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FRM Part II · FRM Exam Part II · An Introduction to Securitisation

A bank originates auto loans and transfers them to a newly created bankruptcy-remote entity that issues notes to investors. The bank wants the loans removed from its own insolvency estate. Which feature of the structure is primarily intended to achieve this?

The true sale of the loans to a bankruptcy-remote special purpose vehicle is what removes the assets from the originator's insolvency estate. It legally isolates the pool from the originator's creditors, so noteholders depend on the pool's performance rather than the originator's solvency.

  1. ATransferring the assets to a special purpose vehicle through a true saleCorrect
  2. BRetaining the equity tranche on the bank's balance sheet
  3. CAppointing a servicer that is independent of the originator
  4. DObtaining a credit rating on the senior notes

Explanation

A true sale of assets to a bankruptcy-remote SPV legally isolates the pool from the originator's creditors if the originator fails. Retaining equity is a risk-retention or incentive tool and does not provide legal isolation. Ratings and servicer choice do not by themselves remove assets from the insolvency estate.

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