This glossary guides you to the meaning of over 500 words and phrases used in securitization industry.
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Asset Backed Commercial Paper (ABCP)
Is an application of the concept of securitisation to funding of trade receivables. Several originators wanting liquidity against their trade receivables sell these receivables to a conduit which then issues commercial paper, that is, short term paper of typically 90 days to 180 days maturity corresponding to the present value of such receivables. On maturity, the originator is supposed to collect the receivables and pass them over to the holders of the paper through the conduit. At times, the conduit is sponsored by a major bank which also provides liquidity support to the conduit to ensure timely redemption of the paper.
Asset Backed Financing
Refers generically to all forms of financing where the financier has a claim over specific assets of the borrower, whether with or without a general claim against the borrower.
Asset Backed Securities (ABS)
Is a security backed by receivables other than those arising out of real estate. Some examples are autos, credit cards, and royalties. It is common in securitisation markets to distinguish between ABS and mortgage-backed securities, viz., MBS. However, in markets outside the United States, the word ABS might cover all classes of securitised instruments, including those out of mortgages.
Generally refers to the underlying covenant in revolving assets securitisation and future flows securitisation that the repayment of principal (amortization) to the investors in a program will be accelerated upon the happening of certain events, normally events such as a fall in the degree of over-collateralisation, under-performance events, etc.
A method for finding out the amortisation of the principal invested in any periodic repayment. The method uses the implicit rate of return to find out the income earned during the period, and treats the balance as amortisation.
Act of God bonds
See catastrophe bonds below.
A legal word for receivables, right to claim.
Refers to US government agencies for promoting mortgage secondary markets. In market language, it may also refer to a a security issued by these organisations. These organizations include: the Federal Home Loan Mortgage Corporation (FHLMC or Freddie Mac), the Federal National Mortgage Association (FNMA or Fannie Mae), the Government National Mortgage Association (GNMA or Ginnie Mae).
In US parlance, refers to the mortgage -backed securities issued by agencies. Compare with private label securities.
Is the concept which assumes that newly issued mortgages tend to prepay slower than mortgages which are older or seasoned. This aging refers to the underlying collateral and not the securities created upon that collateral.
Alternative Risk Transfer
Refers to devices for managing insurable risk other than by seeking an insurance cover. For example, when a corporate wanting protection against natural calamities either sets up a captive insurance company or uses securitisation of risk to cover itself, it is using an alternative to traditional insurance, and hence the device is called alternative risk transfer (ART).
Is the periodic paydown of principal. This is a common feature of most fixed rate loans. Amortization schedule refers to a schedule showing the payment of principal and interest over time for a loan. Compare with bullet payment.
Is the Annual Percentage Rate of Interest. Refers to the intrinsic rate of return (IRR) in a mortgage or loan carrying specified payments over time.
Is the Annual Percentage Yield of Interest. This refers to the APR compounded on a yearly basis.
Adjustable Rate Mortgages
Is a mortgage loan which has a coupon or interest rate that is subject to change on predetermined reset dates, on the basis of variations in a reference rate. These loans use interest rate indices as the reference rate. Adjustable rate loans may have cap and floor features, meaning the maximum rate and the minimum rates after giving effect to variations. There may also be lifetime cap and floor features. Adjustable Rate Mortgages may be strictly amortizing though some have negative amortization features.
In relation to receivables, it means the legal action of transfer of receivables from one person to another. In relation to a mortgage, it would mean the transfer of a mortgage by the mortgagee (borrower and occupier) to another person.
Assignable mortgage/ Assumable Mortgage
Is a mortgage loan which can be assumed by a new buyer. Generally, the new owner must pass a credit approval process.
See weighted average maturity below.
Baby Bonds are bonds which have denominations less than $1,000 per bond.
