what does a lawyer do when they do securitization work

Securities attorneys represent clients with respect to stocks, mutual funds, bonds, and other financial instruments. This work is primarily divided into three broad areas—transactional practice, regulatory practice, and litigation .

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What does an securities lawyer do?

Securities litigators work in both civil and criminal arenas, as they litigate civil suits as well as civil or criminal enforcement actions.

How does securitization work?

How Securitization Works. Securitization works on the assumption that the probability of several assets defaulting is lower than the probability of a single asset defaulting. It assumes that the default probability of different assets is independently distributed.

Does securitization reduce creditor risk?

Of course, even though the securities are back by tangible assets, there is no guarantee that the assets will maintain their value should a debtor cease payment. Securitization provides creditors with a mechanism to lower their associated risk through the division of ownership of the debt obligations.

Why do lenders securitize assets?

By buying into the security, investors effectively take the position of the lender. Securitization allows the original lender or creditor to remove the associated assets from its balance sheets. With less liability on their balance sheets, they can underwrite additional loans.

What is structured finance in law?

Structured finance is a sector of finance - specifically financial law - that manages leverage and risk. Strategies may involve legal and corporate restructuring, off balance sheet accounting, or the use of financial instruments.

What is structured finance and securitization?

Securitization and structured finance law combines multiple legal disciplines to enable originators and owners of assets with a predictable stream of payments, such as residential or commercial mortgage loans, automobile loans and leases, credit card receivables, equipment leases and loans, student loans, trade ...

Are derivatives legal?

Fourth, derivatives traditionally are regulated not through heavy-handed bans on trading, but through common-law contract rules that protect and enforce derivatives that are used for hedging purposes, while declaring purely speculative derivative contracts to be legally unenforceable wagers.

What can you securitize?

TYPES OF ASSETS THAT CAN BE SECURITIZED The most common asset types include corporate receivables, credit card receivables, auto loans and leases, mortgages, student loans and equipment loans and leases. Generally, any diverse pool of accounts receivable can be securitized.

What is a securitization transaction?

A securitization is a transaction in which a sponsor or originator obtains funding by causing a special purpose entity to issue securities backed by (and paid from) the proceeds of financial assets.

What are the risks of derivatives?

There are seven risks associated with derivatives:legal risk;credit risk;market risk;liquidity risk;operational risk;reputation risk; and.systemic risk.

What is derivative example?

A derivative is an instrument whose value is derived from the value of one or more underlying, which can be commodities, precious metals, currency, bonds, stocks, stocks indices, etc. Four most common examples of derivative instruments are Forwards, Futures, Options and Swaps.

How derivatives are traded?

A derivative can trade on an exchange or over-the-counter. Prices for derivatives derive from fluctuations in the underlying asset. Derivatives are usually leveraged instruments, which increases their potential risks and rewards. Common derivatives include futures contracts, forwards, options, and swaps.

What does a securities attorney do?

Securities attorneys represent clients with respect to stocks, mutual funds, bonds, and other financial instruments. This work is primarily divided into three broad areas—transactional practice, regulatory practice, and litigation .

What is a securities litigator?

Securities litigators work in both civil and criminal arenas, as they litigate civil suits as well as civil or criminal enforcement actions. For example, securities attorneys may represent a corporation's shareholders in a securities fraud lawsuit against the corporation's officers and directors, or they may assist clients in matters involving the breach of SEC regulations.

What was the first law to regulate securities?

Securities law initially developed in response to another financial crisis—the far greater calamity of the market collapse in 1929. As part of Franklin Delano Roosevelt’s New Deal, Congress enacted the Securities Act of 1933 as well as the Securities Exchange Act of 1934, which created the Securities and Exchange Commission (SEC). Prior to the 1933 and 1934 Acts, state laws governed securities in what is known as “blue sky laws.” These state laws remain applicable in certain situations in which security remains exempt from federal laws.

Chambers Associate: Can you sum up what the derivatives and securitization teams at Allen & Overy do?

Daniel Resnick, associate: Our securitization team regularly advises arrangers, originators and trustees on transactions involving a wide variety of asset classes and structures.

CA: What do associates do?

