10. Introduction to Securitisation and Asset-Backed Securities

  1. Moorad Choudhry,
  2. David Moskovic,
  3. Max Wong,
  4. Suleman Baig,
  5. Zhuoshi Liu,
  6. Michele Lizzio and
  7. Alexandru Voicu

Published Online: 20 JUN 2014

DOI: 10.1002/9781118638330.ch10

Fixed Income Markets: Management, Trading, Hedging, Second Edition

Fixed Income Markets: Management, Trading, Hedging, Second Edition

How to Cite

Choudhry, M., Moskovic, D., Wong, M., Baig, S., Liu, Z., Lizzio, M. and Voicu, A. (2014) Introduction to Securitisation and Asset-Backed Securities, in Fixed Income Markets: Management, Trading, Hedging, Second Edition, John Wiley & Sons, Inc., Hoboken, NJ, USA. doi: 10.1002/9781118638330.ch10

Publication History

  1. Published Online: 20 JUN 2014
  2. Published Print: 17 JUL 2014

ISBN Information

Print ISBN: 9781118171721

Online ISBN: 9781118638330

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Keywords:

  • ABS;
  • amortizing structures;
  • credit-linked note;
  • master trust;
  • negative basis;
  • repack;
  • revolving structures;
  • risk transfer;
  • RMBS;
  • securitization;
  • special purpose vehicle (SPV);
  • tranching;
  • waterfall

Summary

This is a major chapter on the concept, purpose, and application of securitization. The securitization technique is described in detail from the originator and investor perspectives, and there is a detailed account of the securitization process. The concept of the asset-backed security (ABS) is illustrated with recourse to the residential mortgage-backed security (RMBS), with real-world examples. The use of the ABS for credit risk management and funding purposes is summarized with respect to a bank originator.

In a separate section we introduce the concept of a special purpose vehicle (SPV) and the legal framework around it. We discuss why this type of structure can be a useful vehicle for bond issuance and show the pros and cons for both the bank and the customer. We analyze thoroughly the pricing implications of using an SPV, describe how the risks should be hedged, and compare this to regular bond issuance by the bank. The interaction between the legal framework and the pricing/hedging is addressed in detail. We work through some typical examples of SPV structures.