Securitization Facts

7/26/2019 Securitization Facts

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SecuritizationFrom Wikipedia, the free encyclopedia

Jump to: navigation,searchFor Securitization in International relations, see Securitization (international relations).

Securitizationis the financial practice of pooling various types of contractual debt such as residential

mortgages, commercial mortgages, auto loans or credit card debt obligations (or other non-debt assets whichgenerate receivables) and selling their related cash flows to third party investors assecurities, which may bedescribed asbonds, pass-through securities, or collateralied debt obligations(!"#s)$ %nvestors are repaid fromthe principal and interest cash flows collected from the underlying debt and redistributed through the capitalstructure of the new financing$ &ecurities backed by mortgage receivables are called mortgage-backed securities('&), while those backed by other types of receivables are asset-backed securities(&)$

!ritics have suggested that the comple*ity inherent in securitiation can limit investors+ ability to monitor risk,and that competitive securitiation markets with multiple securitiers may be particularly prone to sharpdeclines in underwriting standards$ rivate, competitive mortgage securitiation played an important role in the$&$ subprime mortgage crisis$./0

%n addition, off-balance sheet treatment for securitiations coupled with guarantees from the issuer can hide thee*tent of leverage of the securitiing firm, thereby facilitating risky capital structures and leading to an under-pricing of credit risk$ #ff-balance sheet securitiations also played a large role in the high leverage level of $&$financial institutions before thefinancial crisis, and the need for bailouts$.10

2he granularityof pools of securitied assets can mitigate the credit risk of individual borrowers$ nlike generalcorporate debt, thecredit 3ualityof securitied debt is non-stationarydue to changes in volatility that are time-and structure-dependent$ %f the transaction is properly structured and the pool performs as e*pected, the creditrisk of all tranchesof structured debt improves4 if improperly structured, the affected tranches may e*periencedramatic credit deterioration and loss$.50

&ecuritiation has evolved from its beginnings in the late /6th century to an estimated outstanding of 7/8$19trillion in the nited &tates and 71$1 trillion in ;urope as of the 1nd 3uarter of 1886$ %n 188ingdomin the /??8s, and became common in various!ommonwealthlegal systems where senior creditors of an insolvent business effectively gain the right tocontrol the company$.02here are main players in securitiation, they include investors, securiters and corporates

Contents

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/ @istory 1 &tructure

o 1$/ ooling and transfer

o 1$1 %ssuance

o 1$5 !redit enhancement and tranching

o 1$9 &ervicing

o 1$ Aepayment structures
https://en.wikipedia.org/wiki/Securitization#mw-headhttps://en.wikipedia.org/wiki/Securitization#mw-headhttps://en.wikipedia.org/wiki/Securitization#p-searchhttps://en.wikipedia.org/wiki/Securitization_(international_relations)https://en.wikipedia.org/wiki/Security_(finance)https://en.wikipedia.org/wiki/Security_(finance)https://en.wikipedia.org/wiki/Bond_(finance)https://en.wikipedia.org/wiki/Collateralized_debt_obligationhttps://en.wikipedia.org/wiki/Mortgage-backed_securityhttps://en.wikipedia.org/wiki/Asset-backed_securityhttps://en.wikipedia.org/wiki/Subprime_mortgage_crisishttps://en.wikipedia.org/wiki/Securitization#cite_note-1https://en.wikipedia.org/wiki/Late-2000s_financial_crisishttps://en.wikipedia.org/wiki/Late-2000s_financial_crisishttps://en.wikipedia.org/wiki/Securitization#cite_note-2https://en.wikipedia.org/wiki/Securitization#cite_note-2https://en.wikipedia.org/wiki/Granularityhttps://en.wikipedia.org/wiki/Granularityhttps://en.wikipedia.org/wiki/Corporate_debthttps://en.wikipedia.org/wiki/Credit_qualityhttps://en.wikipedia.org/wiki/Credit_qualityhttps://en.wikipedia.org/wiki/Credit_qualityhttps://en.wikipedia.org/wiki/Stationary_processhttps://en.wikipedia.org/wiki/Stationary_processhttps://en.wikipedia.org/wiki/Tranchehttps://en.wikipedia.org/wiki/Securitization#cite_note-3https://en.wikipedia.org/wiki/Securitization#cite_note-3https://en.wikipedia.org/wiki/Asset-backed_securityhttps://en.wikipedia.org/wiki/Asset-backed_securityhttps://en.wikipedia.org/wiki/Securitization#cite_note-SIFMA-4https://en.wikipedia.org/wiki/United_Kingdomhttps://en.wikipedia.org/wiki/United_Kingdomhttps://en.wikipedia.org/wiki/British_Commonwealthhttps://en.wikipedia.org/wiki/Securitization#cite_note-5https://en.wikipedia.org/wiki/Securitization#cite_note-5https://en.wikipedia.org/wiki/Securitizationhttps://en.wikipedia.org/wiki/Securitization#Historyhttps://en.wikipedia.org/wiki/Securitization#Structurehttps://en.wikipedia.org/wiki/Securitization#Pooling_and_transferhttps://en.wikipedia.org/wiki/Securitization#Issuancehttps://en.wikipedia.org/wiki/Securitization#Credit_enhancement_and_tranchinghttps://en.wikipedia.org/wiki/Securitization#Servicinghttps://en.wikipedia.org/wiki/Securitization#Repayment_structureshttps://en.wikipedia.org/wiki/Securitization#p-searchhttps://en.wikipedia.org/wiki/Securitization_(international_relations)https://en.wikipedia.org/wiki/Security_(finance)https://en.wikipedia.org/wiki/Bond_(finance)https://en.wikipedia.org/wiki/Collateralized_debt_obligationhttps://en.wikipedia.org/wiki/Mortgage-backed_securityhttps://en.wikipedia.org/wiki/Asset-backed_securityhttps://en.wikipedia.org/wiki/Subprime_mortgage_crisishttps://en.wikipedia.org/wiki/Securitization#cite_note-1https://en.wikipedia.org/wiki/Late-2000s_financial_crisishttps://en.wikipedia.org/wiki/Securitization#cite_note-2https://en.wikipedia.org/wiki/Granularityhttps://en.wikipedia.org/wiki/Corporate_debthttps://en.wikipedia.org/wiki/Credit_qualityhttps://en.wikipedia.org/wiki/Stationary_processhttps://en.wikipedia.org/wiki/Tranchehttps://en.wikipedia.org/wiki/Securitization#cite_note-3https://en.wikipedia.org/wiki/Asset-backed_securityhttps://en.wikipedia.org/wiki/Securitization#cite_note-SIFMA-4https://en.wikipedia.org/wiki/United_Kingdomhttps://en.wikipedia.org/wiki/British_Commonwealthhttps://en.wikipedia.org/wiki/Securitization#cite_note-5https://en.wikipedia.org/wiki/Securitizationhttps://en.wikipedia.org/wiki/Securitization#Historyhttps://en.wikipedia.org/wiki/Securitization#Structurehttps://en.wikipedia.org/wiki/Securitization#Pooling_and_transferhttps://en.wikipedia.org/wiki/Securitization#Issuancehttps://en.wikipedia.org/wiki/Securitization#Credit_enhancement_and_tranchinghttps://en.wikipedia.org/wiki/Securitization#Servicinghttps://en.wikipedia.org/wiki/Securitization#Repayment_structureshttps://en.wikipedia.org/wiki/Securitization#mw-head


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o 1$= &tructural risks and misincentives

5 &pecial types of securitiation

o 5$/ 'aster trust

o 5$1 %ssuance trust

o 5$5 Brantor trust

o 5$9 #wner trust

9 'otives for securitiation

o 9$/ dvantages to issuer

o 9$1 "isadvantages to issuer

o 9$5 dvantages to investors

o 9$9 Aisks to investors

Aecent lawsuits

= &ee also

< Aeferences

6 ;*ternal links

History[edit]

;*amples of securitiation can be found at least as far back as the /6th century$.=0mong the early e*amples ofmortgage-backed securities in the nited &tates were the farm railroad mortgage bonds of the mid-/?th centurywhich contributed to thepanic of /6


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success of this initial transaction, investors grew to accept credit card receivables as collateral, and banksdeveloped structures to normalie the cash flows$.?0

&tarting in the /??8s with some earlier private transactions, securitiation technology was applied to a numberof sectors of the reinsuranceand insurancemarkets including life and catastrophe$ 2his activity grew to nearly7/bn of issuance in 188= following the disruptions in the underlying markets caused by @urricane >atrinaandAegulation EEE$ >ey areas of activity in the broad area oflternative Aisk 2ransferinclude catastrophe bonds,ife %nsurance &ecuritiationand Aeinsurance &idecars$

2he first public &ecuritiation of!ommunity Aeinvestment ct(!A) loans started in /?? 'ortgage 'aster 2rusts (concept imported from the & !redit !ards),%nsurance-backed transaction (such as those implemented by the insurance securitiation guru ;mmanuel%ssanchou) or even more esoteric asset classes (for e*ample securitiation of lottery receivables)$

s the result of the credit crunchprecipitated by thesubprime mortgage crisisthe & market for bonds backedby securitised loans was very weak in 1886 e*cept for bonds guaranteed by a federally backed agency$ s aresult, interest rates rose for loans that were previously securitised such as home mortgages, student loans, autoloansand commercial mortgages./50

Aecently, securitiation has been proposed and used to accelerate development of solarphotovoltaicproHects$./90./0For e*ample,&olar!ityoffered the first $&$ asset-backed securityin the solar industry in 18/5$./=0

Structure[edit]

Pooling and transfer[edit]