In securitisation transactions, it is customary for the originator to continue to service the transaction, that is, collect receivables, follow them up, etc. However, the SPV is given the right, in certain predefined events or at the discretion of the SPV, to remove the servicer and have the transaction serviced by the back up servicer, that is, an entity other than the servicer.
BAN or Bond Anticipation Note
Is a short term security issued by a municipality. The security will be paid or redeemed by funds from a new issue. It is a cash management tool.
The law relating to bankruptcy of entities.
The properties of a bankrupt entity which are usually taken over by a Court-appointed administrator.
A key concern in securitisation transactions to ensure that the transfer of assets of the originator to the investors’ representative or SPV is not affected by bankruptcy or distress of the originator. This necessitates certain legal precautions in structuring the assignment of receivables, as also so constituting the SPV that it can neither be taken to liquidation by the shareholders of the originator, nor by those of the SPV itself. Further, the structure should also ensure that the SPV would not be treated as the subset of the originator by substantive consolidation. Such a structure is called bankruptcy remote structure.
Refers to a situation where an entity is unable to pay its debts. Normally the assets of a bankrupt entity are taken over by a Court-appointed administrator, and the entity is taken to winding up.
Similar to grantor trust where the only role of the trust is to hold title to the asset and the trustee has no interest in the asset. See also grantor trust, tax transparency.
Is a security which does not have the owner’s name on the certificate. Interest and principal are paid to the person presenting the attached coupons to the agents for payment.
Refers to charges which are imposed upon the redemption or liquidation of an investment or borrowing option. Sometimes, these charges are viewed as early withdrawal penalties. They are called back-end because they occur at the end of the investment process.
Is the standard to measure, monitor, price or evaluate a security or derivative. It could also refer to a rate used as the basis for adjustable rate loans or mortgages. For example, the treasury market is the benchmark for the corporate, mortgage backed, international and emerging credit markets.
The interest of the investors on whose behalf the trustee or the SPV holds securities/ receivables. In a securitisation deal, the receivables/ cash flows are legally held by the SPV or trust, for the benefit of the investors; hence the investors are beneficiaries and their interest is beneficial interest.
Bond Equivalent Yield (BEY)
Is the computation of a yield on the basis of a 365-day year.
Beneficial interest certificates
Certificates indicating the beneficial interest of investors in the SPV/ trust. These are different from bonds which are debt securities issued by the SPV. See also cash flow bonds.
Bank for International Settlements (BIS)
An international banking forum which sets standards for bank capital and risk management. The BIS has, inter alia, set model capital adequacy norms based on which bank regulators in individual countries fix the minimum capital requirements for banks and financial intermediaries. These proposals also include provisions relating to securitisation transactions.
A securitisation issue where no or scanty details are known about the collateral, that is, underlying assets. Normally this is the case where the SPV issues securities backed by receivables of multiple originators.
An instrument created by securitising the receivables from music tapes of a famous singer by that name. Perhaps the first instance of securitisation of intellectual property rights.
Refers to bonds created by converting sovereign debts of Argentina, Mexico and Venezuela into tradeable securities under a plan initiated by the US Government in 1989. Named after its author, Brady.
Is an organization which is created to serve as a vehicle to transport damaged loans or securities from an ailing financial institution. Often these nonperforming securities are package into securities or portfolios, which may be, acquired by turn-around specialists or vulture funds at significantly discounted prices. This activity can help improve the creditworthiness of the impaired financial institution because loans or securities in default are no longer held by that institution. This frees up regulatory capital for other purposes and removes impediments for complying with various regulatory bodies and banking laws. It should be noted that from a banking, brokerage or insurance perspective, illiquid or defaulted loans and securities have substantially higher regulatory capital haircuts relative to most other liquid securities. See Special Purpose Vehicle below.
Refer to categories for securities or derivatives. Some buckets refer to maturity classifications, such as, 3, 6, 12 month buckets. There are many other designations as well. The term can also refer to duration adjusted groups, option adjusted groups, and other predefined categories which represent a dominant, common feature.
