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Commoditization
A financial technique that consists in converting a pool of assets, which are more or less illiquid due to the absence of an efficient market, into securities that can be bought and sold on a financial market. The originator usually sells the pool of assets to be securitized to a special purpose entity (SPE) which finances their acquisition by issuing negotiable securities, usually bonds or commercial paper.
(1) Asset-backed securities (ABS) are negotiable securities that represent an interest in underlying assets. The buyer of the securities in effect acquires a portion of the securitized pool of assets. Principal and interest payments on the asset-backed securities are funded exclusively from the financial flows generated by the securitized assets, which provide for the repayment of the securities.
(2) This technique, which originally involved pools of receivables converted into negotiable securities and still does in large part today, has been extended to other assets, such as inventories or real property. In principle, it can apply to any pool of assets whose future financial flows can reasonably be estimated, the objective being to convert illiquid assets into liquid securities.
Translations
Synonyms and variations
- Asset securitization
- Pools of receivables
- Securitization