Securatization Trust


Securitization is a financial process that involves pooling and packaging various types of assets, which are then sold to investors with cash flow from underlying assets to make interest and principal payments to the investors. The Securitization Trust is the financial vehicle used in the process of securitization and plays a crucial role in converting various types of liquid financial assets into marketable securities.

Features of Securitization Trust: 

  • The primary purpose of a securitization trust is to purchase and hold a pool of financial assets from an originating entity, involving a stream of cash flow.
  • Securitization issues securities backed by cash flow that can be circulated and distributed amongst the holders of securities based on terms specified in documentation that enhance the credit quality of the security to attract investors in securitization.
  • They are structured to be fail-safe and isolate the bankruptcy risk; for the same reason, they may contract with a servicing company to administer and manage the underlying assets.
  • The trusts have securitization issues predominantly prioritising receiving cash flow, where the losses are absorbed prior and the risk is distributed among a broader group of investors depending on the structure of the trust.
  • Securitization trusts convert illiquid assets into securities with standardised terms, which makes it easier for investors to buy and sell these securities with increasing market liquidity.

Role of Trustee in Asset Securitization, Structuring, and Transaction: 

Securitization trust plays an important role in asset securitization transactions, ensuring structured and orderly cash flow from underlying assets to the investors and upholding the interests of all parties involved. Following are the roles and responsibilities of Trustees in asset securitization:

  • They act as fiduciaries for investors in securitization transactions, safeguarding investors' interests and ensuring that their rights and entitlements are upheld, in the case of long-term asset transactions. formulate an exit strategy so the investors realise their investment schedules
  • A securitization trust holds the custody of underlying assets and the legal titles on behalf of investors, having the authority to enforce the rights and remedies associated with them in the event of default or contractual breach.
  • They are responsible for cash flow management generated by the assets and distributing them to investors based on predetermined payment priorities and respective interests.
  • Many securitization transactions are operated by servicing companies, and trustees oversee the servicer's activities, ensuring the workflow is adequate and they comply with all terms and transactions of service management.
  • Securitization trusts are supposed to maintain records of cash flow, arrange meetings with investors, present them with transaction-related data, provide reports offering transparency into the securitization process, deal with decisions on certain matters, and address concerns.
  • The trustees oversee the credit enhancement mechanism and manage the flow of funds within the transaction, ensuring interest and principal from underlying assets are distributed in accordance with the investors needs.
  • The trustees in asset securitization are responsible for monitoring and ensuring tax-related compliance requirements and regulations are followed and facilitating asset sales and repurchases between issuer and originator, adhering to transaction documentation.
  • Securitization trusts need to be involved in the resolution of disputes or disagreements and oversee the orderly winding down of transactions in cases of securitization maturity and predefined termination.