Securitisation

Securitisation is a financial process that involves taking an illiquid asset, or group of assets, and transforming them into a security. A security is a financial instrument that can be traded and typically has a more liquid market than the underlying assets themselves. The process starts with the pooling of various types of contractual debt such as residential mortgages, commercial loans, or credit card obligations. These pooled debts are then sold to a special purpose vehicle (SPV), a legal entity created exclusively for the securitization transaction. The SPV structures this pool of assets into tranches, each with a different level of risk and returns to suit different types of investors.

These tranches are then sold as securities to investors. As the underlying loans or debts are paid off by the original borrowers, the investors receive payments according to the terms of the securities they hold. The appeal of securitization lies in the conversion of illiquid assets into liquid securities, risk distribution among investors, and the potential for credit enhancement. This process can also provide the original asset holders with new sources of financing since they get paid upfront for the assets sold to the SPV.