CFA Level I · CFA Level I Exam · Asset-Backed Security (ABS) Instrument and Market Features
The transfer of receivables from an originator to a special purpose entity is most likely intended to achieve bankruptcy remoteness because, if the originator becomes insolvent, the:
Bankruptcy remoteness works because receivables sold in a true sale belong to the special purpose entity, not the originator. If the originator becomes insolvent, its creditors generally cannot claim those assets, so ABS investors depend on the pool's cash flows rather than the originator's credit.
- Aservicer must repurchase all defaulted receivables from investors
- Bassets transferred in a true sale are generally beyond the reach of the originator's creditorsCorrect
- Coriginator's creditors become investors in the senior tranche of the securities
Explanation
A true sale legally moves ownership of the receivables to the SPE, so the originator's creditors cannot claim them in bankruptcy. The other options describe repurchase or creditor participation, which are not features of bankruptcy remoteness.
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