Question

1. What is the process of "Securitization"?

2. In the context of financial markets, what are the benefits of "free market"?

Answer 1

1)Securitization is the process of making illiquid asset or group of assets into security. The process of securitization is as follows-

a) The originator creates the underlying assets.

b) Selection of receivables to be assigned

c) Formation of SPV (special purpose vehicles)

d) SPV acquires the receivables under a discounted value

e) The servicer for the transaction ( normally originator) is appointed

f) The servicer collects the receivables and pays off the collection to SPV

g) The SPV either pass the collection to the investor or reinvest to payoff

h) In case of any default, the servicer takes action against debtors

i) When an only small amount of receivables are left to be collected, the originator usually buying back the receivables.

j) At the end of the transaction, the originator's profit if retained and subject to any losses to the extent agreed by the oriinator is paid off.