Concept of securitization

Securitization essentially implies creation of securities - generically, any process by which securities, viz., tradeable capital market instruments are created, is securitization. However, in present day capital market usage, the term is implied to include securities created out of a pool of assets, normally receivables, which are put under the legal control of the investors through a special intermediary created for this purpose. The securities are liquidated on the primary strength of the assets in the pool, but may be supported by "credit enhancements" provided by the originator or organised through external agencies.

The original concept of securitization was to create securities based on financial assets, say, receivables on mortgage loans, auto loans, credit cards, etc. However, later innovation has extended application of securitization to cover non-financial assets such as aircraft, buildings, and on the other hand, the same device has also been applied to securitise risk, such as insurance risk, weather risk, etc.

Innovation is constantly extending securitization applications.

• To read about the concept of securitization, basic concepts of structured finance, application of the generic concept to receivables, read the first Chapter of Vinod Kothari's book Securitisation: The Financial Instrument of the New Millennium, available online here.
• Nomura's article on the advantages of securitiztion- written in the context of post-Enron controversy on securitization deals: click here on this site
• Another comprehensive write-up on securitization by Tom Nicolle, the article discussed the entire spectrum of securitization with agencies involved, steps, etc: Introduction to Securitization. Click here.
• A crisp, easy-to-read article on securitization by Sunil Gangwani covering issues, including taxation and accounting nuances - this a PDF file and will open with Adobe Acrobat reader Click here to read.
• If you want to read a document on securitization in Spanish, Dr. Roberto Gonzalez's article on Securitisation law in Ecuador also discusses the generic methodology of securitisation. Click here to read.
• A complete glossary of securitization terminology is online on our site - click here.

• Should you know of any good primers on the Web, do let us know.