Is a type of credit security which repays the entire principal on the maturity date. Prior to the maturity or prepayment of the bond, interest payments are to be made in accordance with the payment schedule. Normally, corporate bonds pay off in lump sum principal, that is, are bullet paying bonds, whereas many mortgages, leases etc. pay off on an amortization basis. See also amortisation above.
Is mortgage market phenomenon representing the tendency of mortgage pools to become less sensitive to interest rate as they tend to maturity. The older the pool, the more burnt out is the sensitivity to interest rate changes.
Is a contract whereby the purchaser, owner or holder is given the right but is not obligated to purchase the underlying security or commodity at a fixed strike price within a limited time frame. Compare with put option below.
The possibility that prepayments will increase above an anticipated rate, causing earlier-than-expected return of principal, usually occurring during a time of falling interest rates.
Is the ceiling, upper limit price, or interest rate which would be paid.
The amount of capital relative to the assets of a financial intermediary. Almost all banking regulators now require a certain minimum of capital against the risk-weighted assets of financial entities. Generally these requirements are set in accordance with concordat under the aegis of Bank for International Settlements.
In a securitisation transaction, the amount of cash deposit put by the originator to serve as a cushion for the investors; a device of credit enhancement. Generally, the collateral is retained out of the amount payable by the SPV for purchase of the receivables of the originator.
Cash flow bonds
Securitised instruments issued as bonds, instead of pass through or pay through certificates. Different examples are collateralised mortgage obligation bonds, collateralised loan obligation bonds, etc.
In insurance language, the risk of a major devastation of person or property, generally due to natural calamities. In securitisation language, it also means the risk of an unprecedented near-complete collapse of the originator’s cash flows, leading to a catastrophe for the investors.
Catastrophe bonds or Cat bonds
A securitised instrument based on insurance receivables out of catastrophe insurance.
CATS are Certificates of Accrual on Treasury Securities. In a generic sense, the sliced off interest payments or coupons are called strips or zeroes. At those times the discounted bond principal is referred to as the Corpus.
Collateralized Bond Obligation (CBO)
CBO is a Collateralized Bond Obligation. It is similar in structure to a CMO deal, indicating the receivables of an entity, normally banks, on account of bonds held by the bank, transferred to an SPV and securitised. Since the underlying receivables are from bonds, hence the name collateralised bond obligations.
CBOE is the Chicago Board Options Exchange
CBOT is the Chichago Board of Trade
Current Face Value
The current amount of principal outstanding on a security, which is calculated by multiplying the original face value by the most recent factor.
Refers to the Chapter 11 of US Bankruptcy Code which provides for certain protection to distressed companies, such as stay against suits or action against properties etc. Similar provisions exist in many other countries.
Creation of a security over certain assets of a borrower to secure a credit or a debt obligation. In securitisation structure, if the SPV issues bonds, it might create a charge on the receivables held by it.
Picking up selected high quality assets for the purpose of securitisation leaving behind low grade assets. Cherry picking of assets for securitisation is frowned up by creditors of the originator as also the shareholders. In some countries, cherry picking for securitisation is prohibited.
Choses in action
A legal expression for actionable claims or receivables.
A trust formed for non-business purposes. Specific to securitisations, charitable trusts are used as an intermediary owner of the SPV – that is, the SPV is owned by the trust; had the SPV been owned by the originator, the originator or the shareholders of the originator could either take the SPV to liquidation. By inducting the charitable trust as owner, the SPV becomes an orphan company.
Clean up buyback or call
An option with the originator in securitisation transactions where the originator can buy back the outstanding securitised instruments when the principal outstanding has been substantially amortised, leaving a small uneconomic amount to serviced. Normally, clean up call is exercised when the outstanding principal falls below 10% of the original.
Collateralized Loan Obligations (CLO)
Is similar in structure to the Collateralized Mortgage Obligation. See Collateralized Mortgage Obligation below for analogous terms -the only difference here being that the securities issued on behalf of the originating bank are backed by receivables from loans, rather than bonds.