2he originatorinitially owns the assets engaged in the deal$ 2his is typically a company looking to either raisecapital, restructure debt or otherwise adHust its finances (but also includes businesses established specifically togenerate marketable debt (consumer or otherwise) for the purpose of subse3uent securitiation)$ ndertraditional corporate financeconcepts, such a company would have three options to raise new capital: a loan,bond issue, or issuance of stock$ @owever, stock offerings dilute the ownership and control of the company,while loan or bond financing is often prohibitively e*pensive due to thecredit ratingof the company and theassociated rise in interestrates$
https://en.wikipedia.org/wiki/Securitization#cite_note-assetsecur-9https://en.wikipedia.org/wiki/Reinsurancehttps://en.wikipedia.org/wiki/Reinsurancehttps://en.wikipedia.org/wiki/Insurancehttps://en.wikipedia.org/wiki/Hurricane_Katrinahttps://en.wikipedia.org/wiki/Hurricane_Katrinahttps://en.wikipedia.org/w/index.php?title=Regulation_XXX&action=edit&redlink=1https://en.wikipedia.org/wiki/Alternative_Risk_Transferhttps://en.wikipedia.org/wiki/Alternative_Risk_Transferhttps://en.wikipedia.org/wiki/Catastrophe_bondhttps://en.wikipedia.org/wiki/Life_Insurance_Securitizationhttps://en.wikipedia.org/wiki/Life_Insurance_Securitizationhttps://en.wikipedia.org/wiki/Reinsurance_Sidecarhttps://en.wikipedia.org/wiki/Community_Reinvestment_Acthttps://en.wikipedia.org/wiki/Community_Reinvestment_Acthttps://en.wikipedia.org/wiki/Securitization#cite_note-11https://en.wikipedia.org/wiki/Bond_Market_Associationhttps://en.wikipedia.org/wiki/Wikipedia:Please_clarifyhttps://en.wikipedia.org/wiki/Wikipedia:Please_clarifyhttps://en.wikipedia.org/wiki/Outstanding_bondhttps://en.wikipedia.org/wiki/Wikipedia:Please_clarifyhttps://en.wikipedia.org/wiki/Wikipedia:Please_clarifyhttps://en.wikipedia.org/wiki/Securitization#cite_note-commonstruct-12https://en.wikipedia.org/wiki/Collateralized_debt_obligationhttps://en.wikipedia.org/wiki/Collateralized_debt_obligationhttps://en.wikipedia.org/wiki/Collateralized_debt_obligationhttps://en.wikipedia.org/wiki/Securitization#cite_note-commonstruct-12https://en.wikipedia.org/wiki/Securitization#cite_note-commonstruct-12https://en.wikipedia.org/wiki/Credit_crunchhttps://en.wikipedia.org/wiki/Credit_crunchhttps://en.wikipedia.org/wiki/Subprime_mortgage_crisishttps://en.wikipedia.org/wiki/Subprime_mortgage_crisishttps://en.wikipedia.org/wiki/Mortgage_loanhttps://en.wikipedia.org/wiki/Student_loanhttps://en.wikipedia.org/wiki/Auto_loanhttps://en.wikipedia.org/wiki/Auto_loanhttps://en.wikipedia.org/wiki/Commercial_mortgagehttps://en.wikipedia.org/wiki/Commercial_mortgagehttps://en.wikipedia.org/wiki/Securitization#cite_note-13https://en.wikipedia.org/wiki/Photovoltaichttps://en.wikipedia.org/wiki/Securitization#cite_note-14https://en.wikipedia.org/wiki/Securitization#cite_note-15https://en.wikipedia.org/wiki/SolarCityhttps://en.wikipedia.org/wiki/SolarCityhttps://en.wikipedia.org/wiki/Asset-backed_securityhttps://en.wikipedia.org/wiki/Securitization#cite_note-16https://en.wikipedia.org/wiki/Securitization#cite_note-16https://en.wikipedia.org/w/index.php?title=Securitization&action=edit&section=2https://en.wikipedia.org/w/index.php?title=Securitization&action=edit&section=3https://en.wikipedia.org/wiki/Corporate_financehttps://en.wikipedia.org/wiki/Loanhttps://en.wikipedia.org/wiki/Bond_issuehttps://en.wikipedia.org/wiki/Stockhttps://en.wikipedia.org/wiki/Credit_ratinghttps://en.wikipedia.org/wiki/Credit_ratinghttps://en.wikipedia.org/wiki/Interesthttps://en.wikipedia.org/wiki/Interesthttps://en.wikipedia.org/wiki/Securitization#cite_note-assetsecur-9https://en.wikipedia.org/wiki/Reinsurancehttps://en.wikipedia.org/wiki/Insurancehttps://en.wikipedia.org/wiki/Hurricane_Katrinahttps://en.wikipedia.org/w/index.php?title=Regulation_XXX&action=edit&redlink=1https://en.wikipedia.org/wiki/Alternative_Risk_Transferhttps://en.wikipedia.org/wiki/Catastrophe_bondhttps://en.wikipedia.org/wiki/Life_Insurance_Securitizationhttps://en.wikipedia.org/wiki/Reinsurance_Sidecarhttps://en.wikipedia.org/wiki/Community_Reinvestment_Acthttps://en.wikipedia.org/wiki/Securitization#cite_note-11https://en.wikipedia.org/wiki/Bond_Market_Associationhttps://en.wikipedia.org/wiki/Wikipedia:Please_clarifyhttps://en.wikipedia.org/wiki/Outstanding_bondhttps://en.wikipedia.org/wiki/Wikipedia:Please_clarifyhttps://en.wikipedia.org/wiki/Securitization#cite_note-commonstruct-12https://en.wikipedia.org/wiki/Collateralized_debt_obligationhttps://en.wikipedia.org/wiki/Collateralized_debt_obligationhttps://en.wikipedia.org/wiki/Securitization#cite_note-commonstruct-12https://en.wikipedia.org/wiki/Credit_crunchhttps://en.wikipedia.org/wiki/Subprime_mortgage_crisishttps://en.wikipedia.org/wiki/Mortgage_loanhttps://en.wikipedia.org/wiki/Student_loanhttps://en.wikipedia.org/wiki/Auto_loanhttps://en.wikipedia.org/wiki/Auto_loanhttps://en.wikipedia.org/wiki/Commercial_mortgagehttps://en.wikipedia.org/wiki/Securitization#cite_note-13https://en.wikipedia.org/wiki/Photovoltaichttps://en.wikipedia.org/wiki/Securitization#cite_note-14https://en.wikipedia.org/wiki/Securitization#cite_note-15https://en.wikipedia.org/wiki/SolarCityhttps://en.wikipedia.org/wiki/Asset-backed_securityhttps://en.wikipedia.org/wiki/Securitization#cite_note-16https://en.wikipedia.org/w/index.php?title=Securitization&action=edit&section=2https://en.wikipedia.org/w/index.php?title=Securitization&action=edit&section=3https://en.wikipedia.org/wiki/Corporate_financehttps://en.wikipedia.org/wiki/Loanhttps://en.wikipedia.org/wiki/Bond_issuehttps://en.wikipedia.org/wiki/Stockhttps://en.wikipedia.org/wiki/Credit_ratinghttps://en.wikipedia.org/wiki/Interest


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2he consistently revenue-generating part of the company may have a much higher credit rating than thecompany as a whole$ For instance, a leasing company may have provided 7/8m nominal value of leases, and itwill receive a cash flow over the ne*t five years from these$ %t cannot demand early repayment on the leases andso cannot get its money back early if re3uired$ %f it could sell the rights to the cash flows from the leases tosomeone else, it could transform that income stream into a lump sum today (in effect, receiving today thepresent value of a future cash flow)$ Where the originator is a bank or other organiation that must meet capitalade3uacy re3uirements, the structure is usually more comple* because a separate company is set up to buy theassets$

suitably large portfolio of assets is IpooledI and transferred to a Ispecial purpose vehicleI or ISPVI (theissuer), a ta*-e*empt company or trust formed for the specific purpose of funding the assets$ #nce the assets aretransferred to the issuer, there is normally no recourse to the originator$ 2he issuer is IbankruptcyremoteI,meaning that if the originator goes into bankruptcy, the assets of the issuer will not be distributed to thecreditors of the originator$ %n order to achieve this, the governing documents of the issuer restrict its activities toonly those necessary to complete the issuance of securities$ 'any issuers are typically IorphanedI$ %n the caseof certain assets, such as credit card debt, where the portfolio is made up of a constantly changing pool ofreceivables, a trust in favor of the & may be declared in place of traditional transfer by assignment (see theoutline of the master trust structurebelow)$

ccountingstandards govern when such a transfer is a true sale, a financing, a partial sale, or a part-sale andpart-financing$./


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(%#A)$ 2he floating rate usually reflects the movement in the inde* plus an additional fi*ed margin to coverthe added risk$./?0

Credit enhancement and tranching[edit]

nlike conventional corporate bonds which are unsecured, securities created in a securitiation are IcreditenhancedI, meaning their credit 3uality is increased above that of the originator+s unsecured debt or underlyingasset pool$ 2his increases the likelihood that the investors will receive the cash flows to which they are entitled,

and thus enables the securities to have a higher credit rating than the originator$ &ome securitiations usee*ternal credit enhancement provided by third parties, such assurety bondsand parentalguarantees(althoughthis may introduce a conflict of interest)$

2he issued securities are often split intotranches, or categoried into varying degrees of subordination$ ;achtranche has a different level of credit protection or risk e*posure: there is generally a senior (II) class ofsecurities and one or more Hunior subordinated (II, I!I, etc$) classes that function as protective layers for theII class$ 2he senior classes have first claim on the cash that the & receives, and the more Hunior classes onlystart receiving repayment after the more senior classes have been repaid$ ecause of the cascading effectbetween classes, this arrangement is often referred to as a cash flo aterfall$.180%f the underlying asset poolbecomes insufficient to make payments on the securities (e$g$ when loans default within a portfolio of loan

claims), the loss is absorbed first by the subordinated tranches, and the upper-level tranches remain unaffecteduntil the losses e*ceed the entire amount of the subordinated tranches$ 2he senior securities might be or rated, signifying a lower risk, while the lower-credit 3uality subordinated classes receive a lower creditrating, signifying a higher risk$./?0

2he most Hunior class (often called the equity class) is the most e*posed to payment risk$ %n some cases, this isa special type of instrument which is retained by the originator as a potential profit flow$ %n some cases thee3uity class receives no coupon (either fi*ed or floating), but only the residual cash flow (if any) after all theother classes have been paid$

2here may also be a special class which absorbs early repayments in the underlying assets$ 2his is often the case

where the underlying assets are mortgages which, in essence, are repaid whenever the properties are sold$ &inceany early repayments are passed on to this class, it means the other investors have a more predictable cash flow$

%f the underlying assets are mortgages or loans, there are usually two separate IwaterfallsI because the principaland interest receipts can be easily allocated and matched$ ut if the assets are income-based transactions such asrental deals one cannot categorise the revenue so easily between income and principal repayment$ %n this caseall the revenue is used to pay the cash flows due on the bonds as those cash flows become due$

!redit enhancements affect credit risk by providing more or less protection for promised cash flows for asecurity$ dditional protection can help a security achieve a higher rating, lower protection can help create newsecurities with differently desired risks, and these differential protections can make the securities more

attractive$

%n addition to subordination, credit may be enhanced through:./60

reserveor spread account, in which funds remaining after e*penses such as principal and interest

payments, charge-offs and other fees have been paid-off are accumulated, and can be used when &;e*penses are greater than its income$

2hird-party insurance,or guarantees of principal and interest payments on the securities$

