Securitization Primer

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Securitisation - a

primer

B Vinod Kothari

[For another comprehensive write-up on securitisation b Tom Nicolle, visitour Articles page - click the left hand link].

These are etracts from Vinod Kothari's book titled Securitisation:

The Financial Instrument of the Ne Millennium. To kno more

about the book or order a cop, click here.

CHAPER 1

Just as the electronics industr was

formed when the vacuum tubes were

replaced b transistors, and transistors

were then replaced b integrated

circuits, the financial services industr is

being transformed now that securitised

credit is beginning to replace traditional

lending. Like other technological transformations, this one will take place

over the ears, not overnight. We

estimate it will take 10 to 15 ears for

structured securitised credit to replace

to displace completel the classical

lending sstem -not a long time,

considering that the fundamentals of

banking have remained essentiall

unchanged since the Middle Ages.

Lowell L Bran





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Techgica adacee hae chaged he face f he d f fiace.

I i da e a d f aaci ha a d f eai. M

eai hae bee aaciaied.

Taaci ea cig gehe f eiie ih a c e,

heea eai ea eeig gehe f hee eiie. F eae,

he a ba ide a a f a f e a e, he aaci

ead a eaihi: ha f a ede ad a be. Hee, he

eaihi i eiaed he he e a i ceed i a debee.

The eaihi f beig a debeehde i he ca i caabe

f aciii ad eiai b aaci.

1. Basic meaning of securitisation:

"Seciiai" i i ide ee iie ee ch ce hich ce

a fiacia eai i a aaci.

Hi f ei f fiace, ad cae a, he ae beig ief he fe, i eee ih iace hee eai hae bee ceed

i aaci. I fac, hi a he eaie, ad b fa eaed,

cibi f cae a he d f fiace, i., he dia

hae, hich iie ieceea ehi f he ca. Oehi f a

ca i a eai, acaged a a aaci b he ceai f he

dia hae. Thi eaie iace f eciiai a iea i

he gh f he cae f f dig bie, ad hece,

idiaiai, ha ee aed he i a e f he geae

iei f he 19h ce -he he e beig he ea egie. Tha efec he igificace f he dia hae, ad if he ae idea i

eeded, he e cce f eciiai: i a ia he d f

fiace a ie e i id.

Ohe iace f eciiai f eaihi ae cecia ae,

hich eciie a ade deb.

Asset securitisation:

Hee, i he ee i hich he e i ed i ee da caia ae

acii, securitisation ha acied a ica eaig f i , hich i a





times, for the sake of distinction, called ae eciiaion. It is taken to

mean a device of structured financing where an entit seeks to pool together

its interest in identifiable cash flows over time, transfer the same to investors

either with or without the support of further collaterals, and thereb achieve

the purpose of financing. Though the end-result of securitisation is financing,

but it is not "financing" as such, since the entit securitising its assets it not

borrowing mone, but selling a stream of cash flows that was otherwise to

accrue to it.

The imple a o ndeand he concep of

eciiaion i o ake an eample. Le a, I

an o on a ca o n i fo hie. I cold ake a

loan ih hich I cold b he ca. The loan i m

obligaion and he ca i m ae, and boh ae

affeced b m ohe ae and ohe

obligaion. Thi i he cae of imple financing.

On he ohe hand, if I ee o analicall

eniage he ca, m ae in he inan cae, a

claim o ale oe a peiod of ime, ha i, abili

o geneae a eie of hie enal oe a peiod

of ime, I migh ell a pa of he cah flo b a

of hie enal fo a iplaed ime and heeb

aie enogh mone o b he ca. The ineo i happie no, becae he ha a claim fo a

cah flo hich i no affeced b m ohe

obligaion; I am happie becae I hae he cake

and ea i alo, and alo becae he obligaion

o epa he financie i aken cae of b he

cahflo fom he ca ielf.

Blend of financial engineeing and capial make:

Thus, the present-da meaning of securitisation is a blend of two forces that

are critical in toda's world of finance: structured finance and capital

markets. Securitisation leads to structured finance as the resulting securit is

not a generic risk in entit that securitises its assets but in specific assets or cashflows of such entit. Two, the idea of securitisation is to create a capital

market product - that is, it results into creation of a "securit" which is a

marketable product.





Thi meaning of eciiaion can be epeed in aio damaic od:

Securitisation is the process of commoditisation. The baic idea

i o ake he ocome of hi poce ino he make, he capial

make. Th, he el of ee eciiaion poce, haee

migh be he aea o hich i i applied, i o ceae ceain inmen

hich can be placed in he make.

