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

A bank pools 5,000 residential mortgages and sells them to a newly created legal entity that funds the purchase by issuing notes to investors. The notes are repaid solely from the pool's cash flows. Which feature most directly makes this a securitisation rather than a simple loan sale?

The defining feature is that the vehicle issues tranched securities with different priorities over the pool's cash flows. Pooling, transfer to an SPV and tranching create the structure. Servicing by the originator or a single currency does not make a transaction a securitisation.

  1. AThe notes are issued in tranches with differing priority claims on the pool's cash flowsCorrect
  2. BThe bank continues to service the mortgages
  3. CThe mortgages are all denominated in the same currency
  4. DThe buyer of the loans is a regulated entity

Explanation

Securitisation involves pooling assets, transferring them to a special purpose vehicle, and issuing tranched securities repaid from the pool. Servicing and currency are incidental features. Tranching with prioritised claims is what distinguishes it from a plain loan sale.

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