Zach Sinemus, associate: Associates have a lot of client interaction. My day-to-day involves responding to client inquiries and balancing anywhere from two to eight projects at a time.

CA: What are the high points of practicing in this area?

ZS: The highs are definitely the range of work we get to do and the number of jurisdictions our matters implicate. I am on matters at the moment with teams from Tokyo and London, and they really make me feel like I’m in a unique firm that offers multijurisdictional advice that other firms simply can’t offer.

CA: And the lows?

ZS: The lows recently have come from the degree to which our group has been focused on margin work. We cornered the market on sell-side margin regulation work (i.e.

CA: Which factors are currently driving securitization work and the derivatives market?

ZS: There are constantly new regulations either being introduced or being phased in. Most of the work that I do is focused on Dodd-Frank regulation, which is still relatively new to the market.

CA: How can students and associates keep up to date with these trends?

DR: Students and associates can keep up to date with securitization trends by attending securitization and structured finance seminars, partaking in industry calls that discuss the latest securitization trends, conducting online research, reading external posts/updates/memos by Allen & Overy and on fellow BigLaw firms’ websites, and speaking with peers..

CA: What opportunities in derivatives and securitization are unique to Allen & Overy?

ZS: The opportunities unique to A&O come from our cross-border work.

How does securitization work?

Securitization works on the assumption that the probability of several assets defaulting is lower than the probability of a single asset defaulting. It assumes that the default probability of different assets is independently distributed.

What is a securitization?

What is Securitization? Securitization is a risk management tool used to reduce idiosyncratic risk. Idiosyncratic Risk Idiosyncratic risk, also sometimes referred to as unsystematic risk, is the inherent risk involved in investing in a specific asset – such as a stock – the. associated with the default of individual assets.

Why do banks use securitization?

Banks and other financial institutions use securitization to lower their exposure to risk and reduce the size of their overall balance sheet.

How securitization works

First, the originator evaluates the assets that it plans to sell, grouping those with similar qualities. This is known as the reference portfolio. These assets will be sold to another financial entity, which will turn them into securities that can be traded on a secondary market.

Securitization in various industries

Securitization is used by a host of different industries. Some of the more well-known include:

Benefits of securitization

Turning illiquid assets into liquid ones. Securitization allows an issuer to turn a relatively illiquid asset into one that is liquid and tradeable. Imagine a mortgage lender, such as a bank, makes 30-year fixed-rate loans to home buyers. The lender can wait three decades to get its money back as borrowers repay their loans month-by-month.

Downsides of securitization

Complexity. Securitizations have been around since the 1980s, but as the market has grown so has the complexity of the assets that are bundled into these new securities.

The bottom line

Securitization is a process in which individual loans, debts, or other legally binding agreements and contracts that involve a payment stream are bundled together into one security. It expands the market for credit assets.

How does securitization work?

In securitization, the company holding the assets—known as the originator—gathers the data on the assets it would like to remove from its associated balance sheets. For example, if it were a bank, it might be doing this with a variety of mortgages and personal loans it doesn't want to service anymore.

Why is a car seized and liquidated?

Should a debtor cease the loan repayments on, say, his car or his house, it can be seized and liquidated to compensate those holding an interest in the debt. Also, as the originator moves debt into the securitized portfolio it reduces the amount of liability held on their balance sheet.

Do different securities carry different levels of risk?

Different securities—and the tranches of these securities—can carry different levels of risk and offer the investor various yields. Investors must take care to understand the debt underlying the product they are buying. Even so, there can be a lack of transparency about the underlying assets.

Can a financial asset be securitized?

In theory, any financial asset can be securitized —that is, turned into a tradeable, fungible item of monetary value. In essence, this is what all securities are. However, securitization most often occurs with loans and other assets that generate receivables such as different types of consumer or commercial debt.

What is the purpose of securitization?

The Purpose of Securitization. Securitization is a form of risk management for the originator. In Step One of the securitization process the originator (often a bank) sells the portfolio of assets to the issuer.

What is the process of securitizing a loan?