!ver"collateralisation, usually by using finance income to pay off principal on some securities before

principal on the corresponding share of collateral is collected$
https://en.wikipedia.org/wiki/Securitization#cite_note-Dwight-19https://en.wikipedia.org/w/index.php?title=Securitization&action=edit&section=5https://en.wikipedia.org/wiki/Credit_enhancementhttps://en.wikipedia.org/wiki/Credit_enhancementhttps://en.wikipedia.org/wiki/Surety_bondhttps://en.wikipedia.org/wiki/Surety_bondhttps://en.wikipedia.org/wiki/Guarantyhttps://en.wikipedia.org/wiki/Guarantyhttps://en.wikipedia.org/wiki/Tranchehttps://en.wikipedia.org/wiki/Tranchehttps://en.wikipedia.org/wiki/Subordination_(finance)https://en.wikipedia.org/wiki/Securitization#cite_note-20https://en.wikipedia.org/wiki/Securitization#cite_note-20https://en.wikipedia.org/wiki/Securitization#cite_note-Dwight-19https://en.wikipedia.org/wiki/Securitization#cite_note-sofabs-18https://en.wikipedia.org/wiki/Insurancehttps://en.wikipedia.org/wiki/Insurancehttps://en.wikipedia.org/wiki/Securitization#cite_note-Dwight-19https://en.wikipedia.org/w/index.php?title=Securitization&action=edit&section=5https://en.wikipedia.org/wiki/Credit_enhancementhttps://en.wikipedia.org/wiki/Credit_enhancementhttps://en.wikipedia.org/wiki/Surety_bondhttps://en.wikipedia.org/wiki/Guarantyhttps://en.wikipedia.org/wiki/Tranchehttps://en.wikipedia.org/wiki/Subordination_(finance)https://en.wikipedia.org/wiki/Securitization#cite_note-20https://en.wikipedia.org/wiki/Securitization#cite_note-Dwight-19https://en.wikipedia.org/wiki/Securitization#cite_note-sofabs-18https://en.wikipedia.org/wiki/Insurance


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Cash fundingor a cash collateral account, generally consisting of short-term, highly rated investments

purchased either from the seller+s own funds, or from funds borrowed from third parties that can be usedto make up shortfalls in promised cash flows$

third-party letter of creditor corporate guarantee$

back-up servicer for the loans$

"iscounted receivables for the pool$

Servicing[edit]

servicercollects payments and monitors the assets that are the cru* of the structured financial deal$ 2heservicer can often be the originator, because the servicer needs very similar e*pertise to the originator andwould want to ensure that loan repayments are paid to the &pecial urpose ehicle$

2he servicer can significantly affect the cash flows to the investors because it controls the collection policy,which influences the proceeds collected, the charge-offs and the recoveries on the loans$ ny income remainingafter payments and e*penses is usually accumulated to some e*tent in a reserve or spread account, and anyfurther e*cess is returned to the seller$ ond rating agencies publish ratings of asset-backed securities based on

the performance of the collateral pool, the credit enhancements and theprobability of default$./60

When the issuer is structured as a trust, the trusteeis a vital part of the deal as the gate-keeper of the assets thatare being held in the issuer$ ;ven though the trustee is part of the &, which is typically wholly owned by the#riginator, the trustee has afiduciaryduty to protect the assets and those who own the assets, typically theinvestors$

#epayment structures[edit]

nlike corporate bonds, most securitiations are amortied, meaning that the principal amount borrowed is paidback gradually over the specified term of the loan, rather than in one lump sum at the maturity of the loan$ Fully

amortiing securitiations are generally collateralised by fully amortiing assets, such as home e3uity loans,auto loans, and student loans$repayment uncertainty is an important concern with fully amortiing &$ 2hepossible rate of prepayment varies widely with the type of underlying asset pool, so many prepayment modelshave been developed to try to define common prepayment activity$ 2he & prepayment modelis a well-knowne*ample$./?0.1/0

controlled amortiation structure can give investors a more predictable repayment schedule, even though theunderlying assets may be nonamortising$ fter a predetermined Irevolving periodI, during which only interestpayments are made, these securitiations attempt to return principal to investors in a series of defined periodicpayments, usually within a year$ n early amortiation event is the risk of the debt being retired early$./?0

#n the other hand, $ulletor slugstructures return the principal to investors in a single payment$ 2he mostcommon bullet structure is called the soft $ullet, meaning that the final bullet payment is not guaranteed to bepaid on the scheduled maturity date4 however, the maHority of these securitiations are paid on time$ 2he secondtype of bullet structure is the hard $ullet, which guarantees that the principal will be paid on the scheduledmaturity date$ @ard bullet structures are less common for two reasons: investors are comfortable with soft bulletstructures, and they are reluctant to accept the lower yields of hard bullet securities in e*change for a guarantee$./?0

&ecuritiations are often structured as a se3uential pay bond, paid off in a se3uential manner based on maturity$2his means that the first tranche, which may have a one-year average life, will receive all principal payments
https://en.wikipedia.org/wiki/Letter_of_credithttps://en.wikipedia.org/wiki/Letter_of_credithttps://en.wikipedia.org/w/index.php?title=Securitization&action=edit&section=6https://en.wikipedia.org/wiki/Probability_of_defaulthttps://en.wikipedia.org/wiki/Securitization#cite_note-sofabs-18https://en.wikipedia.org/wiki/Fiduciaryhttps://en.wikipedia.org/wiki/Fiduciaryhttps://en.wikipedia.org/w/index.php?title=Securitization&action=edit&section=7https://en.wikipedia.org/wiki/Amortizationhttps://en.wikipedia.org/wiki/Home_equity_loanhttps://en.wikipedia.org/wiki/Home_equity_loanhttps://en.wikipedia.org/wiki/Student_loanhttps://en.wikipedia.org/wiki/Student_loanhttps://en.wikipedia.org/wiki/PSA_prepayment_modelhttps://en.wikipedia.org/wiki/Securitization#cite_note-Dwight-19https://en.wikipedia.org/wiki/Securitization#cite_note-Committee-21https://en.wikipedia.org/wiki/Securitization#cite_note-Dwight-19https://en.wikipedia.org/wiki/Securitization#cite_note-Dwight-19https://en.wikipedia.org/w/index.php?title=Sequential_pay_bond&action=edit&redlink=1https://en.wikipedia.org/wiki/Letter_of_credithttps://en.wikipedia.org/w/index.php?title=Securitization&action=edit&section=6https://en.wikipedia.org/wiki/Probability_of_defaulthttps://en.wikipedia.org/wiki/Securitization#cite_note-sofabs-18https://en.wikipedia.org/wiki/Fiduciaryhttps://en.wikipedia.org/w/index.php?title=Securitization&action=edit&section=7https://en.wikipedia.org/wiki/Amortizationhttps://en.wikipedia.org/wiki/Home_equity_loanhttps://en.wikipedia.org/wiki/Student_loanhttps://en.wikipedia.org/wiki/PSA_prepayment_modelhttps://en.wikipedia.org/wiki/Securitization#cite_note-Dwight-19https://en.wikipedia.org/wiki/Securitization#cite_note-Committee-21https://en.wikipedia.org/wiki/Securitization#cite_note-Dwight-19https://en.wikipedia.org/wiki/Securitization#cite_note-Dwight-19https://en.wikipedia.org/w/index.php?title=Sequential_pay_bond&action=edit&redlink=1


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until it is retired4 then the second tranche begins to receive principal, and so forth$ ./?0ro rata bondstructures payeach tranche a proportionate share of principal throughout the life of the security$./?0

Structural ris%s and misincentives[edit]

&ome originators (e$g$ of mortgages) have prioritised loan volume over credit 3uality, disregarding the long-term risk of the assets they have created in their enthusiasm to profit from the fees associated with originationand securitiation$ #ther originators, aware of the reputational harm and added e*pense if risky loans are

subHect to repurchase re3uests or improperly originated loans lead to litigation, have paid more attention tocredit 3uality$.citation needed0

Special types of securitization[edit]

&aster trust[edit]

master trust is a type of & particularly suited to handle revolving credit cardbalances, and has thefle*ibility to handle different securities at different times$ %n a typical master trust transaction, an originator ofcredit card receivables transfers a pool of those receivables to the trust and then the trust issues securities

backed by these receivables$ #ften there will be many tranched securities issued by the trust all based on one setof receivables$ fter this transaction, typically the originator would continue to service the receivables, in thiscase the credit cards$

2here are various risks involved with master trusts specifically$ #ne risk is that timing of cash flows promisedto investors might be different from timing of payments on the receivables$ For e*ample, credit card-backedsecurities can have maturities of up to /8 years, but credit card-backed receivables usually pay off much more3uickly$ 2o solve this issue these securities typically have a revolving period, an accumulation period, and anamortiation period$ ll three of these periods are based on historical e*perience of the receivables$ "uring therevolving period, principal payments received on the credit card balances are used to purchase additionalreceivables$ "uring the accumulation period, these payments are accumulated in a separate account$ "uring the

amortiation period, new payments are passed through to the investors$

second risk is that the total investor interests and the seller+s interest are limited to receivables generated bythe credit cards, but the seller (originator) owns the accounts$ 2his can cause issues with how the seller controlsthe terms and conditions of the accounts$ 2ypically to solve this, there is language written into the securitiationto protect the investors and potential receivables$

third risk is that payments on the receivables can shrink the pool balance and under-collateralie total investorinterest$ 2o prevent this, often there is a re3uired minimum seller+s interest, and if there was a decrease then anearly amortiation event would occur$./60

Issuance trust[edit]

%n 1888, !itibankintroduced a new structure for credit card-backed securities, called an issuance trust, whichdoes not have limitations that master trusts sometimes do, that re3uires each issued series of securities to haveboth a senior and subordinate tranche$ 2here are other benefits to an issuance trust: they provide more fle*ibilityin issuing seniorNsubordinate securities, can increase demand because pension funds are eligible to invest ininvestment-grade securities issued by them, and they can significantly reduce the cost of issuing securities$ecause of these issues, issuance trusts are now the dominant structure used by maHor issuers of credit card-backed securities$./60

'rantor trust[edit]
https://en.wikipedia.org/wiki/Securitization#cite_note-Dwight-19https://en.wikipedia.org/w/index.php?title=Pro_rata_bond&action=edit&redlink=1https://en.wikipedia.org/wiki/Securitization#cite_note-Dwight-19https://en.wikipedia.org/wiki/Securitization#cite_note-Dwight-19https://en.wikipedia.org/w/index.php?title=Securitization&action=edit&section=8https://en.wikipedia.org/wiki/Wikipedia:Citation_neededhttps://en.wikipedia.org/wiki/Wikipedia:Citation_neededhttps://en.wikipedia.org/w/index.php?title=Securitization&action=edit&section=9https://en.wikipedia.org/w/index.php?title=Securitization&action=edit&section=10https://en.wikipedia.org/wiki/Credit_cardhttps://en.wikipedia.org/wiki/Securitization#cite_note-sofabs-18https://en.wikipedia.org/wiki/Securitization#cite_note-sofabs-18https://en.wikipedia.org/w/index.php?title=Securitization&action=edit&section=11https://en.wikipedia.org/wiki/Citibankhttps://en.wikipedia.org/wiki/Securitization#cite_note-sofabs-18https://en.wikipedia.org/w/index.php?title=Securitization&action=edit&section=12https://en.wikipedia.org/wiki/Securitization#cite_note-Dwight-19https://en.wikipedia.org/w/index.php?title=Pro_rata_bond&action=edit&redlink=1https://en.wikipedia.org/wiki/Securitization#cite_note-Dwight-19https://en.wikipedia.org/w/index.php?title=Securitization&action=edit&section=8https://en.wikipedia.org/wiki/Wikipedia:Citation_neededhttps://en.wikipedia.org/w/index.php?title=Securitization&action=edit&section=9https://en.wikipedia.org/w/index.php?title=Securitization&action=edit&section=10https://en.wikipedia.org/wiki/Credit_cardhttps://en.wikipedia.org/wiki/Securitization#cite_note-sofabs-18https://en.wikipedia.org/w/index.php?title=Securitization&action=edit&section=11https://en.wikipedia.org/wiki/Citibankhttps://en.wikipedia.org/wiki/Securitization#cite_note-sofabs-18https://en.wikipedia.org/w/index.php?title=Securitization&action=edit&section=12


