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

The primary reason a company that originates receivables transfers them to a special purpose entity in a true sale is most likely to:

The main purpose of a true sale to a special purpose entity is to legally separate the receivables from the originator, so they stay outside the originator's bankruptcy estate if it fails. It does not guarantee investor payments, and the originator gives up legal ownership.

  1. Aensure the receivables are legally separated from the originator's bankruptcy estateCorrect
  2. Bguarantee that the ABS investors will receive their promised cash flows in full
  3. Callow the originator to keep legal ownership of the receivables while receiving cash

Explanation

A true sale moves legal ownership to the SPE, so the receivables cannot be claimed by the originator's creditors if the originator fails. This is bankruptcy remoteness. Investors face credit risk in the pool, so there is no guarantee of full payment, and the originator gives up legal ownership.

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