Securitisation is the process of integration and differentiation.

The eni ha eciie i ae fi pool hem ogehe ino a

common hochpo (aming i i no one ae b eeal ae, a

i nomall he cae). Thi he poce of inegaion. Then, he poolielf i boken ino inmen of fied denominaion. Thi i he

poce of diffeeniaion.

Securitisation is the process of de-construction of an entit. If

one eniage an eni' ae a being compoed of claim o

aio cah flo, he poce of eciiaion old pli apa

hee cah flo ino diffeen bcke, claif hem, and ell hee

claified pa o diffeen ineo a pe hei need. Th,eciiaion beak he eni ino aio b-e.

We ill en o hi pecific, peen-da meaning of eciiaion.

Hoee, le go back o he geneic meaning of he em - ha i,

coneing an ae o a elaionhip ino a eci, a commodi.

1. Meaning of securit:

Ve ndeandabl, fhe deelopmen in hi aea ill conine o

ake place. Moe financial elaion of oda ill in ime o come be

coneed ino and be anfeable a "eciie".

In connecion ih eciiaion, he od "eci" doe no mean

ha i adiionall migh hae mean nde copoae la o

commece: a eced inmen. The od "eci" hee mean a





fiacia cai hich i geea aifeed i f f a dce, i

eeia feae beig aeabii. T ee aeabii, he

ie hae geea acceabii a a e f ae. Hece,

i i geea eihe aed b cedi aig agecie, i i eced b

chage e baia ae. Fhe, ee iidi, he

ie i geea ade i hge .

2. Need fo eciiaion:

The geeic eed f eciiai i a d a ha f gaied

fiacia ae. F he diici beee a fiacia eai ad

a fiacia aaci eaie, e dead ha a eai iaiab

eed he cig gehe ad eaiig gehe f eiie. N

ha he eiie d eceai ce gehe f hei , diec. The igh ie a be f fiacia ieediaie i he

ce, b eehee, a eai ie a fii e a ceai

ie. Geea, fiacia eai ae ceaed bac ahe

fiacia eai, ch a a a beig ae acie a ae, ad i

ha cae, he eeded fied eid f he eai hige he he

hich i ee bac-.

Fiacia ae deeed i ee he eed ie a age

be f ie i he ae ace. A he be f ie

ee iceaig, he aeage ie e ie ee cig

d -hi i a ie e f he aeace, becae gig ie

ea iee f a ide bae f ie. The a ie i

a feia ie: he i a ch i he bie f

iee. Hece, he eed a ie hich i eaie

dead, ad i iid. Thee eed e he age f ei

f fiacia ie hich d ce fiacia cai i

iid, ea dead ad hge dc, a ie

caig ceified ai abe (cedi-aig eci ) , hich

d be aaiabe i a deiai i ee e' e.

Th, eciiai i a geeic ee i baic he d f fiace,

ad i i a i a ha eciiai eee he eie age f

fiacia ie, ad hece, he eie age f fiacia ae.

Fig ae he ea a h he d f fiace efe a

eciied fiacia ie he deig fiacia cai i i

igia f:





1. Fiacia cai fe ie ieabe f e, cea

ide he each f he a ie. The iiia ee hi a

he deee f fiacia ieediai: a ieedia ch a a

ba d gehe he ece f he a ie ad e

he ae f he age iee eed f he e. Hee, he

cae he ecd diffic, ed be.

2. Sa ie ae ica i he bie f iee, ad

hece, iidi f iee i ciica f he. Udeig

fiacia aaci eed fii f iee e a fied ie,

agig f a fe h a be a be f ea. Thi

be cd ee be ed b fiacia ieediai,

ice if he ieedia ided a fied iee i he

eee, ad ief gh fd ih a i f iidi, i d gecagh i ei be f a iach. Hece, he ae a a

aeabe ie.

3. Geea, ie ae eaie ded ha fiacia

aaci. A ie i hge, a ade i a adad

f, ad geea caiig adad ie bigai. Hece, i

ca be ded geeica. Beide, a ia a f ie

ifai i he ai ad ice f he ie, ad bh ae fa

eaie i cae f ie ha i cae f deig fiacia

aaci.

I h, he eed f eciiai a a iecaabe, ad

ee da' fiacia ae d hae bee ha he ae,

e e adad hig ha ae ae cd b ad e, ha

i, fiacia eciie, ee aaiabe.

