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

The main reason the originator transfers assets to a special purpose entity in a securitization is most likely to:

The transfer to a special purpose entity is meant to isolate the assets from the originator's bankruptcy risk. Because the sale is a legal true sale, investors depend on the cash flows and credit quality of the asset pool rather than on the originator's own creditworthiness.

  1. Aguarantee investors a fixed return from the originator's own earnings
  2. Bisolate the assets from the originator's bankruptcy risk so that the ABS credit quality depends on the poolCorrect
  3. Callow the originator to keep servicing and ownership of the assets on its balance sheet

Explanation

A true sale to a bankruptcy-remote SPE legally separates the assets from the originator, so creditors of the originator cannot claim them. Investors then rely on the pool's cash flows rather than the originator's credit. The other options contradict the purpose of the legal separation.

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