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Securitization dates back to the early 1970s, with the development of mortgagebacked

securities. Mortgage securitizations were followed by asset-backed

securities (ABS). ABS’s typically securitize a large pool of homogeneous assets,

such as receivables, and they generally have simple structures.

CDOs first appeared in the market in the late 1980s, securitizing a pool of

heterogeneous loans (CLOs) or bonds (CBOs). In the 1990s CDOs were issued

against a much broader spectrum of underlying collateral, including corporate

bonds, corporate loans, trust preferred stocks, high-yield loans, middle-market

loans, asset-backed consumer debt and combinations of these asset classes.4

CDOs could have a variety of complex structures depending on their purpose,

exposure to underlying assets and credit structure (refer to Exhibit 5).

4

A New Plateau for the U.S. Securitization Market, FDIC, http://www.fdic.gov.

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Those transactions were termed as the “traditional” approach to securitization. A

traditional securitization involves the (economic) transfer of assets and other

credit exposures through pooling and repackaging using a special purpose entity,

into securities that can be sold to investors. This may be accomplished by legally

isolating the underlying exposures from the originating bank or through subparticipation.5

Basel II imposed regulatory operational constraints to ensure a “clean break”

between the bank originating assets and the securitization transaction itself. The

clean break approach established regulatory requirements regarding the transfer of

assets from the originating bank. Such requirements were intended to minimize

the reputational risk of the bank sponsoring a securitization structure. For

instance, originators of assets in certain countries might not provide liquidity

facilities for their securitizations or use the name of the bank in identifying the

securitization.

In order for an...