A transaction in which the risks and rewards—but not the ownership—of a pool of cash generating assets are transferred to another party.
The basic structure of a traditional securitisation involves the sale of the pool of assets by their owner to a special purpose vehicle (SPV). The SPV finances the purchase by the issue of interest-bearing debt securities (notes) to investors and grants security over the assets to a trustee for the noteholders. Payments on the notes are funded by the cash flows on the pool of assets. The securitisation may be tranched, which means that several series of notes are issued, each with separate risk and reward characteristics.
The types of assets that have been widely securitised include mortgage loans, credit cards and other unsecured consumer loans, and auto loans. For more information, see Practice Note: What is securitisation?
In a synthetic securitisation, the owner of the assets will instead enter into an arrangement with a counterparty who effectively assumes the risk in the pool of assets in return for part of the income stream on the assets.