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Brantor trusts are typically used in automobile-backed securities and A;'%!s (Aeal ;state 'ortgage%nvestment !onduits)$ Brantor trusts are very similar to pass-through trusts used in the earlier days ofsecuritiation$ n originator pools together loans and sells them to a grantor trust, which issues classes ofsecurities backed by these loans$ rincipal and interest received on the loans, after e*penses are taken intoaccount, are passed through to the holders of the securities on a pro-rata basis$.110

!ner trust[edit]

%n an owner trust, there is more fle*ibility in allocating principal and interest received to different classes ofissued securities$ %n an owner trust, both interest and principal due to subordinate securities can be used to paysenior securities$ "ue to this, owner trusts can tailor maturity, risk and return profiles of issued securities toinvestor needs$ sually, any income remaining after e*penses is kept in a reserve account up to a specified leveland then after that, all income is returned to the seller$ #wner trusts allow credit risk to be mitigated by over-collateraliation by using e*cess reservesand e*cess finance income to prepay securities before principal,which leaves more collateral for the other classes$

&otives for securitization[edit]

(dvantages to issuer[edit]

#educes funding costs: 2hrough securitiation, a company rated but with worthy cash flow would beable to borrow at possibly rates$ 2his is the number one reason to securitie a cash flow and can havetremendous impacts on borrowing costs$ 2he difference between debtand debt can be multiplehundreds ofbasis points$ For e*ample, 'oody+s downgraded Ford 'otor !redit+s rating in January 1881, butsenior automobile backed securities, issued by Ford 'otor !redit in January 1881 and pril 1881, continue tobe rated because of the strength of the underlying collateral and other credit enhancements$./60

#educes asset"lia$ility mismatch: I"epending on the structure chosen, securitiation can offer perfectmatched funding by eliminating funding e*posure in terms of bothdurationand pricing basis$I.150;ssentially, in

most banks and finance companies, the liability book or the funding is from borrowings$ 2his often comes at ahigh cost$ &ecuritiation allows such banks and finance companies to create a self-funded asset book$

)oer capitalrequirements: &ome firms, due to legal, regulatory,or other reasons, have a limit or range thattheir leverage is allowed to be$ y securitiing some of their assets, which 3ualifies as a sale for accountingpurposes, these firms will be able to remove assets from their balance sheets while maintaining the IearningpowerI of the assets$.110

)oc%ing in profits: For a given block of business, the total profits have not yet emerged and thus remainuncertain$ #nce the block has been securitied, the level of profits has now been locked in for that company,thus the risk of profit not emerging, or the benefit of super-profits, has now been passed on$

*ransfer ris%s(credit,li3uidity,prepayment, reinvestment, asset concentration): &ecuritiation makes itpossible to transfer risks from an entity that does not want to bear it, to one that does$ 2wo good e*amples ofthis are catastrophe bondsand ;ntertainment &ecuritiations$ &imilarly, by securitiing a block of business(thereby locking in a degree of profits), the company has effectively freed up its balance to go out and writemore profitable business$

!ff $alance sheet: "erivatives of many types have in the past been referred to as Ioff-balance-sheet$I 2his termimplies that the use of derivatives has no balance sheet impact$ While there are differences among the variousaccounting standards internationally, there is a general trend towards the re3uirement to record derivatives atfair value on the balance sheet$ 2here is also a generally accepted principle that, where derivatives are being
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used as a hedge against underlying assets or liabilities, accounting adHustments are re3uired to ensure that thegainNloss on the hedged instrument is recognied in the income statement on a similar basis as the underlyingassets and liabilities$ !ertain credit derivatives products, particularly !redit "efault &waps, now have more orless universally accepted market standard documentation$ %n the case of !redit "efault &waps, thisdocumentation has been formulated by the %nternational &waps and "erivatives ssociation(%&") who havefor a long time provided documentation on how to treat such derivatives on balance sheets$

Earnings: &ecuritiation makes it possible to record an earnings bounce without any real addition to the firm$

When a securitiation takes place, there often is a Itrue saleI that takes place between the #riginator (the parentcompany) and the &;$ 2his sale has to be for the market value of the underlying assets for the Itrue saleI tostick and thus this sale is reflected on the parent company+s balance sheet, which will boost earnings for that3uarter by the amount of the sale$ While not illegal in any respect, this does distort the true earnings of theparent company$

(dmissi$ility: Future cashflows may not get full credit in a company+s accounts (life insurance companies, fore*ample, may not always get full credit for future surpluses in their regulatory balance sheet), and asecuritiation effectively turns an admissible future surplus flow into an admissible immediate cash asset$

)iquidity: Future cashflows may simply be balance sheet items which currently are not available for spending,

whereas once the book has been securitied, the cash would be available for immediate spending or investment$2his also creates a reinvestment book which may well be at better rates$

+isadvantages to issuer[edit]

&ay reduce portfolio quality: %f the risks, for e*ample, are being securitied out, this would leave amaterially worse 3uality of residual risk$

Costs: &ecuritiations are e*pensive due to management and system costs, legal fees,underwritingfees, ratingfees and ongoing administration$ n allowance for unforeseen costs is usually essential in securitiations,especially if it is an atypical securitiation$

Size limitations: &ecuritiations often re3uire large scale structuring, and thus may not be cost-efficient forsmall and medium transactions$

#is%s: &ince securitiation is a structured transaction, it may include par structures as well as creditenhancements that are subHect to risks of impairment, such as prepayment, as well as credit loss, especially forstructures where there are some retained strips$

(dvantages to investors[edit]

!pportunity to potentially earn a higher rate of return,on a ris%"ad-usted $asis.

!pportunity to invest in a specific pool of high quality assets: "ue to the stringent re3uirements forcorporations (for e*ample) to attain high ratings, there is a dearth of highly rated entities that e*ist$&ecuritiations, however, allow for the creation of large 3uantities of , or rated bonds, and risk averseinstitutional investors, or investors that are re3uired to invest in only highly rated assets, have access to a largerpool of investment options$

Portfoliodiversification: "epending on the securitiation, hedge fundsas well as other institutional investorstend to like investing in bonds created through securitiations because they may be uncorrelatedto their otherbonds and securities$
https://en.wikipedia.org/wiki/International_Swaps_and_Derivatives_Associationhttps://en.wikipedia.org/wiki/Earningshttps://en.wikipedia.org/wiki/Liquidityhttps://en.wikipedia.org/w/index.php?title=Securitization&action=edit&section=16https://en.wikipedia.org/wiki/Legal_feeshttps://en.wikipedia.org/wiki/Underwritinghttps://en.wikipedia.org/wiki/Underwritinghttps://en.wikipedia.org/w/index.php?title=Securitization&action=edit&section=17https://en.wikipedia.org/wiki/Rate_of_returnhttps://en.wikipedia.org/wiki/Portfolio_(finance)https://en.wikipedia.org/wiki/Diversification_(finance)https://en.wikipedia.org/wiki/Diversification_(finance)https://en.wikipedia.org/wiki/Hedge_fundhttps://en.wikipedia.org/wiki/Hedge_fundhttps://en.wikipedia.org/wiki/Uncorrelatedhttps://en.wikipedia.org/wiki/International_Swaps_and_Derivatives_Associationhttps://en.wikipedia.org/wiki/Earningshttps://en.wikipedia.org/wiki/Liquidityhttps://en.wikipedia.org/w/index.php?title=Securitization&action=edit&section=16https://en.wikipedia.org/wiki/Legal_feeshttps://en.wikipedia.org/wiki/Underwritinghttps://en.wikipedia.org/w/index.php?title=Securitization&action=edit&section=17https://en.wikipedia.org/wiki/Rate_of_returnhttps://en.wikipedia.org/wiki/Portfolio_(finance)https://en.wikipedia.org/wiki/Diversification_(finance)https://en.wikipedia.org/wiki/Hedge_fundhttps://en.wikipedia.org/wiki/Uncorrelated


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Isolation of credit ris% from the parent entity: &ince the assets that are securitied are isolated (at least intheory) from the assets of the originating entity, under securitiation it may be possible for the securitiation toreceive a higher credit rating than the Iparent,I because the underlying risks are different$ For e*ample, a smallbank may be considered more risky than the mortgage loans it makes to its customers4 were the mortgage loansto remain with the bank, the borrowers may effectively be paying higher interest (or, Hust as likely, the bankwould be paying higher interest to its creditors, and hence less profitable)$

#is%s to investors[edit]

)iquidity ris%

Credit/default: "efault risk is generally accepted as a borrowerOs inability to meet interest payment obligationson time$.190For &, default may occur when maintenance obligations on the underlying collateral are notsufficiently met as detailed in its prospectus$ key indicator of a particular securityOs default risk is its creditrating$ "ifferent tranches within the & are rated differently, with senior classes of most issues receiving thehighest rating, and subordinated classes receiving correspondingly lower credit ratings$./?0lmost all mortgages,including reverse mortgages, and student loans, are now insured by the government, meaning that ta*payers areon the hook for any of these loans that go bad even if the asset is massively over-inflated$ %n other words, thereare no limits or curbs on over-spending, or the liabilities to ta*payers$

@owever, the credit crisis of 188


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Aecently there have been several lawsuits attributable to the rating of securitiations by the three leading ratingagencies$ %n July, 188?, the &Os largest public pension fund has filed suit in !alifornia state court inconnection with 7/ billion in losses that it says were caused by Lwildly inaccurateM credit ratings from the threeleading ratings agencies$./0

See also[edit]

!ollateralied debt obligation, securitiation vehicle for corporate debt securities !ollateralied fund obligation, securitiation vehicle for private e3uity and hedge fund assets

!ollateralied mortgage obligation,securitiation vehicle for mortgage-backed securities

!ollateralied loan obligation, securitiation vehicle for corporate loans

#eferences[edit]

/$ 0ump up 1'ichael &imkovic,Competition and Crisis in Mortgage Securitization1$ 0ump up 1'ichael &imkovic,Secret Liens and the Financial Crisis of 200, merican ankruptcy aw Journal,

ol$ 65, p$ 15, 188?