S ef i he ecic gic f eciiai ha he ed

ad eciiai ii. Caia ae ae da a

ace hee eehig i aded: f cai e eiie cai

e ae, i, ad ead.

3. Seciiaion of eceiable:

Oe f he aicai f he eciiai echie ha bee i

ceai f aeabe eciie f baed eceiabe. The





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4. ick gide o Jagon:

T C,

.

T oiginao:

. T

:

, ineo.

T

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, fe flo eciiaion,

ae-backed eciiaion.

I US , :

mogage-backed eciie ae-backed eciie. T

:

, USA ,

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S

,

, anfe of he eceiable

. I , aignmen

of eceiable. I ,

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I , e ale





eceiable, and no meel a financing again he eci of he

eceiable.

Since eciiaion inole a anfe of eceiable fom he

oiginao, i old be inconenien, o he een of being impoible,

o anfe ch eceiable o he ineo diecl, ince he

eceiable ae a diee a he ineo hemele. Beide, he

bae of ineo cold keep changing a he eling eci i

eeniall a makeable eci. Theefoe, i i necea o bing in

an inemedia ha old hold he eceiable on behalf of he end

ineo. Thi eni i ceaed olel fo he ppoe of he

anacion: heefoe, i i called a special purpose vehicle (SPV)

o a special purpose entit (SPE) o, if ch eni i a compan,

special purpose compan (SPC). The fncion of he SPV in a

eciiaion anacion cold ech fom being a pe condi o

inemedia ehicle, o a moe acie ole in eineing o ehaping

he cahflo aiing fom he ae anfeed o i, hich i

omehing ha old depend on he end objecie of he

eciiaion eecie.

Theefoe, he oiginao anfe he ae o he SPV, hich hold

he ae on behalf of he ineo, and ie o he ineo i

on eciie. Theefoe, he SPV i alo called the issuer.

Thee i no nifom name fo he eciie ied b he SPV a ch

eciie ake diffeen fom. Thee eciie cold eihe epeen

a diec claim of he ineo on all ha he SPV collec fom he

eceiable anfeed o i: in hi cae, he eciie ae called pass

through certificates o beneficial interest certificates a he

impl ceificae of popoional beneficial inee in he ae held

b he SPV. Alenaiel, he SPV migh be e-configing hecahflo b eineing i, o a o pa o he ineo on fied

dae, no maching ih he dae on hich he anfeed

eceiable ae colleced b he SPV. In hi cae, he eciie held

b he ineo ae called pa through certificates. The eciie

ied b he SPV cold alo be named baed on hei ik o ohe

feae, ch a senior notes o junior notes, floating rate notes,

ec.

Anohe od commonl ed in eciiaion eecie i

bankruptc remote transfer. Wha i mean i ha he anfe of

he ae b he oiginao o he SPV i ch ha een if he





oiginao ee o go bankp, o ge ino ohe financial difficlie,

he igh of he ineo on he ae held b he SPV i no

affeced. In ohe od, he ineo old conine o hae a

paamon inee in he ae iepecie of he difficlie, die

o bankpc of he oiginao.

5. Feae of eciiaion:

A eciied inmen, a compaed o a diec claim on he ie,

ill geneall hae he folloing feae:

Marketabilit:

The e ppoe of eciiaion i o ene makeabili o

financial claim. Hence, he inmen i ced o a o be

makeable. Thi i one of he mo impoan feae of a eciied

inmen, and he ohe ha follo ae mol impoed onl o

ene hi one. The concep of makeabili inole o polae:

(a) he legal and emic poibili of makeing he inmen; (b)

he eience of a make fo he inmen.

A fa a he legal poibili of makeing he inmen i concened,

adiional mecanile la ook a conempoaneo ie of

makeable docmen. In mo jidicion of he old, la

dealing ih makeable inmen (alo efeed o a negoiable

inmen) ee mol limied in applicaion o ha ee hen in

ciclaion a ch. Beide, he copoae la mol defined and

ogh o eglae iance of e al copoae financial claim,

ch a hae, bond and debene. Fo an codified la, hi i

no nepeced, ince la do no lead commece: mo ofen, hefollo, a he concen of he la-make i mol eglao and no

pomoional.

Hence, in mo jidicion of he old, ell-coded la ei o

enable and eglae he iance of adiional fom of eciied

claim, ch a hae, bond, debene and ade pape (negoiable

inmen). Mo conie lack in legal em peaining o ohe

eciied podc, of ecen o eoic oigin, ch a eciiaion

of eceiable. On a polic plane, i i incmben on he pa of he

eglao o ie an eciied inmen ih he ame concen a

in cae of adiional inmen, fo eaon of ineo poecion.





