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

A bank originates residential mortgages and sells the pool to a special purpose vehicle (SPV), which funds the purchase by issuing tranched notes to investors. Which feature most clearly distinguishes this transaction as a true-sale securitisation from a secured borrowing by the bank?

The key feature is legal isolation: the assets are sold to the SPV so that the originator's creditors cannot reach them if the originator becomes insolvent. This bankruptcy remoteness separates a true-sale securitisation from a secured borrowing, where the assets remain on the originator's side.

  1. AThe bank retains all credit losses on the pool and guarantees every tranche
  2. BThe assets are legally isolated from the originator so that the originator's creditors cannot claim them if it failsCorrect
  3. CThe notes are issued with a single class and identical seniority to all investors
  4. DThe SPV is consolidated into the bank's regulatory capital calculation without any exceptions

Explanation

A true sale legally transfers the assets to the SPV, making them bankruptcy-remote from the originator. Retaining all losses or guaranteeing all tranches would undermine the transfer. Tranching, not a single class, is the standard structure.

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