5$ 0ump up 1Aaynes, &ylvain and nn Autledge, 2he nalysis of &tructured &ecurities, #*ford ress, 1885, p$ /85%&C ?


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/?$ SJump up to: abcdefghijkFi8ed Income Sectors &sset9:ac%ed Securities & primer on asset9;ac%ed securities,"wight sset 'anagement !ompany (188)$ !ite error: %nvalid tag4 name I"wightI defined multiple times with

different content (see the help page)$ !ite error: %nvalid tag4 name I"wightI defined multiple times with different

content (see thehelp page)$

18$ 0ump up 1>im, '$ 4 @essami, $ 4 &ombolestani, ;$ (18/8, 'arch 19) !;C =98 - !ash Flow Waterfall .ideofile0$ A: http:NNwww$youtube$comNwatchUvV"w=@mXs

1/$ 0ump up 12he !ommittee on the Blobal Financial &ystem defined &tructured Finance, I2he role of ratings instructured finance: issues and implicationsI, January 188

11$ SJump up to: ab


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!ollateralied loan obligation(!#)

!ollateralied fund obligation(!F#)

&enior stretch loan

&tructured product

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Investmentstrategy

(r$itrage/

#elative value

!apital structure arbitrage

!onvertible arbitrage

;3uity market neutral

Fi*ed income arbitrageNFi*ed-income relative-value

investing

&tatistical arbitrage

olatility arbitrage

Event"driven

ctivist shareholder

"istressed securities

Aisk arbitrage

&pecial situation

+irectional !onvergence trade

!ommodity trading advisorsN'anaged futures account

"edicated short

Blobal macro
https://en.wikipedia.org/wiki/Collateralized_loan_obligationhttps://en.wikipedia.org/wiki/Collateralized_fund_obligationhttps://en.wikipedia.org/wiki/Senior_stretch_loanhttps://en.wikipedia.org/wiki/Structured_producthttps://en.wikipedia.org/wiki/Securitizationhttps://en.wikipedia.org/wiki/Template:Hedge_fundshttps://en.wikipedia.org/wiki/Template_talk:Hedge_fundshttps://en.wikipedia.org/w/index.php?title=Template:Hedge_funds&action=edithttps://en.wikipedia.org/wiki/Hedge_fundhttps://en.wikipedia.org/wiki/Arbitragehttps://en.wikipedia.org/wiki/Relative_value_(economics)https://en.wikipedia.org/wiki/Capital_structure#Arbitragehttps://en.wikipedia.org/wiki/Convertible_arbitragehttps://en.wikipedia.org/wiki/Market_neutral#Equity-market-neutralhttps://en.wikipedia.org/wiki/Fixed_income_arbitragehttps://en.wikipedia.org/wiki/Fixed_income_arbitragehttps://en.wikipedia.org/wiki/Fixed-income_relative-value_investinghttps://en.wikipedia.org/wiki/Fixed-income_relative-value_investinghttps://en.wikipedia.org/wiki/Fixed-income_relative-value_investinghttps://en.wikipedia.org/wiki/Statistical_arbitragehttps://en.wikipedia.org/wiki/Volatility_arbitragehttps://en.wikipedia.org/wiki/Event-driven_investinghttps://en.wikipedia.org/wiki/Activist_shareholderhttps://en.wikipedia.org/wiki/Distressed_securitieshttps://en.wikipedia.org/wiki/Risk_arbitragehttps://en.wikipedia.org/wiki/Special_situationhttps://en.wikipedia.org/wiki/Convergence_tradehttps://en.wikipedia.org/wiki/Commodity_trading_advisorhttps://en.wikipedia.org/wiki/Commodity_trading_advisorhttps://en.wikipedia.org/wiki/Managed_futures_accounthttps://en.wikipedia.org/wiki/Managed_futures_accounthttps://en.wikipedia.org/wiki/Short_(finance)https://en.wikipedia.org/wiki/Global_macrohttps://en.wikipedia.org/wiki/File:Chicklet-currency.jpghttps://en.wikipedia.org/wiki/Collateralized_loan_obligationhttps://en.wikipedia.org/wiki/Collateralized_fund_obligationhttps://en.wikipedia.org/wiki/Senior_stretch_loanhttps://en.wikipedia.org/wiki/Structured_producthttps://en.wikipedia.org/wiki/Securitizationhttps://en.wikipedia.org/wiki/Template:Hedge_fundshttps://en.wikipedia.org/wiki/Template_talk:Hedge_fundshttps://en.wikipedia.org/w/index.php?title=Template:Hedge_funds&action=edithttps://en.wikipedia.org/wiki/Hedge_fundhttps://en.wikipedia.org/wiki/Arbitragehttps://en.wikipedia.org/wiki/Relative_value_(economics)https://en.wikipedia.org/wiki/Capital_structure#Arbitragehttps://en.wikipedia.org/wiki/Convertible_arbitragehttps://en.wikipedia.org/wiki/Market_neutral#Equity-market-neutralhttps://en.wikipedia.org/wiki/Fixed_income_arbitragehttps://en.wikipedia.org/wiki/Fixed-income_relative-value_investinghttps://en.wikipedia.org/wiki/Fixed-income_relative-value_investinghttps://en.wikipedia.org/wiki/Statistical_arbitragehttps://en.wikipedia.org/wiki/Volatility_arbitragehttps://en.wikipedia.org/wiki/Event-driven_investinghttps://en.wikipedia.org/wiki/Activist_shareholderhttps://en.wikipedia.org/wiki/Distressed_securitieshttps://en.wikipedia.org/wiki/Risk_arbitragehttps://en.wikipedia.org/wiki/Special_situationhttps://en.wikipedia.org/wiki/Convergence_tradehttps://en.wikipedia.org/wiki/Commodity_trading_advisorhttps://en.wikipedia.org/wiki/Managed_futures_accounthttps://en.wikipedia.org/wiki/Short_(finance)https://en.wikipedia.org/wiki/Global_macro


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ongNshort e3uity

2rend following

!ther Fund of hedge fundsN 'ulti-manager

*rading

lgorithmic trading

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@igh-fre3uency trading

rime brokerage

rogram trading

roprietary trading

#elated

terms

&ar%ets

!ommodities

"erivatives

;3uity

Fi*ed income

Foreign e*change

'oney markets

&tructured securities

&isc rbitrage pricing theory

ssets under management

lackG&choles model(Breeks (finance): "elta neutral)

!apital asset pricing model(lphaNetaN &ecurity

characteristic line)

Fundamental analysis

@edge
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Securitization

&hort

2a*ation of private e3uity and hedge funds

2echnical analysis

Investors

ulture funds

Family offices

Financial endowments

Fund of hedge funds

@igh-net-worth individual

%nstitutional investors

%nsurance companies

%nvestment banks

'erchant banks

ension funds

&overeign wealth funds

#egulatory Fund governance

lternative investment management companies

@edge funds

@edge fund managers

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e

3inancial ris%and financial ris% management
https://en.wikipedia.org/wiki/Short_(finance)https://en.wikipedia.org/wiki/Taxation_of_private_equity_and_hedge_fundshttps://en.wikipedia.org/wiki/Technical_analysishttps://en.wikipedia.org/wiki/Vulture_fundhttps://en.wikipedia.org/wiki/Family_officehttps://en.wikipedia.org/wiki/Financial_endowmenthttps://en.wikipedia.org/wiki/Fund_of_funds#Fund_of_hedge_fundshttps://en.wikipedia.org/wiki/High-net-worth_individualhttps://en.wikipedia.org/wiki/Institutional_investorhttps://en.wikipedia.org/wiki/Insurance#Insurance_companieshttps://en.wikipedia.org/wiki/Investment_bankinghttps://en.wikipedia.org/wiki/Merchant_bankhttps://en.wikipedia.org/wiki/Pension_fundhttps://en.wikipedia.org/wiki/Sovereign_wealth_fundhttps://en.wikipedia.org/wiki/Fund_governancehttps://en.wikipedia.org/wiki/Category:Alternative_investment_management_companieshttps://en.wikipedia.org/wiki/Category:Hedge_fundshttps://en.wikipedia.org/wiki/Category:Hedge_fund_managershttps://en.wikipedia.org/wiki/Securitizationhttps://en.wikipedia.org/wiki/Template:Financial_riskhttps://en.wikipedia.org/wiki/Template_talk:Financial_riskhttps://en.wikipedia.org/w/index.php?title=Template:Financial_risk&action=edithttps://en.wikipedia.org/wiki/Financial_riskhttps://en.wikipedia.org/wiki/Financial_risk_managementhttps://en.wikipedia.org/wiki/Short_(finance)https://en.wikipedia.org/wiki/Taxation_of_private_equity_and_hedge_fundshttps://en.wikipedia.org/wiki/Technical_analysishttps://en.wikipedia.org/wiki/Vulture_fundhttps://en.wikipedia.org/wiki/Family_officehttps://en.wikipedia.org/wiki/Financial_endowmenthttps://en.wikipedia.org/wiki/Fund_of_funds#Fund_of_hedge_fundshttps://en.wikipedia.org/wiki/High-net-worth_individualhttps://en.wikipedia.org/wiki/Institutional_investorhttps://en.wikipedia.org/wiki/Insurance#Insurance_companieshttps://en.wikipedia.org/wiki/Investment_bankinghttps://en.wikipedia.org/wiki/Merchant_bankhttps://en.wikipedia.org/wiki/Pension_fundhttps://en.wikipedia.org/wiki/Sovereign_wealth_fundhttps://en.wikipedia.org/wiki/Fund_governancehttps://en.wikipedia.org/wiki/Category:Alternative_investment_management_companieshttps://en.wikipedia.org/wiki/Category:Hedge_fundshttps://en.wikipedia.org/wiki/Category:Hedge_fund_managershttps://en.wikipedia.org/wiki/Securitizationhttps://en.wikipedia.org/wiki/Template:Financial_riskhttps://en.wikipedia.org/wiki/Template_talk:Financial_riskhttps://en.wikipedia.org/w/index.php?title=Template:Financial_risk&action=edithttps://en.wikipedia.org/wiki/Financial_riskhttps://en.wikipedia.org/wiki/Financial_risk_management


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Categories

Credit ris%

!oncentration risk

!onsumer credit risk

!redit derivative

Securitization

&ar%et ris%

!ommodity risk(e$g$ olume risk, asis risk, &hape risk,

@olding period risk, rice area risk)

;3uity risk

FE risk

'argining risk

%nterest rate risk

olatility risk

i3uidity risk(e$g$ Aefinancing risk)

