ERM Glossary: Securitisation

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Securitisation is a special case of Alternative Risk Transfer (ART) involving packaging risks into capital market instruments. It involves a group of assets, usually loans, being aggregated into a pool that is then used to back the issuance of new securities.

Securitisation is the process by which ABS are created. A company sells assets to a special purpose entity which then issues securities backed by these assets. This allows the credit quality of the assets to be separated from the credit rating of the original company and transfers risk to external investors.

Assets used in securitisations include mortgages to create mortgage-backed securities or residential mortgage-backed securities (RMBS) as well as commercial mortgage-backed securities. Credit card receivables may also be securitised (indeed nearly any form of cash flows can in principle be securitised).

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