Hee, i eed be ed ha hee a a de ei

egae iace f a eciied ie, i i aie beiee ha

he a de ei ch iace. A egai i a deig b

hai ief, i d be idic ee ha eehig ha i

egaed i ee aed. Regai i a ecei ad

feed i he e.

The ecd ie i e f haig ceaig a ae f he

ie. Seciiai i a faac e he eciied dc i

aeabe. The e e f eciiai i be defeaed if he

ie i aded a fe feia ie ih a

ibii f haig a iid ae heei. Liidi a eciied

ie i affded eihe b idcig i i a gaied ae

(ch a eciie echage) b e e agecie acig aae ae i i, ha i, ageeig b ad e he ie a

eihe e-deeied ae-deeied ice.

Merchantable qualit:

T be ae-acceabe, a eciied dc ha hae a

echaabe ai. The cce f echaabe ai i cae f

hica gd i ehig hich i acceabe echa i

a ade. Whe aied fiacia dc, i d ea he

fiacia cie ebdied i he ie ae eced he

ie' aifaci. "T he ie' aifaci" i a eaie e,

ad heefe, he igia f he eciied ie ece he

ie baed he eed f he ie. The geea e i: he

e bad he bae f he ie, he e i he ie' abii abb he i, ad hece, he e he eed eciie.

F ide diibed eciied ie, eaai f he

ai, ad i ceificai b a ideede ee, i., raing, i

c. The aig ee f he beefi f he a ie, h i

heie eeced be i a ii aaie he degee f

i ied.

I cae f eciiai f eceiabe, he cce f ai





dege daic chage making aing i a nieal

eiemen fo eciiaion. A aead diced,

eciiai i a cae hee a cai he deb f he igia

i beig bgh b he ie. Hece, he ai f he cai f he

deb ae igificace, hich a ie eabe ie

e e he cedi-aig f deb ( a fi f deb)

ad , ae he ie a ideede f he iga'

aig.

Wide Distribution:

The baic e f eciiai i diibe he dc. The

ee f diibi hich he igia d ie achiee i

baed a caaie aai f he c ad he beefi

achieed heeb. Wide diibi ead a c-beefi i he

ee ha he ie i abe ae he dc ih e e,

ad hece, e fiacia c hief. B ide ie bae

ie c f diibi ad eicig.

I acice, eciiai ie ae i diffic f eai ie

dead. Hece, eciiai hae bee iae aced

ih feia ie. Hee, i i ie ha i ce, eaiie cd be aaced i eciied dc.

Homogeneit:

T ee a a aeabe ie, he ie hd be

acaged a i hge . Hgeei, ie he abe

feae, i a fci f eai aeig. M eciied ie

ae be i affdabe he agia ie, ad hece, he

ii deiai bece eaie he eed f he aeie. Shae i caie a be be i ice a a a

R. 10 each, b debee ad bd ae iced i R. 100 each

R. 1000 each. Deiged f age ie, cecia ae

a be i deiai a high a R. 5 Lac. Ohe eciiai

aicai a a f hi gic.

The eed bea he he be eciied i eea

hge ae eciiai a eecie f iegai ad

diffeeiai: iegai f he eea ae i e , ad

he he ae' diffeeiai i if aeabe . Thi fe

iie he e feae : a ieedia achiee hi ce.





Special prpose ehicle:

I cae he eciiai ie a ae cai hich eed

be iegaed ad diffeeiaed, ha i, e i i a diec ad

eced cai he ie, he ie i eed a ieedia

agec ac a a ei f he ae cai hich i beig

eciied. Le ae he eaie eae f a eced debee, ieece, a eced a f eea ie. Hee, eci chage

e he ie' eea ae eed be iegaed, ad heeafe

be i aeabe . F hi e, he ie i big i

a ieedia agec he baic fci i hd he eci

chage behaf f he ie, ad he ie ceificae he

ie f beeficia iee i he chage hed b he ieedia.

S, heea he chage cie be hed b he ieedia,

beeficia iee heei bece a aeabe eci.

The ae ce i ied i eciiai f eceiabe, hee

he ecia e ieedia hd he eceiabe ih ief, ad

ie beeficia iee ceificae he ie.

6. Seciiaion and financial

diinemediaion:

Seciiai i fe aid e i fiacia diieediai. Thi

cce eed be eabaed. The be a dead hi cce i

ae he cae f cae debee, a e-ded eci.