!perational ris%

#perational risk management

egal risk

olitical risk

Aeputational risk

aluation risk

rofit risk

&ettlement risk

&ystemic risk

&odeling 'arket portfolio

'odern portfolio theory

AA#!
https://en.wikipedia.org/wiki/Credit_riskhttps://en.wikipedia.org/wiki/Concentration_riskhttps://en.wikipedia.org/wiki/Consumer_credit_riskhttps://en.wikipedia.org/wiki/Credit_derivativehttps://en.wikipedia.org/wiki/Market_riskhttps://en.wikipedia.org/wiki/Commodity_riskhttps://en.wikipedia.org/wiki/Commodity_riskhttps://en.wikipedia.org/wiki/Volume_riskhttps://en.wikipedia.org/wiki/Basis_riskhttps://en.wikipedia.org/wiki/Shape_riskhttps://en.wikipedia.org/wiki/Holding_period_riskhttps://en.wikipedia.org/wiki/Price_area_riskhttps://en.wikipedia.org/wiki/Equity_riskhttps://en.wikipedia.org/wiki/Foreign_exchange_riskhttps://en.wikipedia.org/wiki/Margining_riskhttps://en.wikipedia.org/wiki/Interest_rate_riskhttps://en.wikipedia.org/wiki/Volatility_riskhttps://en.wikipedia.org/wiki/Liquidity_riskhttps://en.wikipedia.org/wiki/Refinancing_riskhttps://en.wikipedia.org/wiki/Operational_riskhttps://en.wikipedia.org/wiki/Operational_risk_managementhttps://en.wikipedia.org/wiki/Legal_riskhttps://en.wikipedia.org/wiki/Political_riskhttps://en.wikipedia.org/wiki/Reputational_riskhttps://en.wikipedia.org/wiki/Valuation_riskhttps://en.wikipedia.org/wiki/Profit_riskhttps://en.wikipedia.org/wiki/Settlement_riskhttps://en.wikipedia.org/wiki/Systemic_riskhttps://en.wikipedia.org/wiki/Financial_risk_modelinghttps://en.wikipedia.org/wiki/Market_portfoliohttps://en.wikipedia.org/wiki/Modern_portfolio_theoryhttps://en.wikipedia.org/wiki/Risk-adjusted_return_on_capitalhttps://en.wikipedia.org/wiki/Credit_riskhttps://en.wikipedia.org/wiki/Concentration_riskhttps://en.wikipedia.org/wiki/Consumer_credit_riskhttps://en.wikipedia.org/wiki/Credit_derivativehttps://en.wikipedia.org/wiki/Market_riskhttps://en.wikipedia.org/wiki/Commodity_riskhttps://en.wikipedia.org/wiki/Volume_riskhttps://en.wikipedia.org/wiki/Basis_riskhttps://en.wikipedia.org/wiki/Shape_riskhttps://en.wikipedia.org/wiki/Holding_period_riskhttps://en.wikipedia.org/wiki/Price_area_riskhttps://en.wikipedia.org/wiki/Equity_riskhttps://en.wikipedia.org/wiki/Foreign_exchange_riskhttps://en.wikipedia.org/wiki/Margining_riskhttps://en.wikipedia.org/wiki/Interest_rate_riskhttps://en.wikipedia.org/wiki/Volatility_riskhttps://en.wikipedia.org/wiki/Liquidity_riskhttps://en.wikipedia.org/wiki/Refinancing_riskhttps://en.wikipedia.org/wiki/Operational_riskhttps://en.wikipedia.org/wiki/Operational_risk_managementhttps://en.wikipedia.org/wiki/Legal_riskhttps://en.wikipedia.org/wiki/Political_riskhttps://en.wikipedia.org/wiki/Reputational_riskhttps://en.wikipedia.org/wiki/Valuation_riskhttps://en.wikipedia.org/wiki/Profit_riskhttps://en.wikipedia.org/wiki/Settlement_riskhttps://en.wikipedia.org/wiki/Systemic_riskhttps://en.wikipedia.org/wiki/Financial_risk_modelinghttps://en.wikipedia.org/wiki/Market_portfoliohttps://en.wikipedia.org/wiki/Modern_portfolio_theoryhttps://en.wikipedia.org/wiki/Risk-adjusted_return_on_capital


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Aisk-free rate

Aisk parity

&harpe ratio

alue-at-Aisk (aA)and e*tensions rofit at risk,'argin at risk, i3uidity at risk

4asic concepts

"iversification

;*pected return

@aard

@edge

Aisk

Aisk pool

&ystematic risk

Financial economics

%nvestment management

'athematical finance

(uthority control C": 8////?59

Yimg srcVINNen$wikipedia$orgNwikiN&pecial:!entralutooginNstartUtypeV/*/I altVII titleVII widthVI/IheightVI/I styleVIborder: none4 position: absolute4I NZAetrieved from Ihttps:NNen$wikipedia$orgNwNinde*$phpUtitleV&ecuritiationToldidV


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*ranche

From Wikipedia, the free encyclopedia

Jump to: navigation,search

2his article needs additional citations forverification$ lease helpimprove this articleby addingcitations to reliable sources$ nsourced material may be challenged and removed$ (&ugust 200)(Learnho# and #hen to remo+e this template message)

3inancial mar%ets
https://en.wikipedia.org/wiki/Tranche#mw-headhttps://en.wikipedia.org/wiki/Tranche#mw-headhttps://en.wikipedia.org/wiki/Tranche#p-searchhttps://en.wikipedia.org/wiki/Wikipedia:Verifiabilityhttps://en.wikipedia.org/wiki/Wikipedia:Verifiabilityhttps://en.wikipedia.org/w/index.php?title=Tranche&action=edithttps://en.wikipedia.org/w/index.php?title=Tranche&action=edithttps://en.wikipedia.org/wiki/Help:Introduction_to_referencing_with_Wiki_Markup/1https://en.wikipedia.org/wiki/Help:Introduction_to_referencing_with_Wiki_Markup/1https://en.wikipedia.org/wiki/Help:Maintenance_template_removalhttps://en.wikipedia.org/wiki/Help:Maintenance_template_removalhttps://en.wikipedia.org/wiki/Financial_markethttps://en.wikipedia.org/wiki/File:Question_book-new.svghttps://en.wikipedia.org/wiki/Tranche#mw-headhttps://en.wikipedia.org/wiki/Tranche#p-searchhttps://en.wikipedia.org/wiki/Wikipedia:Verifiabilityhttps://en.wikipedia.org/w/index.php?title=Tranche&action=edithttps://en.wikipedia.org/wiki/Help:Introduction_to_referencing_with_Wiki_Markup/1https://en.wikipedia.org/wiki/Help:Introduction_to_referencing_with_Wiki_Markup/1https://en.wikipedia.org/wiki/Help:Maintenance_template_removalhttps://en.wikipedia.org/wiki/Help:Maintenance_template_removalhttps://en.wikipedia.org/wiki/Financial_market


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Pu$lic mar%et

E2change5 Securities

4ond mar%et

ond valuation

!orporate bond

Fi*ed income

Bovernment bond @igh-yield debt

'unicipal bond

&ecuritiation

Stoc% mar%et

!ommon stock

referred stock

Aegistered share

&tock

&tock certificate

&tock e*change

!ther mar%ets

"erivatives

(!redit derivative

Futures e*change

@ybrid security)Foreign e*change

(!urrency

;*change rate)

!ommodity

'oney

Aeal estate

Aeinsurance
https://en.wikipedia.org/wiki/Market_(economics)https://en.wikipedia.org/wiki/Exchange_(organized_market)https://en.wikipedia.org/wiki/Security_(finance)https://en.wikipedia.org/wiki/Bond_markethttps://en.wikipedia.org/wiki/Bond_valuationhttps://en.wikipedia.org/wiki/Corporate_bondhttps://en.wikipedia.org/wiki/Fixed_incomehttps://en.wikipedia.org/wiki/Government_bondhttps://en.wikipedia.org/wiki/High-yield_debthttps://en.wikipedia.org/wiki/Municipal_bondhttps://en.wikipedia.org/wiki/Securitizationhttps://en.wikipedia.org/wiki/Stock_markethttps://en.wikipedia.org/wiki/Common_stockhttps://en.wikipedia.org/wiki/Preferred_stockhttps://en.wikipedia.org/wiki/Registered_sharehttps://en.wikipedia.org/wiki/Stockhttps://en.wikipedia.org/wiki/Stock_certificatehttps://en.wikipedia.org/wiki/Stock_exchangehttps://en.wikipedia.org/wiki/Derivatives_markethttps://en.wikipedia.org/wiki/Credit_derivativehttps://en.wikipedia.org/wiki/Futures_exchangehttps://en.wikipedia.org/wiki/Hybrid_securityhttps://en.wikipedia.org/wiki/Foreign_exchange_markethttps://en.wikipedia.org/wiki/Currencyhttps://en.wikipedia.org/wiki/Exchange_ratehttps://en.wikipedia.org/wiki/Commodity_markethttps://en.wikipedia.org/wiki/Money_markethttps://en.wikipedia.org/wiki/Real_estatehttps://en.wikipedia.org/wiki/Reinsurancehttps://en.wikipedia.org/wiki/File:Philippine-stock-market-board.jpghttps://en.wikipedia.org/wiki/Market_(economics)https://en.wikipedia.org/wiki/Exchange_(organized_market)https://en.wikipedia.org/wiki/Security_(finance)https://en.wikipedia.org/wiki/Bond_markethttps://en.wikipedia.org/wiki/Bond_valuationhttps://en.wikipedia.org/wiki/Corporate_bondhttps://en.wikipedia.org/wiki/Fixed_incomehttps://en.wikipedia.org/wiki/Government_bondhttps://en.wikipedia.org/wiki/High-yield_debthttps://en.wikipedia.org/wiki/Municipal_bondhttps://en.wikipedia.org/wiki/Securitizationhttps://en.wikipedia.org/wiki/Stock_markethttps://en.wikipedia.org/wiki/Common_stockhttps://en.wikipedia.org/wiki/Preferred_stockhttps://en.wikipedia.org/wiki/Registered_sharehttps://en.wikipedia.org/wiki/Stockhttps://en.wikipedia.org/wiki/Stock_certificatehttps://en.wikipedia.org/wiki/Stock_exchangehttps://en.wikipedia.org/wiki/Derivatives_markethttps://en.wikipedia.org/wiki/Credit_derivativehttps://en.wikipedia.org/wiki/Futures_exchangehttps://en.wikipedia.org/wiki/Hybrid_securityhttps://en.wikipedia.org/wiki/Foreign_exchange_markethttps://en.wikipedia.org/wiki/Currencyhttps://en.wikipedia.org/wiki/Exchange_ratehttps://en.wikipedia.org/wiki/Commodity_markethttps://en.wikipedia.org/wiki/Money_markethttps://en.wikipedia.org/wiki/Real_estatehttps://en.wikipedia.org/wiki/Reinsurance


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!ver"the"counter ,off"e2change.

