Securitisation turns the cash flows or credit risk of a specified asset pool into securities or other investment claims, often divided into classes with different priorities. It lets an originator raise funding or transfer part of its credit risk, while investors take exposure to the pool and its contractual structure. Pooling loans does not make their losses disappear: the transaction determines who bears them.
An asset-backed security is an instrument created through this process. Securitisation is the process; the security is one of its outputs. Mortgage-backed securities and collateralised loan obligations apply related structuring ideas to different collateral.
Follow the assets, funding and servicing separately
Consider a fictional cash securitisation. An originator transfers loans with USD 100 million of outstanding principal to an issuing vehicle. Assume the vehicle pays USD 100 million for them, funded by claims issued at par: first-loss 10 million, mezzanine 20 million and senior 70 million. These are stipulated amounts, with no transaction costs or additional funding needs.
| Role | What it does in this example | What does not follow automatically |
|---|---|---|
| Originator and seller | Made the loans and transfers them to the vehicle in return for cash | Selling the pool need not remove every exposure it has to the transaction |
| Issuing vehicle, or SPV | Holds the pool and issues the investor claims | A separate legal name alone does not establish legal isolation |
| Servicer | Collects borrower payments, keeps records and administers delinquent loans under the servicing agreement | Servicing does not by itself mean owning the loans or guaranteeing payment |
| Investors | Supply funding and hold claims governed by the deal documents | Investors in different classes do not have identical rights or losses |
The originator can remain the servicer. Its operational relationship with borrowers can therefore continue after the transfer. A trustee may separately monitor compliance and enforce rights for investors under the documents. These roles matter when assessing who must perform if an institution fails; a pool spreadsheet alone cannot answer that question.
Original fictional transaction, all amounts in USD millions. Solid arrows show setup transfers; the dashed arrow shows ongoing servicing remittance. The loss ledger stipulates strict junior-to-senior principal write-downs and excludes interest, fees, timing and other credit enhancement.
One pool loss, different investor outcomes
Now stipulate a final unrecovered principal shortfall of USD 15 million, with no earlier amortisation or write-downs. This is already a loss after any recoveries incorporated in the scenario; applying loss given default again would double-count the recovery adjustment.
Under the stipulated subordination, the first-loss claim absorbs 10 million and is exhausted. The remaining 5 million reduces the mezzanine claim. The senior tranche takes no principal loss in this scenario. Remaining principal is therefore 0, 15 and 70 million, totalling 85 million.
The senior claim starts losing principal only when cumulative pool loss exceeds the 30 million beneath it. At exactly 30 million of pool loss, its principal loss is still zero. This protection is conditional on the stated structure; it is neither a guarantee nor a credit rating.
This ledger explains the loss order, not the full payment waterfall. Actual documents can specify separate interest and principal priorities, fees, reserves, excess spread, coverage tests and payment diversions. A claim can suffer a delay or a market-price fall even when this simplified ledger assigns it no final principal loss.
Cash transfer and synthetic transfer
In a cash or traditional securitisation, assets or their economic interest are transferred into the financing structure; the example above assumes a pool purchase by an SPV. In a synthetic securitisation, credit derivatives or guarantees transfer an agreed layer of credit risk without requiring a sale of the underlying loans. Protection premiums and contingent protection payments replace the simple asset-sale story; synthetic transactions can be funded or unfunded. Basel CRE40.2–40.3 describes these two forms in its bank-capital framework. Basel Committee, CRE40.
The distinction changes what to model. A cash transaction needs asset collections and payment rules. A synthetic transaction needs the protection contract's loss definition, attachment, settlement and enforceability, alongside the reference pool. Neither can be valued from the tranche notionals alone.
Legal isolation and capital relief are separate tests
A vehicle is intended to help isolate the pool from the originator's insolvency. Whether a transfer achieves a true sale, and whether the vehicle is sufficiently bankruptcy remote, depends on the documents and applicable law. Bankruptcy remoteness does not mean that the assets cannot default or the vehicle cannot incur losses.
Regulatory recognition of risk transfer is another question. The Basel standard effective 1 January 2023 requires significant credit-risk transfer and other conditions before an originating bank can exclude exposures from risk-weighted assets; retained securitisation exposures still attract capital. Its synthetic-recognition conditions are separate. These are international prudential standards implemented through jurisdiction-specific rules. Basel Committee, CRE40.24–40.25.
For an Australian example, APRA's APS 120, in force from 1 January 2024 and checked on 27 October 2026, requires legal advice on isolation and enforceability for relevant transfers. It distinguishes traditional transactions eligible for capital relief from funding-only transactions. It also requires an originating ADI in a synthetic securitisation to include the underlying pool in its credit-risk capital calculation. Basel's synthetic provisions should therefore not be read as an automatic Australian capital entitlement. APRA, APS 120, “Exposures transferred in a securitisation” and “Synthetic securitisation”.
For analysis, keep three questions distinct: what moved, who now bears each loss, and what the relevant legal and regulatory tests recognise. The 100-million pool and 15-million loss ledger answer only the stipulated economic allocation.
Sources
- Frank J. Fabozzi, Bond Markets, Analysis, and Strategies, 9th edition, Pearson, 2016, Chapter 15, pp. 318–322: creation of ABS, parties, transaction structure and the SPV's role. Used for the mechanics and roles, rather than current legal or market claims.
- Basel Committee, CRE40: Securitisation—general provisions, version published 26 November 2020, effective 1 January 2023; §§40.1–40.3, 40.21 and 40.24–40.25. Checked 27 October 2026.
- APRA, APS 120 Securitisation, in force from 1 January 2024: definitions, legal isolation, funding-only treatment, synthetic treatment and Attachment A. Checked 27 October 2026.