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CA Final · Advanced Financial Management · Securitization

In a securitization, the originator sells loans to an SPV and agrees to give no recourse beyond a limited first-loss cushion. Which feature is most essential for the transfer to be treated as a true sale, isolating the assets from the originator's insolvency?

A true sale needs a legal transfer of the receivables to the SPV, with the originator keeping no claim on the assets and no ongoing control. This isolates the pool from the originator's insolvency. Full guarantees, repurchase at will or retained control would undermine that isolation.

  1. AThe originator keeps full control and the right to repurchase any asset at will
  2. BThe originator guarantees all investor payments in full
  3. CLegal transfer of the receivables to the SPV, with the originator having no claim on the assets or ongoing control over themCorrect
  4. DThe SPV is a subsidiary whose accounts are merged with the originator's for all purposes

Explanation

A true sale requires the legal transfer of the assets to the SPV so that the originator surrenders control and creditors of the originator cannot reach them. Full guarantees, unrestricted repurchase rights, or retained control would make the transaction resemble a secured borrowing.

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