FRM Part II · FRM Exam Part II · An Introduction to Securitisation
A bank originates a pool of auto loans and sells them to a newly created legal entity that issues notes to investors. The entity has no employees and its activities are limited to holding the loans and paying noteholders. Which description best identifies this entity and its primary purpose?
The entity is a special purpose vehicle. It buys the loans through a true sale and issues notes, keeping the assets legally separate from the originator so that the originator's insolvency does not directly affect noteholders' claims on the pool.
- AA special purpose vehicle, which isolates the pooled assets from the originator's bankruptcy riskCorrect
- BA servicer, which collects payments and monitors delinquent borrowers
- CA trustee, which approves the credit rating of each tranche
- DA credit enhancer, which absorbs first losses on the pool
Explanation
In a securitisation the originator transfers assets to an SPV in a true sale. The SPV is bankruptcy-remote, so the assets are ring-fenced from the originator's insolvency. Servicers collect cash, trustees protect investors' interests, and credit enhancement is a separate feature, so the other options misdescribe the entity.
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