Asset-backed security: Difference between revisions

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Why should this matter? Because, in America, there is rather hairy “[[risk retention rule]]” for those who would sponsor an “[[asset-backed security]]”. To qualify, the [[ABS]] needs to be of [[self-liquidating financial asset]]s that a sponsor has transferred to the issuing vehicle (i.e. and that it has not just acquired at arm’s length in the open market).
Why should this matter? Because, in America, there is rather hairy “[[risk retention rule]]” for those who would sponsor an “[[asset-backed security]]”. To qualify, the [[ABS]] needs to be of [[self-liquidating financial asset]]s that a sponsor has transferred to the issuing vehicle (i.e. and that it has not just acquired at arm’s length in the open market).


We have a basic [[ABS - overview|botanist’s guide to ABS]] here  
We have a basic [[Asset-backed securities field guide|botanist’s guide to ABS]] here.
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*[[Asset-backed securities field guide]]
*[[Asset-backed securities field guide]]

Latest revision as of 14:50, 11 May 2023

Financial Weapons of Mass Destruction
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Financial Weapons of Mass Destruction®



ABS

Tax havens! Derivatives! Bearer paper!

Docs Secured MTN. Heavy, but dreary. 7
Amendability Fat chance. If you don’t like it, ummm — well, what did you buy it for? 0
Collateral Fully funded, backed with juicy second mortgages on residential homes in suburban Reno? Yum Yum. 7
Transferability Bearer paper right? Good luck with that. Buy ABS, get stuck with it. 7
Leverage Usually not, but skip down the tranches and just maybe! 4
Fright-o-meter Can frighten the bejesus out of those of a nervous disposition. But bark worse than bite. 5

Asset-backed security — The term “asset-backed security”—
(A) means a fixed-income or other security collateralized by any type of self-liquidating financial asset (including a loan, a lease, a mortgage, or a secured or unsecured receivable) that allows the holder of the security to receive payments that depend primarily on cash flow from the asset, including—

(i) a collateralized mortgage obligation;
(ii) a collateralized debt obligation;
(iii) a collateralized bond obligation;
(iv) a collateralized debt obligation of asset-backed securities;
(v) a collateralized debt obligation of collateralized debt obligations; and
(vi) a security that the Commission, by rule, determines to be an asset-backed security for purposes of this section; and

(B) does not include a security issued by a finance subsidiary held by the parent company or a company controlled by the parent company, if none of the securities issued by the finance subsidiary are held by an entity that is not controlled by the parent company. [1]

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Asset-backed security
/ˈæsɛt-bækt sɪˈkjʊərɪti/ (n.)
Different things to different people. In the Eastern wilds on the old side of the Atlantic, bascially any repack, securitisation, or monetisation that winds up in negotiable debt securities format will count.

The Americans — don’t they always? — have to be a bit more prescriptive than that — what else would regulators have to do otherwise? — and there is this definition in the federal rules (god knows which one “15 USC § 78c(a)(79)” comes from, but we think is somewhere within the general Securities Exchange Act, Securities Act, Investment Company Act memeplex). Note the curious reference to “self-liquidating financial asset”s, which means certain financings would be out of scope. Those of instruments that don’t pay a cashflow or have a stated maturity as such — one that leaps to mind is a carbon credit, and gold is another, as would any other non-financial commodities.

Why should this matter? Because, in America, there is rather hairy “risk retention rule” for those who would sponsor an “asset-backed security”. To qualify, the ABS needs to be of self-liquidating financial assets that a sponsor has transferred to the issuing vehicle (i.e. and that it has not just acquired at arm’s length in the open market).

We have a basic botanist’s guide to ABS here.

See also

References

  1. 15 USC § 78c(a)(79) Source: Cornell University US Code resource