Securitization is the process of turning assets like credit card debt , auto loans, commercial mortgages and residential mortgages into a portfolio of securities that you can buy and sell shares of. Investors typically securitize debt, turning contracts into a package of shares with a rate of return based on the future value of the payments.

What is a securitized asset?

Securitization is the process of creating tradable securities that are backed by and based on groups of existing assets. As a category this type of product is called an asset-backed security, and any individual product is typically named after the underlying assets.

Why does the issuer pay the bank for loans?

The issuer pays the bank for these loans because it expects to make more money off them in the future. The bank, in turn, forgoes those future profits in exchange for eliminating the risk that its borrowers will default on those loans. At its best, this securitization process can introduce liquidity into the market.

Is a stock a security?

Stocks are the classic example of a security. They can be represented by a stock certificate, but a share of stock is not a tangible thing. It’s value is based on the company it represents and what other traders on the open market will pay for it.

Is securitization a fungible asset?

By turning groups of debt or other assets into a tradable security, the securitization process makes them liquid. Investors can now easily buy and sell shares of mortgages as a fungible asset class, collecting the returns without the high initial costs. Of course, all of this can have a downside as well.

What is a securitization?

Securitization is a financial arrangement that consists of issuing securities that are backed by a pool of assets, in most cases debt. The underlying assets are “transformed” into securities, hence the expression “securitization.”. The holder of the security receives income from the products of the underlying assets, ...

What is the advantage of securitization?

The advantage of a securitization transaction is that it enables the holder of the underlying debt to refinance that debt. Therefore, securitization involves assets that are typically illiquid (such as household debt), which are impossible to sell directly, since each individual debt is unique and requires separate administrative processing. Securitization also involves debts of smaller amounts, such as consumer debt, which, individually, generate relatively little income (in comparison to the amount of income typically generated by institutional investors) but which can be grouped together to make up a more valuable pool. Therefore, one of the main purposes of securitization is to create a marketable asset by combining several assets that, individually,are not as readily bought or sold, or in other words, to make a market for such assets.

Why is the complexity of securities a disadvantage?

In reality, the complexity of the different types of securities is a disadvantage because it leads to what is known as “information asymmetry.” In other words, the issuer of the securities knows much more about what he is really selling than the buyer (investor) does. As long as the securities issued behave as indicated in the brochure, all is well and nobody asks any questions. But as soon as problems begin to arise for certain types of securities, people become suspicious of any product falling within that category – since you really need to be an expert to be able to evaluate a securitization program –and suddenly nobody wants to buy them anymore. Akerlof first described this mechanism in terms of the used-car market (“The market for Lemons”). In this regard, the credit rating agencies have received a great deal of blame for having been too generous in awarding “AAA” ratings, but the real problem is the loss of confidence that spreads throughout an entire asset class to a completely irrational degree.

What is a guarantee by a third party?

Guarantee by a third party: monoline insurance companies specialize in providing guarantees for securitization structures. Derivatives (credit derivatives): the use of derivatives, particularly credit derivatives, also makes it possible to hedge against the risk associated with the pool of collateral.

What is the difference between traditional and synthetic securitization?

An important distinction must be made between “traditional” securitization, where the assets are actually sold to the SPV (“true sale”), and what is known as “synthetic” securitization, where the originator retains ownership of the assets and transfers only the risk to the SPV, via a credit derivative.

Why do originators securitize?

For the originator, the main reason for securitizing is to reduce (some might say “get rid of”) the amount of assigned debt from his balance sheet, which on the one hand leads to a corresponding reduction in his regulatory capital requirements under Basel II, and on the other hand enables him to bring in additional liquidity (which can be used to make new loans).

Can a securitization be backed by future debt?

However, some securities can also be backed by future debt (see below).

History of Securities Law

• Securitization is a way to transform an illiquid asset (or group of illiquid assets) into a security. A group of contractual debt obligations -- e.g. a mortgage, auto loan, or credit card debt obligation -- is pooled together and the cashflows resulting from these underlyings is resold to investors as a security. Examples of securitized securities ...

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• Securities attorneys represent clients with respect to stocks, mutual funds, bonds, and other financial instruments. This work is primarily divided into three broad areas—transactional practice, regulatory practice, and litigation.

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