Margin is the amount of collateral that is required to be posted by investors who purchase securities in a securitisation transaction. The margin is typically expressed as a percentage of the purchase price of the securities.
The margin is used to protect investors from losses in the event that the underlying assets default. If the underlying assets default, the investors will lose their investment, but they will not lose the collateral that they posted.
The margin is typically set by the issuer of the securities. The issuer will consider a number of factors when setting the margin, including the credit quality of the underlying assets, the volatility of the underlying assets, and the risk appetite of the investors.
The applications of margin in securitisation include:
- To protect investors: The margin protects investors from losses in the event that the underlying assets default. This is because the investors will not lose their entire investment, as they will still have the collateral that they posted.
- To reduce risk: The margin reduces the risk for the issuer by providing a buffer against losses in the event of a default. This is because the issuer will not be required to make payments to the investors if the underlying assets default and the investors have enough collateral to cover their losses.
- To improve liquidity: The margin can help to improve liquidity for the securities by making them more attractive to investors. This is because investors are more likely to invest in securities that have a margin, as it provides them with some protection against losses.
Margin can be a valuable tool for securitisation transactions. It can help to protect investors, reduce risk, and improve liquidity.
Here are some of the benefits of using margin in securitisation transactions:
- Protection: Margin provides protection for investors in the event of a default by the underlying assets. This can help to mitigate losses and reduce the risk of the investment.
- Reduced risk: Margin can help to reduce risk for the issuer by providing a buffer against losses in the event of a default. This can make the securitisation transaction more attractive to investors and improve the overall credit rating of the transaction.
- Improved liquidity: Margin can help to improve liquidity for the securities by making them more attractive to investors. This is because investors are more likely to invest in securities that have a margin, as it provides them with some protection against losses.
Overall, margin can be a valuable tool for securitisation transactions. It can help to protect investors, reduce risk, and improve liquidity.