Common Structures of Asset-Backed Securities and Their Risks

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.