. The assets are transferred to a special purpose vehicle (SPV), which issues securities backed by the cash flows from the pool. The originator may retain servicing rights, while the SPV provides legal isolation of the assets from the originator’s balance sheet.

The process typically involves pooling eligible assets, transferring them via a true sale to the SPV, and issuing multiple tranches of securities with different risk and return profiles. The cash flows from the asset pool are allocated to the tranches according to a predefined waterfall, with senior tranches repaid first and equity or junior tranches bearing first losses. Various credit enhancements—such as overcollateralisation, reserve accounts, subordination, or third-party guarantees—are used to improve credit quality and obtain higher ratings. Servicing arrangements and trusteeship ensure ongoing management and payment flows.

Common forms include mortgage-backed securities (RMBS), asset-backed securities (ABS), collateralized debt obligations (CDOs), and collateralized loan obligations (CLOs). Synthetic securitisations, which use credit derivatives rather than transferring assets, are another variant. Regulatory and accounting treatments vary by jurisdiction, with post-crisis reforms emphasizing risk retention, disclosure, rating agency involvement, and capital treatment under Basel II/III.

Benefits include improved liquidity, funding diversification, and risk transfer from the originator to a broader investor base. Risks involve complexity, model risk, opaqueness, dependence on servicing, and potential systemic effects during stress. Securitisation remains a widely used, regulated tool for liquidity and capital management when properly structured and monitored.