Glossary: FI Module 17 — Securitization
| Term | Definition |
|---|---|
| Securitization | The process of pooling assets and issuing securities backed by those asset pools |
| Special purpose entity (SPE/SPV) | A legally separate entity created to hold the asset pool and issue securities |
| Originator | The entity that creates the underlying assets (loans, receivables) and sells them to the SPE |
| Servicer | The entity responsible for collecting payments from borrowers and distributing them to investors |
| Bankruptcy remoteness | The legal separation of the SPE from the originator, protecting the asset pool if the originator defaults |
| True sale | The legal transfer of assets from originator to SPE that ensures bankruptcy remoteness |
| Asset-backed security (ABS) | A security backed by a pool of financial assets (auto loans, credit cards, student loans) |
| Tranche | A class of securities carved from the same asset pool, each with different risk/return characteristics |
| Contraction risk | The risk that borrowers prepay faster than expected, shortening the security’s life |
| Extension risk | The risk that borrowers prepay slower than expected, lengthening the security’s life |
See also: Securitization