Securitisation – Friend Not Foe

AXA Investment Managers explores how securitisation has evolved since the financial crisis, and dispels the negative myths which have lingered for institutional investors

Securitisation can o er a wealth of benefits to the economy and investors alike. However, the spectre of the US sub-prime home mortgage market means that many investors still associate the idea of securitisation exclusively with the world of sub-prime residential mortgage-backed securities, collateralised debt obligations (CDOs) or leveraged investment vehicles. Rather, since the global financial crisis, the IMF and OECD have encouraged regulators to enable a sustainable recovery of the securitisation markets.

Securitisation is a process by which illiquid financial assets that would otherwise only exist on bank balance sheets are transformed into tradable commodities. In this way, securitisation enables institutional investors to diversify into otherwise granular, inaccessible and illiquid instruments. An example might be a car manufacturer using the process of securitisation to sell their claim on a stream of loan payments (i.e. convert the stream into one lump sum) to nance research and development to remain competitive.

As such, securitisation offers a diverse universe of investments, and market reform over the years has steadily introduced more transparency, investor protection, and better alignment of incentives to the asset class.

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