Financial Market Interdependence & Securitization

Financial market interdependence
& securitization
Presented to: Presented by:

Dr. Tejinderpal Singh Leena Sethi
Roll No.- 9
Contents
 Introduction
 Factors responsible for advancement of globalization
 Market interdependence
 Globalization of financial markets
Liberalization of international capital account
 Implications
 Securitization
 Asset characteristics
 Parties to a securitization transaction
 Securitization Process
 Instruments of securitization
 Types of securities
Benefits of Securitization
 Examples of Securitization in India
Conclusion
Introduction
●
Interdependent
●
Open & competitive world
Liberalization
Factors responsible for advancement of globalization
Competi
tive
Expansio Technolo Entry in
develop Acceptab
n of gical the Continge
ment of ility of
world advance foreign nt asset
financial USD
trade ments markets
instrume
nts
Market interdependence
Meaning:
Market interdependence is when the movement of one market
is affected by the movement of another market.
 It means that different countries are voluntarily dependent on

one another in their own individual economic interest of
producing goods and services at which they have the most
competitive advantage and import those that are produced
cheaper elsewhere, voluntarily invest across the borders on the
basis of same treatment as if they are investing in their own
countries.
Example: a drop in the value of the dollar vs. other currencies

can cause a rise in the price of oil in dollars as oil
is a dollar denominated asset.
So, the oil market is dependent on the foreign exchange market.
Globalization of financial
markets
 It has resulted in the demise of financing along the

predominantly national lines.
 Now- a – days not just one bank approaches companies

regularly, instead many banks from different countries compete at
Corporate level.
 This competition between financial intermediaries has resulted

From liberalization and globalization of financial markets
Liberalization of International
Capital Account
This has given rise to the rapid development of an Integrated

International Capital Account.
 This development has enhanced Capital Mobility and
Substitutability between domestic and foreign bonds.
EUROS & DOMESTIC INTEREST RATES have converged for most
major currencies.
There also appears to be a tendency for REAL INTEREST RATE
DIFFERENTIALS BETWEEN COUNTRIES.
Implications
Efficiency of If domestic real interest rates are affected more by the

●
development of the world real interest rates than in

macro-economic the past, efficacy of monetary policy in influencing
domestic private investment might be reduced
policy
Impact of The more closely linked are financial markets,

●
stronger are the exchange rate crowding out effects

fiscal policy on & the weaker are the interest rate crowding out
effects.
real output
International ●
How does the tendency towards
allocation of convergence, financially open
countries?
capital
SECURITIZATION
 Securitization is the transformation of an illiquid asset into a liquid and tradable

security.
It is a financial transaction in which assets are pooled and securities representing
interests in the pool are issued.
 The process of pooling and repackaging of homogeneous illiquid financial assets into
marketable securities that can be sold to the investors.
Asset characteristics
●
Asset to be analysed as a series of cash flows
Cash flow ●
Principal part of the asset should be the right to receive
from the debtors
●
If the security available to collalateralize the cash
Security flows is available the security can be realised by SPV
●
Assets should have either a distributed risk
Distributed risk feature or backing by a credit support
●
No wide variations in documentation,
Homogeneity product type etc..
No executory ●
Must work even if the originator goes
clauses bankrupt
Independence from ●
Independent of the existence of the
the originator originator
Parties to a securitisation transaction
1. Originator:
An entity making loans to borrowers or having receivables
from customers
2. Special Purpose Vehicle:
The entity which buys assets from Originator and packages
them into security for further sale
a. Bankruptcy remote
b. Separates the risk of assets from the credit risk of the
seller
3. Credit Enhancer:
To reduce the overall credit risk of a security issue by
providing senior subordinate structure, over-
collateralization or a cash collateral.
4. Investors :
The party to whom securities are sold. May be in the form of
individuals/institutional investors like FI’s, MF’s,PF’s, pension
funds , insurance companies etc…
5. Credit Rating Agency:
To provide value addition to security
6. Administrator or servicer:
Collects payment due from the obligor & passes it
to the SPV.
7. Obligors:
Whose debts and collateral constitute the
underlying assets of securitization.
8. Structurer:
They bring together all the parties to a
securitization deal.
Process of Securitization
1. Selection of assets by the Originator

