Skip to content

CFA Level I · CFA Level I Exam · Asset-Backed Security (ABS) Instrument and Market Features

A court finds that an originator kept control over the receivables it transferred to its special purpose entity and treated the entity as a mere extension of itself. The legal outcome that investors in the ABS most likely face is that the:

Investors most likely face the receivables being pulled into the originator's bankruptcy estate, which can delay or reduce payments. If a court sees no genuine separation or true sale, the bankruptcy-remote protection fails. No automatic upgrade or servicer change fixes this.

  1. Aservicer must replace the originator and the transfer remains valid
  2. Breceivables may be consolidated into the originator's bankruptcy estate, delaying or reducing investor paymentsCorrect
  3. CABS tranches are automatically upgraded because the originator's assets back the securities

Explanation

If the transfer is not respected as a true sale, or the SPE is consolidated with the originator, the receivables can be pulled into the originator's bankruptcy. Investors then face stays, delays and possible losses. Replacing the servicer does not cure this, and no automatic upgrade occurs.

Did you get it right without looking?

One question tells you little. A timed set on Asset-Backed Security (ABS) Instrument and Market Features shows your real accuracy, how long you take and where you lose marks.

Practise Asset-Backed Security (ABS) Instrument and Market FeaturesFree diagnostic mock

More Asset-Backed Security (ABS) Instrument and Market Features questions