Special purpose entity
The vehicle a securitisation's loans are sold to, put beyond the reach of the seller's creditors. That legal isolation is what the ratings rest on.
Where you will meet it
Special purpose entity appears in 2 learning outcomes on the CFA syllabus. A few of them:
- Explain how securitisation works and the role of the special purpose entity
“The originator sells the loans to a special purpose entity, and the sale must be a true sale that puts the assets beyond the reach of the originator's creditors — that bankruptcy remoteness is the point of the structure, and it lets the securities be rated on the loans rather than on the originator.”
- Explain covered bonds and what sets them apart from other asset-backed securities
“Unlike a typical asset-backed security, the assets are not sold to a bankruptcy-remote special purpose entity: they stay on the issuer's balance sheet, and investors have dual recourse, first to the issuer and then to the cover pool if the issuer fails.”
Practise it
Practise special purpose entity until it is automatic: questions that explain every wrong option.
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