Commercial Mortgage Backed Securities (CMBS)
Refers to Commercial Mortgage Backed Securities. A section of Mortgage Backed Securities , the word is used to distinguish these from Residential mortgage backed securities (RMBS). Commercial mortgages represent mortgage loans for commercial properties such as multi-family dwelling, shops, restaurants, showrooms, etc.
CME is the Chicago Mercantile Exchange.
Collateralized Mortgage Obligation (CMO)
Collateralized Mortgage Obligation Is a securitisation payment method where the cash inflows of the SPV are divided into several tranches, each tranche having different payback period and seniority profile. These tranches, which are often designated as A to Z pieces or securities, normally in the form of bonds. For example, the A bonds might be the senior most in terms of security, and might off faster than other bonds. The different tranches can be structured as per the objectives of the investors as to pay back period and the risk inherent. The common CMO structures are: Interest Only, Principal Only, Floater, Inverse Floater, Planned Amortization Class, Support, Scheduled, Sequential, Targeted Amortization Class, and Z or Accrual Bond. Often, many of these securities contain option characteristics. Related structures are Collateralized Bond Obligations and Collateralized Loan Obligations.
The risk that the cashflows collected by the originator gets co-mingled with that of the originator; hence, in bankruptcy, such cash would become the part of the bankruptcy estate of the originator and would not be available, for lack of traceability, to the SPV, even though it belongs to the SPV.
Is the generic term for a structure that integrates cashflows from the underlying collateral to be differentiated into several distinct cashflows streams, or different securities, each having different repayment and seniority structure. Some of these securities may experience greater stability whereas others may absorb more of the risky characteristics of the underlying assets. The purpose of the reconfiguration of the cashflows from underlying assets is to either carve out securities of different maturities, or to allow some to be subordinated to the others so as to improve the rating of the latter. Specific categories of these structures are Collateralized Bond Obligations, Collateralized Loan Obligations, and Collateralized Mortgage Obligations.
Is the underlying security, mortgage, or asset for the purposes of securitization or borrowing and lending activities. In respect of securitisation transactions, it means the underlying cashflows.
Collateral Trust Bond
Is a security issued by a corporation and is secured by other securities. This bond compares to Mortgage Backed Securities which are secured by real property or unsecured bonds. Depending on the underlying collateral and the terms of the issue, these bonds can offer somewhat better financing rates to the issuer.
Where the originator in a securitisation is also the servicer, the cash collected by the originator may at times co-mingle, or may deliberately be mixed up with that of the originator himself, leading to no clear identification of the cash collected on behalf of the SPV. This is called co-mingling.
A short term debt instrument, typically of 90 days to 364 day maturity, normally in form of a promissory note, issued at a discount on face value. Plain commercial paper is mostly unsecured, but a combination of securitisation and commercial paper has resulted into asset backed commercial paper.
A medium, or a legal vehicle. Specific to securitisations, this means an entity formed to hold receivables transferred by the originator on behalf of the investors. In pass through structures, an SPV is a mere conduit as it merely represents the collective property and cashflows of the investors. In case of asset-backed commercial paper it means the SPV which holds the receivables transferred by different originators, and issues commercial paper to raise money to buy the same.
Several possible meanings, but in the context of securitisations, normally refers to the action of a judicial authority in treating the SPV and the originator as the same entity by applying a legal concept called lifting or piercing the corporate veil. If consolidation is done by a Court, the transfer of assets by the originator to the SPV would become unfructuous. Securitisation structures aim at avoiding the possibility of a consolidation by Courts.
In accounting sense, could mean the consolidation of the accounts of the SPV with those of the originator. Again, this would mean the assets transferred by the originator would come back on the balance sheet of the originator.
Refers to a mortgage loan provision. It defines and allows an A