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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 statement best describes the role of the special purpose vehicle (SPV)?

The SPV purchases the loans from the originator and finances the purchase by issuing tranched securities. Because the sale is a true sale, the assets are legally separated from the originator, protecting investors from the originator's bankruptcy while credit losses are allocated by tranche seniority.

  1. AIt buys the loans from the originator and funds the purchase by issuing tranched securities, isolating the assets from the originator's bankruptcy riskCorrect
  2. BIt guarantees all tranche payments using the originator's capital so that investors bear no credit risk
  3. CIt retains all of the credit risk of the pool and issues only senior notes to investors
  4. DIt services the loans and sets the interest rate that borrowers pay on the underlying pool

Explanation

The SPV acquires the assets in a true sale and issues tranched notes to pay for them. This bankruptcy remoteness is the core purpose. The guarantee option is wrong because investors do bear pool credit risk according to tranche seniority.

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