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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, which feature best describes the role of the special purpose vehicle (SPV)?

The SPV buys the loans from the originator in a true sale and issues tranched securities. Because it is bankruptcy-remote, the pool is isolated from the originator's insolvency, so investors depend on the asset cash flows rather than the originator's creditworthiness.

  1. AIt buys the loans from the originator and issues tranched securities, isolating the assets from the originator's bankruptcy riskCorrect
  2. BIt guarantees the senior tranche against all losses using its own capital
  3. CIt services the loans and bears all prepayment risk on behalf of investors
  4. DIt retains the entire equity tranche to satisfy regulatory capital rules

Explanation

The SPV is a bankruptcy-remote entity that purchases the assets in a true sale and funds itself by issuing tranches. This separation lets investors rely on the asset pool rather than the originator's credit. The other options misdescribe the SPV as a guarantor, servicer or mandatory equity holder.

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