A a diced eaie, if e iagie a fiacia d ih eciie(ad ch d i iagia), a fiacia aaci i be caied

a e--e eai. F eae, if a ca eed a a, if i

hae ee ch a f he ede, ad he ede i hae

eabih a e--e eai ih he ca. Each ede ha

dead he big ca, ad afe hi a. Thi i fe

diffic, ad hece, hee aea a fiacia ieedia, ch a a ba i

hi cae, hich fd f a f ch ie, ad e hee

ed fd ed he ca. N, e e he ca

eciie he a, ad ie debee he ie. Wi hi eiiae

he eed f he ieedia ba, ice he ie a ed he

ca diec i a a each, i f f a eci hich i ea

aaie, ad hich i iid ?





Utilities added b financial intermediaries:

A financial inemedia iniiall came in pice o aoid he difficlie in a

diec lende-booe elaion beeen he compan and he ineo. The

difficlie cold hae been one o moe of he folloing:

(a) Transactional difficult: An aeage mall ineo old hae a mall

amon of m o lend heea he compan' need old be maie. The

inemedia bank pool he fnd fom mall ineo o mee he pical

need of he compan. The inemedia ma ie i on eci, of

malle ale.

(b) Informational difficult: An aeage mall ineo old eihe no be

aae of he booe compan o old no kno ho o appaie o

manage he loan. The inemedia fill p hi gap.

(c) Perceived risk: The ik a ineo peceie in ineing in a bank ma

be mch lee han ha of ineing diecl in he compan, hogh in

eali, he financial ik of he compan i anpoed on he bank.

Hoee, he bank i a pool of eeal ch indiidal ik, and hence, heineo' pefeence of a bank o he booe compan i eaonable.

Seciiaion of he loan ino bond o debene fill p all he hee

difficlie in diec echange menioned aboe, and hence, aoid he need

fo a diec inemediaion. I aoid he anacional difficl b beaking

he lmp loan ino makeable lo. I aoid infomaional difficl becae

he eciied podc i offeed geneall b a of a pblic offe, and i

eenial feae ae ell dicloed. I aoid he peceied ik difficloo, ince he inmen i geneall ell-eced, and i aed fo he

ineo' aifacion.

Securitisation: changes the function of intermediation:

Hence, i i e o a ha eciiaion lead o a degee of

diinemediaion. Diinemediaion i one of he impoan aim of a

peen-da copoae eae, ince b leap-fogging he inemedia, he

compan inend o edce he co of i finance. Hence, eciiaion ha

been emploed o diinemediae.





I i, hee, ia dead ha eciiai de eiiae

he eed f he ieedia: i ee edefie he ieedia' a. Le

ee he abe eae. If he ca i he abe cae i iig

debee he bic eace a ba a, i i eiiaig he

ieedia agehe ? I d ib be aidig he ba a a

ieedia i he fiacia f, b d i eed he eice f a

iee bae ccef ccde he ie f debee.

Hece, eciiai chage he baic e f fiacia ieediaie.

Tadiia, fiacia ieediaie hae eeged ae a aaci

ibe b efig a ig fci, ad hae cibed edce

he ie' eceied i b biig hei eci f ha f he

ed e. Seciiai hee eice f he ieedia i a

bacgd b aig i ibe f he ed-e ffe hee feae i

f f he eci, i hich cae, he fc hif he e eeia

fci f a fiacia ieedia: ha f diibig a fiacia dc.

F eae, i he abe cae, hee he ba beig he eaie

ieedia a eiiaed ad iead he eice f a iee bae

ee gh diibe a debee ie, he fc hifed f he

ig ii ided b he bae he diibi ii ided b

he iee bae.

Thi ha haeed hica dc a e. Wih adadiai,

acagig ad badig f hica dc, he e f ieedia

ade, aica eaie, hifed f he h acaged ae

aiie ided he ce aace a ai, he e

h baica efed he diibi fci.

Seciiai ee eiiae fd-baed fiacia ieediaie b fee-

baed diib. I he abe eae, he ba a a fd-baed

ieedia, a eei f fd, heea he iee bae a a fee- baed ieedia, a caa, a ieie f fd. Hece, ih iceaig

ed ad eciiai, he e f fee-baed fiacia eice ha bee

bgh i he fc.

