ALSO FROM SONGWI.COM. (I hope Rufus isn't mad if we're letting some cats out of the bag here.)
Securitization
Securitize the asset or the risk: Market Choices
Securitize the Asset: ABS Defined
Currently, the term “asset-backed security” is defined only for purposes of Form S-3. As many SEC proposals relate to the treatment of asset-backed securities regardless of the form on which their offering is initially registered, the SEC proposes to move the definition of “asset-backed security” to the definition section of proposed Regulation AB, a proposed sub-part in Regulation S-K for asset-backed securities. The SEC proposes to retain any additional conditions appropriate for Form S-3 eligibility, such as an investment grade requirement, in General Instruction I.B.5 of Form S-3. Under the current proposed format, however, a security that met the general definition of “asset-backed security” would be subject to the disclosure and other requirements proposed regardless of how registered.
After more than ten years of experience with the definition of “asset-backed security,” the SEC believes that the core definition is still sound. The definition allows broad flexibility as to asset types and structures that the SEC believes should be subject to the alternative disclosure and regulatory regime that exists for asset-backed securities. As the Commission stated in the 1992 Release, the definition does not distinguish between pass-through (i.e., equity) and pay-through (i.e., debt) asset-backed securities nor does it limit application to a list of “eligible” assets that can be securitized, so long as such assets meet the general principle that they are financial assets that by their terms convert into cash within a finite time period. The SEC believes, conversely, that the alternative regime for asset-backed securities would not be appropriate for securities that fall outside the definition.
Under a current SEC proposal, the basic definition of “asset-backed security” would be “a security that is primarily serviced by the cash flows of a discrete pool of receivables or other financial assets, either fixed or revolving, that by their terms convert into cash within a finite time period, plus any rights or other assets designed to assure the servicing or timely distributions of proceeds to the securityholders; provided that in the case of financial assets that are leases, those assets may convert to cash partially by the cash proceeds from the disposition of the physical property underlying such leases. (1) The only change proposed by the SEC from the current definition is the addition of the proviso with respect to leases … .
The proposed definition of “asset-backed security” includes the same basic concept of a discrete pool of financial assets that by their terms convert into cash within a finite time period. The SEC believes this does not include so-called “synthetic” securitizations. (2) Synthetic securitizations are a relatively recent development in structured finance designed to create exposure to an asset that is not transferred to or otherwise part of the asset pool. These synthetic transactions are often effectuated through the use of credit derivatives such as a credit default swap or total return swap. Synthetic securitizations do not actually own the underlying assets; instead, the assets that are to constitute the actual “asset pool” under which the return on the ABS is primarily based are only referenced through the credit derivative. (3)
Notes:
(1) As the Commission stated in the 1992 Release, the definition is sufficiently broad to encompass any self-liquidating asset which by its terms converts into one or more cash payments within a finite time period. There are no substantive requirements as to the timing of the cash flows under the definition, such as that they must be constant and uninterrupted. The payments on the asset-backed securities, however, must be based primarily upon the cash flow from the pool assets.
(2) Synthetic securitizations do not meet the basic concepts embodied in our definition of an asset-backed security for several reasons. For example, payments on the securities in a synthetic securitization comprise or include payments based on the value of a reference asset, unrelated to the value of or payments on any actual assets in the pool. Payment is therefore by reference to an asset not in the pool instead of primarily from the performance of a discrete pool of financial assets that by their terms convert into cash and are transferred to a separate issuing entity. Neither does the derivative act as credit enhancement on existing pool assets or as rights or other assets designed to ensure timely servicing or distribution, because it does not relate to the value of any pool asset but instead relates to an external asset, in order to bring the risk of that asset into the pool synthetically. Further, in a synthetic securitization, if a credit event occurs there may be a transfer of assets that would no longer make the pool discrete.
(3) Our treatment is taken in part from the following SEC Discussion: SEC 17 CFR Parts 210, 228, 229, 230, 232, 239, 240, 242, 245 and 249. [Release No. 33-8419; 34-49644; File No. S7-21-04] RIN 3235-AF74 Asset Backed Securities.
Securitize the Risk: An Example of Risk Securitization
Japanese demand for earthquake insurance far exceeds the capacity of the insurance industry to provide suitable coverage. Japanese insurers can offer only limited seismic coverage. The world's vast reinsurance market lacks sufficient depth to fulfill Japanese demand for earthquake insurance. To deepen the market for earthquake insurance, Tokio Marine, a Mitsubishi company and Japan's largest property and casualty insurer, and Zurich-based Swiss Re, a leading re-insurer, have tapped the capital markets.
Tokio Marine has participated in devising a revolutionary product that will expand the capacity of the insurance industry to provide catastrophic coverage. The big insurer and an international team of partners have developed special bonds for securitizing risk and marketing it to institutional investors. They sell the policy obligations to a special re-insurer, Parametric Re, which issues securities to institutional investors in North America and Europe. If no major earthquake occurs in Japan during the next 10 years, the securities earn high returns for the investors. If a big quake strikes, the bond principal is available to compensate policyholders for losses.
Securitizing risk will let insurers in Japan offer a broader range of coverage. Insurers maximize their capacity by sharing risk through the global reinsurance market. They reduce their exposure to individual risks--such as earthquakes and typhoons--by selling off exposure. The earthquake bonds offering was $ 100,000,000 US. It was comprised of two kinds of securities: a $80,000,000 tranche of notes that offered a higher return in exchange for a lack of any guarantee on the principal and a $20,000,000 tranche of the issue consisting of units that carry a guarantee for 50% of the principal and offer a lower return.
Swiss Re handled the details of the reinsurance arrangement. A Swiss Re subsidiary and Goldman Sachs and Company, a leading U.S. investment bank, worked out the securitization details. San Francisco-based EQE International did the number crunching to calculate the risk that underlies the securities.
AI