Forwards

#ptions

&pot market

&waps

*rading articipants

Aegulation

!learing house

#elated areas

anks and banking

Finance

o corporate

o personal

o public

v

t

e

%n structured finance,a trancheis one of a number of related securitiesoffered as part of the same transaction$2he word trancheis Frenchfor slice, section, series, or portion, and is cognate to ;nglish trench(+ditch+)$ %n the

financial sense of the word, eachbondis a different slice of the deal+s risk$2ransaction documentation (seeindenture) usually defines the tranches as different IclassesI of notes, each identified by letter (e$g$, the !lass ,!lass , !lass ! securities) with differentbond credit ratings(ratings)$

2he term trancheis used in fields of finance other than structured finance (such as in straight lending, wheremulti9tranche loansare commonplace), but the term+s use in structured finance may be singled out asparticularly important$ se of ItrancheI as a verb is limited almost e*clusively to this field$

Contents

.hide0 / @ow tranching works

o /$/ ;*ample

1 enefits

5 Aisks

9 &ee also

Aeferences
https://en.wikipedia.org/wiki/Over-the-counter_(finance)https://en.wikipedia.org/wiki/Forward_contracthttps://en.wikipedia.org/wiki/Option_(finance)https://en.wikipedia.org/wiki/Spot_markethttps://en.wikipedia.org/wiki/Swap_(finance)https://en.wikipedia.org/wiki/Trader_(finance)https://en.wikipedia.org/wiki/Financial_market_participantshttps://en.wikipedia.org/wiki/Financial_regulationhttps://en.wikipedia.org/wiki/Clearing_house_(finance)https://en.wikipedia.org/wiki/Bankhttps://en.wikipedia.org/wiki/Financehttps://en.wikipedia.org/wiki/Financehttps://en.wikipedia.org/wiki/Corporate_financehttps://en.wikipedia.org/wiki/Personal_financehttps://en.wikipedia.org/wiki/Public_financehttps://en.wikipedia.org/wiki/Template:Financial_marketshttps://en.wikipedia.org/wiki/Template_talk:Financial_marketshttps://en.wikipedia.org/w/index.php?title=Template:Financial_markets&action=edithttps://en.wikipedia.org/wiki/Structured_financehttps://en.wikipedia.org/wiki/Structured_financehttps://en.wikipedia.org/wiki/Security_(finance)https://en.wikipedia.org/wiki/Security_(finance)https://en.wiktionary.org/wiki/tranchehttps://en.wikipedia.org/wiki/French_languagehttps://en.wikipedia.org/wiki/French_languagehttps://en.wikipedia.org/wiki/Trenchhttps://en.wikipedia.org/wiki/Bond_(finance)https://en.wikipedia.org/wiki/Bond_(finance)https://en.wikipedia.org/wiki/Riskhttps://en.wikipedia.org/wiki/Riskhttps://en.wikipedia.org/wiki/Indenturehttps://en.wikipedia.org/wiki/Bond_credit_ratinghttps://en.wikipedia.org/wiki/Tranchehttps://en.wikipedia.org/wiki/Tranche#How_tranching_workshttps://en.wikipedia.org/wiki/Tranche#Examplehttps://en.wikipedia.org/wiki/Tranche#Benefitshttps://en.wikipedia.org/wiki/Tranche#Riskshttps://en.wikipedia.org/wiki/Tranche#See_alsohttps://en.wikipedia.org/wiki/Tranche#Referenceshttps://en.wikipedia.org/wiki/Over-the-counter_(finance)https://en.wikipedia.org/wiki/Forward_contracthttps://en.wikipedia.org/wiki/Option_(finance)https://en.wikipedia.org/wiki/Spot_markethttps://en.wikipedia.org/wiki/Swap_(finance)https://en.wikipedia.org/wiki/Trader_(finance)https://en.wikipedia.org/wiki/Financial_market_participantshttps://en.wikipedia.org/wiki/Financial_regulationhttps://en.wikipedia.org/wiki/Clearing_house_(finance)https://en.wikipedia.org/wiki/Bankhttps://en.wikipedia.org/wiki/Financehttps://en.wikipedia.org/wiki/Corporate_financehttps://en.wikipedia.org/wiki/Personal_financehttps://en.wikipedia.org/wiki/Public_financehttps://en.wikipedia.org/wiki/Template:Financial_marketshttps://en.wikipedia.org/wiki/Template_talk:Financial_marketshttps://en.wikipedia.org/w/index.php?title=Template:Financial_markets&action=edithttps://en.wikipedia.org/wiki/Structured_financehttps://en.wikipedia.org/wiki/Security_(finance)https://en.wiktionary.org/wiki/tranchehttps://en.wikipedia.org/wiki/French_languagehttps://en.wikipedia.org/wiki/Trenchhttps://en.wikipedia.org/wiki/Bond_(finance)https://en.wikipedia.org/wiki/Riskhttps://en.wikipedia.org/wiki/Indenturehttps://en.wikipedia.org/wiki/Bond_credit_ratinghttps://en.wikipedia.org/wiki/Tranchehttps://en.wikipedia.org/wiki/Tranche#How_tranching_workshttps://en.wikipedia.org/wiki/Tranche#Examplehttps://en.wikipedia.org/wiki/Tranche#Benefitshttps://en.wikipedia.org/wiki/Tranche#Riskshttps://en.wikipedia.org/wiki/Tranche#See_alsohttps://en.wikipedia.org/wiki/Tranche#References


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Ho tranching or%s[edit]

ll the tranches together make up what is referred to as the deal+s capital structureor liability structure$ 2hey aregenerally paid se3uentially from the mostseniorto most subordinate (and generally unsecured), althoughcertain tranches with the same security may be paidpari passu$2he more senior rated tranches generally havehigherbond credit ratings(ratings) than the lower rated tranches$ For e*ample, senior tranches may be rated, or , while a Hunior, unsecured tranche may be rated $ @owever, ratings can fluctuate after the

debt is issued and even senior tranches could be rated below investment grade (less than )$ 2he deal+sindenture(its governing legal document) usually details the payment of the tranches in a section often referredto as the waterfall(because the moneys flow down)$

2ranches with a first lienon the assets of the asset pool are referred to assenior tranchesand are generally saferinvestments$ 2ypical investors of these types of securities tend to be conduits,insurance companies,pensionfundsand other risk averseinvestors$

2ranches with either a second lien or no lien are often referred to as IHunior notesI$ 2hese are more riskyinvestments because they are not secured by specific assets$ 2he natural buyersof these securities tend to behedge fundsand other investors seeking higher riskNreturn profiles$

I'arket information also suggests that the more Hunior tranches of structured products are often bought byspecialist credit investors, while the senior tranches appear to be more attractive for a broader, less specialisedinvestor communityI$./0@ere is a simplified e*ample to demonstrate the principle:

E2ample[edit]

bank transfers risk in its loan portfolio by entering into a default swapwith a ring9fencedspecial

purpose vehicle(&)$ 2he & buys gilts(>government bonds)$

2he & sells 9 tranches of credit linked notes with a waterfall structure whereby:

o 2ranche " absorbs the first 1K of losses on the portfolio, and is the most risky$

o 2ranche ! absorbs the ne*t 1K of losses

o 2ranche the ne*t 1K

o 2ranche the final 1K, is the least risky$

2ranches , and ! are sold to outside investors$

2ranche " is bought by the bank itself$

4enefits[edit]

2ranching offers the following benefits:

2ranches allow for the Iability to create one or more classes of securities whose rating is higher than the

average rating of the underlying collateral asset pool or to generate rated securities from a pool ofunrated assetsI$./0I2his is accomplished through the use of credit support specified within the transactionstructure to create securities with different risk-return profiles$ 2he e3uityNfirst-loss tranche absorbsinitial losses, followed by the meanine tranches which absorb some additional losses, again followedby more senior tranches$ 2hus, due to the credit support resulting from tranching, the most senior claims
https://en.wikipedia.org/w/index.php?title=Tranche&action=edit&section=1https://en.wikipedia.org/wiki/Capital_structurehttps://en.wikipedia.org/wiki/Capital_structurehttps://en.wikipedia.org/w/index.php?title=Liability_structure&action=edit&redlink=1https://en.wikipedia.org/wiki/Seniority_(financial)https://en.wikipedia.org/wiki/Seniority_(financial)https://en.wikipedia.org/wiki/Pari_passuhttps://en.wikipedia.org/wiki/Pari_passuhttps://en.wikipedia.org/wiki/Bond_credit_ratinghttps://en.wikipedia.org/wiki/Indenturehttps://en.wikipedia.org/wiki/Indenturehttps://en.wikipedia.org/wiki/Securitization_transaction#Sequential_Payments.2FCash_Flow_Waterfallshttps://en.wikipedia.org/wiki/First_lienhttps://en.wikipedia.org/wiki/Special_purpose_entityhttps://en.wikipedia.org/wiki/Insurance_companyhttps://en.wikipedia.org/wiki/Insurance_companyhttps://en.wikipedia.org/wiki/Pension_fundhttps://en.wikipedia.org/wiki/Pension_fundhttps://en.wikipedia.org/wiki/Risk_aversehttps://en.wikipedia.org/wiki/Risk_aversehttps://en.wikipedia.org/wiki/Investorshttps://en.wikipedia.org/w/index.php?title=Natural_buyers&action=edit&redlink=1https://en.wikipedia.org/wiki/Hedge_fundshttps://en.wikipedia.org/wiki/Hedge_fundshttps://en.wikipedia.org/wiki/Tranche#cite_note-sfratings-1https://en.wikipedia.org/w/index.php?title=Tranche&action=edit&section=2https://en.wikipedia.org/wiki/Credit_default_swaphttps://en.wikipedia.org/wiki/Credit_default_swaphttps://en.wikipedia.org/wiki/Ringfencinghttps://en.wikipedia.org/wiki/Ringfencinghttps://en.wikipedia.org/wiki/Special_purpose_vehiclehttps://en.wikipedia.org/wiki/Special_purpose_vehiclehttps://en.wikipedia.org/wiki/Giltshttps://en.wikipedia.org/wiki/United_Kingdomhttps://en.wikipedia.org/wiki/Government_bondshttps://en.wikipedia.org/w/index.php?title=Tranche&action=edit&section=3https://en.wikipedia.org/wiki/Tranche#cite_note-sfratings-1https://en.wikipedia.org/wiki/Tranche#cite_note-sfratings-1https://en.wikipedia.org/w/index.php?title=Tranche&action=edit&section=1https://en.wikipedia.org/wiki/Capital_structurehttps://en.wikipedia.org/w/index.php?title=Liability_structure&action=edit&redlink=1https://en.wikipedia.org/wiki/Seniority_(financial)https://en.wikipedia.org/wiki/Pari_passuhttps://en.wikipedia.org/wiki/Bond_credit_ratinghttps://en.wikipedia.org/wiki/Indenturehttps://en.wikipedia.org/wiki/Securitization_transaction#Sequential_Payments.2FCash_Flow_Waterfallshttps://en.wikipedia.org/wiki/First_lienhttps://en.wikipedia.org/wiki/Special_purpose_entityhttps://en.wikipedia.org/wiki/Insurance_companyhttps://en.wikipedia.org/wiki/Pension_fundhttps://en.wikipedia.org/wiki/Pension_fundhttps://en.wikipedia.org/wiki/Risk_aversehttps://en.wikipedia.org/wiki/Investorshttps://en.wikipedia.org/w/index.php?title=Natural_buyers&action=edit&redlink=1https://en.wikipedia.org/wiki/Hedge_fundshttps://en.wikipedia.org/wiki/Tranche#cite_note-sfratings-1https://en.wikipedia.org/w/index.php?title=Tranche&action=edit&section=2https://en.wikipedia.org/wiki/Credit_default_swaphttps://en.wikipedia.org/wiki/Ringfencinghttps://en.wikipedia.org/wiki/Special_purpose_vehiclehttps://en.wikipedia.org/wiki/Special_purpose_vehiclehttps://en.wikipedia.org/wiki/Giltshttps://en.wikipedia.org/wiki/United_Kingdomhttps://en.wikipedia.org/wiki/Government_bondshttps://en.wikipedia.org/w/index.php?title=Tranche&action=edit&section=3https://en.wikipedia.org/wiki/Tranche#cite_note-sfratings-1