I cae f a diec a, he edig ba a efig eea

ieediai fci ed abe: i a diib i he ee ha i

aied i fiace f a age be f a ie; i a

aaiig ad aeig he cedi i i eedig he cae a, adhaig eeded i, i a aagig he ae. Seciiai i each f

hee ieedia fci aa, each be efed b eaae

eciaied agecie. The diibi fci i be efed b he





inemen bank, appaial fncion b a cedi-aing agenc, and

managemen fncion poibl b a mal fnd ho manage he pofolio of

eci inemen b he ineo. Hence, eciiaion eplace fnd-

baed eice b eeal fee-baed eice.

Seciiaion: changing he face of banking:

Note the quotation ith hich e began this Chapter - i a

eciiaion i lol b definiel changing he face of moden banking

and b he n of he ne millennim, eciiaion old hae anfomed

banking ino a ne-look fncion.

Bank ae inceaingl facing he hea of diinemediaion. When aked

h he obbed bank, he infamo Ameican ciminal Willie Son eplied"ha' hee he mone i." No moe o, a bank old a ! In a old of

eciied ae, bank hae diminihed ole. The diincion beeen

adiional bank lending and eciied lending claifie hi iaion.

Tadiional bank lending ha four functions: oiginaing, fnding, eicing,

and monioing. Oiginaing mean making he loan, fnding implie ha he

loan i held on he balance hee, eicing mean collecing he pamen of

inee and pincipal, and monioing efe o condcing peiodiceillance o ene ha he booe ha mainained he financial abili o

eice he loan. Seciied lending inodce he poibili of elling ae

on a bigge cale and eliminaing he need fo fnding and monioing.

The eciied lending fncion ha onl three steps: oiginae, ell, and

eice. Thi change fom a fo-ep poce o a hee-ep fncion ha

been decibed a he fragmentation o epaaion of adiional lending.

Capial make felled eciiaion:

The fel fo he diinemediaion make ha been poided b he capial

make:

Pofeional and pblicl aailable aing of booe ha eliminaedhe infomaional adanage of financial inemediaie. Imagine a

make iho aing agencie: an one ho ha o ake an epoe

in an podc o eni ha o appaie he eni. Obiol enogh,





-

. H,

'

.

T -

. A . M ,

. O ,

,

,

. T

- , .

C . F

- ,

() ( )

. A

:

, . F

,

.

A ,

. T

, , (1)

, (2)

, (3) - -

*- . T

- .

I , -

,

.

1. Seciiaion and ced finance:





S " ". "S

" ' . W

-

,

.

D

? I , . B

'

:

.

O ,

. I /

,

. T,

.

2. Seciiaion a a ool of ik

managemen:

S . I

. W

' , ,

, . C

- . B ,

,

.

I ' ,

, cedi deiaie

.

Seciiaion and cedi deiaie:





Cedi deiaie ae onl a logical eenion of he concep of

eciiaion. A cedi deiaie i a non-fnd baed conac hen

one peon ageed o ndeake, fo a fee, he ik inheen in a cedi

iho acing aking oe he cedi. The ik cold be ndeaken

eihe b gaaneeing again a defal, o b gaaneeing he oal

epeced en fom he cedi anacion. While he fome cold be

j anohe fom of adiional gaanee, he lae i he e

concep of cedi deiaie. Th, if B bank ha a concenaion ina Ion and Seel egmen hile A bank ha concenaion in

Teile, he o can dieif hei ik, iho acall aking

financial epoe, b engaging in cedi deiaie. A can agee o

gaanee he en of B fom a pa of i Ion and Seel epoe,

and B can gaanee he en of A fom Teile (deiaie do no

neceail hae o be ecipocal). Th, A i no eaning boh fom

i on epoe in Ion and Seel, a alo fom he fee-baed

epoe i ha aken in Teile.

Cedi deiaie ee logicall he ne ep in deelopmen of

eciiaion. Seciiaion deelopmen a pemied on cedi

being coneed ino a commodi. In he poce, he ik inheen in

cedi a being pofeionall meaed and aed. In he econd

ep, one old age ha if he ik can be meaed and aded a a

commodi ih he ndeling financing inoled, h can' he

financing and he cedi be ipped a o diffeen podc?

The deelopmen of cedi deiaie ha no edced he ole fo

eciiaion: i ha onl inceaed he poenial fo eciiaion.

Cedi deiaie i onl a ool fo ik managemen: eciiaion i

boh a ool fo ik managemen a alo ea managemen. Eniie

ha an o go fo eciiaion can eail e cedi deiaie a a

cedi enhancemen deice, ha i, ece oal en fom he

pofolio b bing a deiaie, and hen eciie he pofolio.

