common structures of asset-backed securities and their risks.pdfVIP

Corporate Ownership Control / Volume 4, Issue 1, Fall 2006 (continued) COMMON STRUCTURES OF ASSET-BACKED SECURITIES AND THEIR RISKS Tarun Sabarwal* Abstract In recent years, one area of growing concern in corporate governance is the accounting and transfer of risk using special purpose entities (or trusts). Such entities are used widely in issuing asset-backed securities. This paper provides an overview of the asset-backed securities market, and discusses the common structures used in this market to transform the risks associated with the underlying collateral into risks associated with the issued securities. Understanding these structures is essential to understanding the allocation and transfer of risk among the different parties in an asset-backed transaction – the originator, the special-purpose entity, investors, and related parties such as insurance guarantors. Understanding these structures is also essential in proposing potential solutions to regulatory and accounting concerns about the transfer of risks in asset-backed securities. Keywords: asset-backed securities, structured finance, special purpose entity, seller recourse, corporate governance *Department of Economics, Campus Box 1208, Washington University in St. Louis, St. Louis MO 63130-4899, sabarwal@wustl.edu The author is deeply grateful to Bob Anderson for his advice and support. He thanks Bill English, Brian Sack, and Al Teplin for helpful comments. 1. Introduction evaluating structural supports, and sufficient