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Glossary of securitisation terms Back  
Here is our selection of the most commonly used terms in securitsation transactions.
Arbitrage CDO
A CDO transaction based onassets whose aggregate yield is less than the aggregate yield for which the securities issued in connection with the transaction can be sold or funded.

Asset-backed commercial paper
CP whose principal and interest payments are designed to be derived from cash flows from an underlying pool of assets. In the event that CP cannot be reissued in order to repay maturing CP, however, a backstop liquidity facility is drawn upon to provide cash to repay investors.

Asset-backed securities
Bonds or notes backed by pools of financial assets, typically with predictable income flows, originated by banks and other credit providers. Examples of such assets include credit card receivables, trade receivables, and auto loans.

Bullet loan
Loan principal is repaid in full with only one single payment at maturity.

Collateralised debt obligation
A security backed by a pool of various types of debt, which may include corporate bonds sold in the capital markets, loans made to corporations by institutional lenders, and tranches of securitisations.

Commercial mortgage backed securities
Securities that are backed by one or more pools of mortgage loans. CMBS are backed by one or more loans secured by commercial properties, which may include multi-family housing complexes, shopping centres, industrial parks, office buildings and hotels.

Commercial paper
Short-term promissory notes. The maturity of most CP is less than 270 days, with the most common maturities ranging from 30 to 50 days or less.

Conduit
A legal entity that purchases assets from several sellers and funds these purchases either through term securitisations or through the issuance of ABCP.

Credit default swap
A contract whereby the protection seller agrees to pay to the protection buyer the settlement amount upon the occurrence of certain credit events. In exchange for this protection, the protection buyer will pay the protection seller a premium.

Credit derivatives
Capital market instruments designed to transfer credit risk from one party to another; such instruments include credit default swaps, total return swaps, and credit linked notes.

Interest rate swap
A binding agreement between two coutnerparties to exchange periodic interest payments on a predetermined principal amount, which is referred to as the notional amount. Typically, one counterparty will pay interest at a fixed rate and receive interest at a variable rate, and the opposite will apply to the other counterparty.

Listing agent
The agent responsible for carrying out the procedures required to have securities listed on the appropriate stock exchange.

Mark to market
To re-state the value of an asset based on its current market price.

Medium-term note
A corporate debt instrument that is continuously offered over a period fo time by an agent of the issuer. Investors can select from maturity bands of nine months to one year, more than one year to 18 months, more than 18 months to two years, etc up to 30 years.

Monoline insurer
An insurance company that is restricted, by the terms of its charter, to writing insurance policies related to a single type of risk. In a financial context, the monoline insurer unconditionally guarantees the repayment of certain securities issue in connection with specified types of transactions, usually a securitisation and, in the US, municipal bonds, in return for the payment of a fee or a premium.

Mortgage-backed securities (MBS)
MBS include all securities whose security for repayment consists of a mortage loan or a pool of mortgage loans secured on real property. Investors receive payments of interest and principal that are derived from payments received on the underlying mortgage loans.

Originator
An entity that underwrites and makes loans; the obligations arising with respect to such loans are originally owed to this entity before the transfer to the SPE.

Paying agent
A bank of international standing and reputation that has agreed to be responsible for making payments on securities to investors. Payment is usually made via a clearing system.

Pfandbriefe
A debt instrument issued by German mortgage banks and certain German financial institutions.

Residential mortgage-backed securities RMBS are the most fundamental form of securitisation. These securities involve the issuance of debt, secured by a homogenous pool of mortgage loans, that have been secured on residential properties.

Secondary market: A market in which existing securities are re-traded (as opposed to a primary market in which assets are originally sold by the entity that made those assets); usually, these securities are traded among investors through an intermediary, such as an organised exchange like the NYSE, AMEX, and Nasdaq.

Structured investment vehicle
A type of SPE that funds the purchase of its assets, which consist primarily of highly rated securities, through the issuance of both CP and MTNs. In the event of a default by a SIV, its pool of asset may need to be liquidated; therefore, Standard & Poor’s rating on a SIV reflects the risks associated with potential credit deterioration in the portfolio and market value risks associated with selling the assets.

Source: Standard & Poors.

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