3. Economic impac of eciiaion:

Seciiaion i a necea o he econom a an oganied

make ae. While hi ingle line m p he economic ignificance

of eciiaion, he folloing can be een a he economic mei in

eciiaion:

-1 Faciliae ceaion of make in

financial claim:

B ceaing adeable eciie o of financial claim, eciiaion





helps to create markets in claims which would, in its absence, have

remained bilateral deals. In the process, securitisation makes financial

markets more efficient, b edcing anacion co.

-2 Dipee holding of financial

ae:

The basic intent of securitisation is to spread financial assets amidst as

man savers as possible. With this end in view, the securit is

designed in minimum sie marketable lots as necessar. Hence, it

results into dispersion of financial assets.One should not underrate the

significance of this factor just because most of the recentl developed

securitisations have been lapped up b institutional investors. La

investors need a certain cooling-off period before the understand a

financial innovation. Recent securitisation applications, vi., mortgages,

receivables, etc. are, therefore, et to become acceptable to lainvestors. But given their attractive features, there is no reason wh

the will not.

-3 Pomoe aing:

The availabilit of financial claims in a marketable form, with proper

assurance as to qualit in form of credit ratings, and with double

safet-nets in form of trustees, etc., securitisation makes it possible for

the la investors to invest in direct financial claims at attractive rates.

This has salubrious effect on savings.

-4 Redce co:

As discussed above, securitisation tends to eliminate fund-based

intermediaries, and it leads to specialisation in intermediation functions.

This saves the end-user compan from intermediation costs, since the

specialised-intermediar costs are service-related, and generalllower.

-5 Dieifie ik:

Financial intermediation is a case of diffusion of risk because of

accumulation b the intermediar of a portfolio of financial risks.

Securitisation further diffuses such diversified risk to a wide base of

investors, with the result that the risk inherent in financial transactionsgets ver widel diffused.

-6 Foce on e of eoce, and





not their onership:

Oce a ei eciie i fiacia cai, i ceae be he e

f ch ece ad bece ee a ee cdia f he

eea ie h heeafe acie ch cai. Iagie he idea

f eciiai beig caied fhe, ad fiacia cai b

cai i hica ae beig eciied, i hich cae he eieedig he e f hica ae acie ch e ih ig

he e. The e i diffed e a ie cd.I hi

ee, eciiaion caie Gandhi' idea of a capiali being a

ee of eoce and no he one. Seciiaion in i

logical eenion ill enable enepie o e phical ae

een iho oning hem, and o dipee he onehip o he

eal one heeof: he ocie.

4. The alchem of eciiaion: i he m

of pa moe han he hole?

A eeia ecic ei fe aied i: de eciiai ead

a ea cia beefi? Afe a, a ha eciiai de i bea a

ca, a e f ai ae, i ai be f caified ae,

ad ffe he ie. Iagie a d ih eciiai: each

ie d be aig a i i he caified, cie ca a a

he. S, h de i ee a ecic e, if he ca i "de-ced" ad d diffee ie?

A Ne Zeaad-baed cha ae he fig eae iae he

ache f eciiai:

T aeciae he deig ecic diig a eciiai,cide a hheica hdig ca XYZ Ld, hich ha

i baace hee hig he ha hee h-ed

bidiaie, X, Y & Z. (The ce f eciiai ca be

hgh f a eaig diigihabe f ae a if he

ee he h-ed bidiaie, X, Y ad Z.)

Ae X i 100% deb fiaced (5 ea debee ied a

9%) ih i ae a ige 5 ea a a AAA-aed

be aig 10%.





A Y

,

, , .

A Z -

.

I XYZ

,

. T XYZ

""

XYZ. N

,

(.., ' ,

) ""

.

N XYZ

"-" "." I

X,

XYZ

.

S :

,

, ,

X'

Y Z XYZ

X,

Y Z.

A, XYZ

-. I

XYZ , ' XYZ'

.





T XYZ

. T

'

.

H

,

( )

XYZ /

XYZ, .

I XYZ

, ,

.

W , XYZ'

XYZ'

XYZ' ()

. I

( ,

' ,

),

.

B - (

), -

(

),

.

Caping cale and olme efficiencie

B ,

,





defal, ae minimied. If e fhe collec and aggegae diimila pool of

ae, and ie eciie backed b he aggegaed cah flo deied

fom he ndeling ae, a a el of le of pobabili and he baic

pinciple of dieificaion, he maginal ik o he pchae (ineo) of

ch a eci i ignificanl le han he ik of holding een a pool of

indiidal eceiable. And i i fa le han he ik aociaed ih a ingle

eceiable.