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are e*pected to be insulated - e*cept in particularly adverse circumstances - from default risk of theunderlying asset pool through the absorption of losses by the more Hunior claims$I.10

2ranching can be very helpful in many different circumstances$ For those investors that have to invest in

highly rated securities, they are able to gain Ie*posure to asset classes, such as leveraged loans, whoseperformance across the business cycle may differ from that of other eligible assets$I./0&o essentially itallows investors to further diversify their portfolio$

#is%s[edit]

Aisk, Aeturn, Aating T Xield relate

2ranching poses the following risks:

2ranching can add comple*ity to deals$ eyond the challenges posed by estimation of the asset pool+s

loss distribution, tranching re3uires detailed, deal-specific documentation to ensure that the desiredcharacteristics, such as the seniority ordering the various tranches, will be delivered under all plausiblescenarios$ %n addition, comple*ity may be further increased by the need to account for the involvementof asset managers and other third parties, whose own incentives to act in the interest of some investorclasses at the e*pense of others may need to be balanced$

With increased comple*ity, less sophisticated investors have a harder time understanding them and thus

are less able to make informed investment decisions$ #ne must be very careful investing in structuredproducts$ s shown above, tranches from the same offering have different risk, reward, andNor maturitycharacteristics$

'odeling the performance of tranched transactions based on historical performance may have led to the

over-rating (by ratings agencies) and underestimation of risks (by end investors) of asset-backedsecurities with high-yield debtas their underlying assets$ 2hese factors have come to light in the

subprime mortgage crisis$

%n case of default, different tranches may have conflicting goals, which can lead to e*pensive and time-

consuming lawsuits, called tranche arfare(punning on trench warfare)$.50Further, these goals may notbe aligned with those of the structure as a whole or of any borrowerDin formal language, no agent isacting as a fiduciary$ For e*ample, it may be in the interests of some tranches to foreclose on a defaultedmortgage, while it would be in the interests of other tranches (and the structure as the whole) to modifythe mortgage$ %n the words of structuring pioneer ewis Aanieri:.90

!he cardinal principle in the mortgage crisis is a +er- old one. $ou are almost al#a-s ;etter offrestructuring a loan in a crisis #ith a ;orro#er than going to a foreclosure. In the past that #as ne+er at
https://en.wikipedia.org/wiki/Tranche#cite_note-CGFS-2https://en.wikipedia.org/wiki/Tranche#cite_note-sfratings-1https://en.wikipedia.org/w/index.php?title=Tranche&action=edit&section=4https://en.wikipedia.org/wiki/Structured_productshttps://en.wikipedia.org/wiki/Structured_productshttps://en.wikipedia.org/wiki/Riskhttps://en.wikipedia.org/wiki/Maturity_(finance)https://en.wikipedia.org/wiki/High-yield_debthttps://en.wikipedia.org/wiki/Subprime_mortgage_crisishttps://en.wikipedia.org/wiki/Subprime_mortgage_crisishttps://en.wikipedia.org/wiki/Trench_warfarehttps://en.wikipedia.org/wiki/Tranche#cite_note-3https://en.wikipedia.org/wiki/Fiduciaryhttps://en.wikipedia.org/wiki/Lewis_Ranierihttps://en.wikipedia.org/wiki/Tranche#cite_note-4https://en.wikipedia.org/wiki/File:Risk&ReturnForInvestors.svghttps://en.wikipedia.org/wiki/Tranche#cite_note-CGFS-2https://en.wikipedia.org/wiki/Tranche#cite_note-sfratings-1https://en.wikipedia.org/w/index.php?title=Tranche&action=edit&section=4https://en.wikipedia.org/wiki/Structured_productshttps://en.wikipedia.org/wiki/Structured_productshttps://en.wikipedia.org/wiki/Riskhttps://en.wikipedia.org/wiki/Maturity_(finance)https://en.wikipedia.org/wiki/High-yield_debthttps://en.wikipedia.org/wiki/Subprime_mortgage_crisishttps://en.wikipedia.org/wiki/Trench_warfarehttps://en.wikipedia.org/wiki/Tranche#cite_note-3https://en.wikipedia.org/wiki/Fiduciaryhttps://en.wikipedia.org/wiki/Lewis_Ranierihttps://en.wikipedia.org/wiki/Tranche#cite_note-4


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issue ;ecause the loan #as al#a-s in the hands of someone acting as a fiduciar-. !he ;an%, or someoneli%e a ;an% o#ned them, and the- al#a-s e8ercised their ;est 5udgement and their interest. !he pro;lemno# #ith the size of securitization and so man- loans are not in the hands of a portfolio lender ;ut in asecurit- #here structurall- no;od- is acting as the fiduciar-.

See also[edit]

ooled investment rivatiation

2homson Financial eague 2ables

#eferences[edit]

1. S Jump up to: abc%$ Fender, J$ 'itchell I&tructured finance: comple*ity, risk and the use of ratingsI %&

Puarterly Aeview, June 1882. 0ump up 1I2he role of ratings in structured finance: issues and implicationsI !ommittee on the Blobal

Financial &ystem, January 188

3. 0ump up 12he mother of all (A'&) tranche warfare, Financial 2imes lphaville, 2racy lloway, #ct// 18/8

4. 0ump up 12he Financial %nnovation 2hat WasnOt$Aortybomb, 'ike Aorty, transcript of 'ilken %nstitute

!onference, 'ay 1886

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Structured finance

Securitization

&ecuritiation transaction

!redit enhancement

*ranche

*ypes of Securities sset-backed security(&)

'ortgage-backed security('&)

!redit derivative

!redit default swap(!"&)

!ollateralied debt obligation(!"#)
https://en.wikipedia.org/w/index.php?title=Tranche&action=edit&section=5https://en.wikipedia.org/wiki/Pooled_investmenthttps://en.wikipedia.org/wiki/Privatizationhttps://en.wikipedia.org/wiki/Thomson_Financial_League_Tableshttps://en.wikipedia.org/w/index.php?title=Tranche&action=edit&section=6https://en.wikipedia.org/wiki/Tranche#cite_ref-sfratings_1-0https://en.wikipedia.org/wiki/Tranche#cite_ref-sfratings_1-0https://en.wikipedia.org/wiki/Tranche#cite_ref-sfratings_1-0https://en.wikipedia.org/wiki/Tranche#cite_ref-sfratings_1-1https://en.wikipedia.org/wiki/Tranche#cite_ref-sfratings_1-2https://en.wikipedia.org/wiki/Tranche#cite_ref-sfratings_1-2https://en.wikipedia.org/wiki/Tranche#cite_ref-CGFS_2-0https://en.wikipedia.org/wiki/Tranche#cite_ref-3http://ftalphaville.ft.com/blog/2010/10/11/364796/the-mother-of-all-rmbs-tranche-warfare/https://en.wikipedia.org/wiki/Tranche#cite_ref-4http://rortybomb.wordpress.com/2009/07/31/the-financial-innovation-that-wasn't/https://en.wikipedia.org/wiki/Tranchehttps://en.wikipedia.org/wiki/Template:Structured_financehttps://en.wikipedia.org/wiki/Template_talk:Structured_financehttps://en.wikipedia.org/w/index.php?title=Template:Structured_finance&action=edithttps://en.wikipedia.org/wiki/Structured_financehttps://en.wikipedia.org/wiki/Securitizationhttps://en.wikipedia.org/wiki/Securitization_transactionhttps://en.wikipedia.org/wiki/Credit_enhancementhttps://en.wikipedia.org/wiki/Asset-backed_securityhttps://en.wikipedia.org/wiki/Mortgage-backed_securityhttps://en.wikipedia.org/wiki/Credit_derivativehttps://en.wikipedia.org/wiki/Credit_default_swaphttps://en.wikipedia.org/wiki/Collateralized_debt_obligationhttps://en.wikipedia.org/w/index.php?title=Tranche&action=edit&section=5https://en.wikipedia.org/wiki/Pooled_investmenthttps://en.wikipedia.org/wiki/Privatizationhttps://en.wikipedia.org/wiki/Thomson_Financial_League_Tableshttps://en.wikipedia.org/w/index.php?title=Tranche&action=edit&section=6https://en.wikipedia.org/wiki/Tranche#cite_ref-sfratings_1-0https://en.wikipedia.org/wiki/Tranche#cite_ref-sfratings_1-1https://en.wikipedia.org/wiki/Tranche#cite_ref-sfratings_1-2https://en.wikipedia.org/wiki/Tranche#cite_ref-CGFS_2-0https://en.wikipedia.org/wiki/Tranche#cite_ref-3http://ftalphaville.ft.com/blog/2010/10/11/364796/the-mother-of-all-rmbs-tranche-warfare/https://en.wikipedia.org/wiki/Tranche#cite_ref-4http://rortybomb.wordpress.com/2009/07/31/the-financial-innovation-that-wasn't/https://en.wikipedia.org/wiki/Tranchehttps://en.wikipedia.org/wiki/Template:Structured_financehttps://en.wikipedia.org/wiki/Template_talk:Structured_financehttps://en.wikipedia.org/w/index.php?title=Template:Structured_finance&action=edithttps://en.wikipedia.org/wiki/Structured_financehttps://en.wikipedia.org/wiki/Securitiza

Documents

Securitization Facts