Financial markets

Securization

To understand securitization, we must go back to the ethymology of the word “SECURI … ZATION” ; “TITRI … SATION” in french … Indeed, the notion of “title” or “security” the understanding of this financial engineering process.

Securitization is therefore a technique of refinancing companies (mostly banks) that allows the transfer of financial assets to a securitization vehicle (FCT or Special Purpose Vehicle (SPV) under Anglo-Saxon law). Financial assets sold to the securitization vehicle may be receivables, debts or even invoices depending on the activity and / or strategy of the transferor. Once the assets are sold to the fund, the fund will issue bonds called “Asset Back Security” or ABS that will be traded on the financial markets.

That is when it comes into play, investors who can buy these bonds and then trade them in the markets. It is important to note that the purchase of these securities generates cash flows in favor of the originator or transferor. For the record, there is a whole process of financial and technical structuring around this mechanism at the crossroads of law, accounting, finance and not forgetting the contribution of the management of information systems.

There are several types of securitisations: classical or cash securitization and synthetic securitization. These various mechanisms, which are highly valued by banks, involve several players: arranging banks, law firms, consulting and audit firms, a management company, an enhancer if necessary, a custodian, a fund ad hoc) and rating agencies. Let us not forget especially the predominant role of the investor without whom the financing of the operation could not take place on the financial markets.

Here are briefly summarized the main aspects of securitization from my point of view.

To go further, we will have to explore the root causes of the subprime crisis (2007-2008), which led to the bankruptcy of the fourth American investment bank Lehman Brother and understand how this refinancing tool could cause a global crisis .

I invite you to read my next publication “Securitization in Europe: Will the regulatory regime put in place after the subprime crisis prevent new crises? “ Which highlights the role of the regulator and the evolution of the ex post crisis subprime crisis in securitization.

Léandre LALLIER.

CEO de TMG Consulting

Mai 2017.

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