If a booe can idenif, egegae and hen aifacoil decibe fo

ineo a pool of eciiable ae oheie held on i balance hee,

he eciiaion poce can gie ha booe a loe co of fnding and

impoe i balance hee managemen. The booe faced ih ch an

opponi ho chooe no o eciie n he ik of handicapping i

abili o compee.

1. ik and benefi of eciiaion:

The Bank fo Inenaional Selemen in a 1992 pblicaion iled Ae

Tanfe and Seciiaion had he folloing o a on he ik and benefi

of eciiaion:

The poible effec of eciiaion on financial em ma

ell diffe beeen conie becae of diffeence in he

ce of financial em o becae of diffeence in he

a in hich monea polic i eeced. In addiion, he

effec ill a depending pon he age of deelopmen of

eciiaion in a paicla con. The ne effec ma be

poeniall beneficial o hamfl, b a nmbe of concen ae

highlighed belo ha ma in ceain cicmance moe hanoffe he benefi. Seeal of hee concen ae no pincipall

peio in nae, b he ae efeed o hee becae

he ma inflence monea ahoiie' polic on he

deelopmen of eciiaion make.

While ae anfe and eciiaion can impoe he

efficienc of he financial

em and inceae cedi aailabili b offeing booe

diec acce o end-ineo, he poce ma on he ohe

hand lead o ome diminion in he impoance of bank in he





fiacia ieediai ce. I he ee ha eciiai

cd edce he i f fiacia ae ad iabiiie

hed b ba, hi cd ede e diffic he eeci f

ea ic i cie hee cea ba eae

hgh aiabe ii eee eiee. A decie i

he iace f ba cd a eae he eaihi

beee ede ad be, aica i cie hee

ba ae edia i he ec.

Oe f he beefi f eciiai, ae he afai

f iiid a i iid eciie, a ead a iceae i

he aii f ae ae, ahgh cedi ehacee

cd ee hi effec. Mee, he aii cd be

ehaced b ee eae aiai i he cedi

adig f he be. A edeace f ae ih

eadi aceaiabe ae ae cd ee, i ceai

cicace, e a iidai a ed gig-

cce cce f aig ba.

Mee, he eciiai ce igh ead e

ee he fiabii f ba if -ba fiacia

iii ee f caia eiee ee gai a

ceiie adaage i iee i eciied ae.

Ahgh eciiai ca hae he adaage f eabig

edig ae ace bed he cai f he caia bae

f he baig e, he ce cd ead a decie i

he a caia eed i he baig e, heeb

iceaig he fiacia fagii f he fiacia e a a

he, bh aia ad ieaia. Wih a baia

caia bae, cedi e ca be abbed b he baige. B he ae ha caia bae i, he e he e

be haed b he. Thi cce aie, eceai

i a cie, b eecia i he cie hee ba

hae adiia bee he dia fiacia ieediaie.

The f iece be ee cae he ihee i f eciiai:

10 reasons as to wh the Titanic was actuall a

securitisation instrument:





) The downside was not immediatel apparent.

2) It went underwater rapidl despite assurances it was unsinkable.

3) Onl a few wealth people got out in time.

4) The structure appeared iron-clad.

5) Nobod reall understood the risk.

6) The disaster happened overnight London time.

7) Nobod spent an time monitoring the risk.

8) People spent a lot tring to lift it out of the water.

9) People who actuall made mone were not in original deal.

10) Despite the disaster, people still went on other ships.

The abe highigh he i ihee i eciiai. Oe f he bigge

ihee hea i eciiai dea i ha he ae aicia hae

eceai beieed eciied ie be afe, hie i eai, a

f he eee cedi i dbf eceiabe. F eae, a

gig eci f eciiai ae i b-ie a a ad he

ei a. Siia, a f he heah-cae eceiabe de a

eceiabe a eee gd cedi.

Oe iace f a faie i eciiai dea i he USA i he

eciiai f heah cae eceiabe b a ca caed Te

Fiacia. I Chaia a ae eeced 20 ea i i f fad.

I fac, he fi ba eciie cedi-cad ae--RebicBa

Deaae, i 1987--faied i 1988, ad he Fedea Dei Iace C. aid ff ie ea.

I a aice ied On the Frontiers of Creative Finance: How Wall

Street can Securitise Anthing [Fe, Ai 28, 1997] Ki Ca

ed: " Ie d eed beae, f ce. Fiacia ae ae

i f hig iee idea i he abd. Se f hee eic

eciie i dbed cae, hich i dbed cae a

bacah."

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Securitization Primer