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FRM Part I · FRM Exam Part I · Credit Risk Transfer Mechanisms

In a typical cash securitization of a pool of loans, the originating bank sells the loans to a special purpose vehicle (SPV). Which feature of this structure is the main reason investors in the resulting notes are exposed to the performance of the asset pool rather than to the credit of the originating bank?

Investors depend on the asset pool rather than the originator because the loans are sold to a bankruptcy-remote SPV. This true sale legally isolates the assets from the originator's creditors, so the originator's insolvency does not affect the pool backing the notes.

  1. AThe SPV is bankruptcy-remote, so the transferred assets are legally isolated from the originator's creditorsCorrect
  2. BThe originator guarantees all principal and interest on every tranche
  3. CThe SPV is required to hold only investment-grade assets
  4. DThe notes are issued with a floating rate coupon tied to LIBOR-type benchmarks

Explanation

True sale of assets to a bankruptcy-remote SPV isolates the pool from the originator's insolvency, so note performance depends on the pool. A full originator guarantee would tie investors to the bank's credit. Asset rating requirements and coupon type do not create the isolation.

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