2. Packaging of designated pool of loans and advances (assets)
3. Underwriting by underwriters
4. Assigning or selling to of assets to SPV in return for cash
5. Conversion of the assets into divisible securities
6. SPV sells them to investors through private placement or
stock market in return for cash
7. Investors receive income and return of capital from the assets
over the life time of the securities
8. The risk on the securities owned by investors is minimized as
the securities are collateralized by assets
9. The difference between the rate of the borrowers and the
return promised to investors is the servicing fee for originator
and SPV
OBLIGOR ANCILLARY SERVICE
PROVIDER
Interest & principal
Sale of assets Issue of securities
SPECIAL
ORIGINATOR PURPOSE INVESTORS
VEHICLE (SPV)
Consideration for assets Credit rating of Subscription of

purchased securities securities
RATING
AGENCY
STRUCTURER
1. Pass Through Certificates:
• Sale of asset to SPV
• Investors purchase interest in the assets of SPV
• Cash flow (interest and principal) passed through as and
when occurred without any reconfiguration
• Payments made are most often on monthly basis
• Reinvestment risk carried by investor
Instruments of
securitization
2. Pay Through Certificates:
• Sale of assets to SPV
• SPV issues a debt security collateralized by asset cash
flows
• Cash flows (interest and principal) reconfigured to suit the
requirements of the investors i.e. based on the maturity
period of the security
• Reinvestment risk carried by SPV
• Each trench is redeemed one at a time
• Payments would be at different time intervals than the
flows from the underlying assets
Types of securities
Those securities whose income

Assets
●
is derived from pool of

backed underlying assets.
●
Example: payments from car
securities loan, credit card
Mortgage loans are purchased

Mortgag
●
from banks and assembled into

e backed pools which become securities
●
Example: mortgage of real estate
securities property..
Benefits of Securitization
1. Separates the credit risk of the assets from the
credit risk of the Originator
2. Lower the cost of borrowing for Originator as the

security is independent of the rating of the
corporate securitizing these assets
3. Illiquid assets converted into marketable securities

and thus provide alternate funding source
EXAMPLES OF SECURITIZATION
IN INDIA
First securitization deal in India between Citibank and GIC

Mutual Fund in 1991 for Rs 160 million.
L&T raised Rs 4,090 mn through the securitization of future

lease rentals to raise capital for its power plant in 1999.
Securitization of aircraft receivables by Jet Airways for Rs 16,000

mn in 2001 through offshore SPV.
 India’s largest securitization deal by ICICI bank of Rs 19,299 mn

in 2007. The underlying asset pool was auto loan receivables
Conclusion
THANK YOU

Financial Market Interdependence & Securitization

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Financial market interdependence

Presented to: Presented by:

 It means that different countries are voluntarily dependent on

Example: a drop in the value of the dollar vs. other currencies

 It has resulted in the demise of financing along the

 Now- a – days not just one bank approaches companies

 This competition between financial intermediaries has resulted

This has given rise to the rapid development of an Integrated

Efficiency of If domestic real interest rates are affected more by the

development of the world real interest rates than in

Impact of The more closely linked are financial markets,

stronger are the exchange rate crowding out effects

 Securitization is the transformation of an illiquid asset into a liquid and tradable

1. Selection of assets by the Originator

Interest & principal

Sale of assets Issue of securities

Consideration for assets Credit rating of Subscription of

Those securities whose income

is derived from pool of

Mortgage loans are purchased

from banks and assembled into

2. Lower the cost of borrowing for Originator as the

3. Illiquid assets converted into marketable securities

First securitization deal in India between Citibank and GIC

L&T raised Rs 4,090 mn through the securitization of future

Securitization of aircraft receivables by Jet Airways for Rs 16,000

 India’s largest securitization deal by ICICI bank of Rs 19,299 mn

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