UK regulation of term securitization following a hard Brexit

Abstract

The myriad asset classes and structures comprising the modern term securitization market (as opposed to bank-sponsored asset-backed commercial paper conduits) are all more or less complex variations on one theme: overcollateralized bonds. The bonds are typically issued on the credit of a segregated pool of financial collateral, not the credit of an operating company. Even though securitization documentation is more complex than that found in a typical corporate bond issue, securitization transactions are simpler and, arguably, more ‘scientific’ credits. That is because the underlying credit analysis is based on the aggregation of many small, broadly homogeneous credits or pools of credits that lend themselves to a quantitative credit analysis. The bonds usually are issued in tranches of different priorities, with the most senior tranche typically assigned a top, or AAA/Aaa, credit rating. Thus, a top-rated residential mortgage-backed security, or RMBS, with a face value of, say, 80 might be collateralized by residential mortgages with a principal value of 100. The structuring exercise makes possible funding at rates and maturities not otherwise obtainable in the fixed income market. For convenience, the rubric ABS, or asset-backed securities will also be taken to include RMBS and commercial mortgage backed securities, or CMBS.1