Match funding is a process of ensuring that the cash flows from the underlying assets match the payments that are due to the investors. This is done by ensuring that the underlying assets have a similar maturity profile to the securities that are issued to investors.
Match funding is important in securitisation transactions because it helps to reduce the risk of default. If the cash flows from the underlying assets do not match the payments that are due to the investors, the issuer may not be able to make the payments to the investors. This could lead to a default on the securities.
There are a number of ways to achieve match funding in securitisation transactions. One way is to use a special purpose vehicle (SPV) to hold the underlying assets. The SPV can then issue securities that have a maturity profile that matches the cash flows from the underlying assets.
Another way to achieve match funding is to use a swap arrangement. In a swap arrangement, the issuer swaps the cash flows from the underlying assets with a third party. The third party then agrees to make payments to the investors that have a maturity profile that matches the securities that were issued.
Match funding is a valuable tool for securitisation transactions. It can help to reduce the risk of default and can also make it easier to market the securities to investors.
Here are some of the benefits of using match funding in securitisation transactions:
- Reduced risk: Match funding can help to reduce the risk of default by ensuring that the cash flows from the underlying assets match the payments that are due to the investors.
- Improved liquidity: Match funding can help to improve liquidity by making it easier to market the securities to investors.
- Increased investor confidence: Match funding can help to increase investor confidence by ensuring that the issuer is taking steps to reduce the risk of default.
Overall, match funding can be a valuable tool for securitisation transactions. It can help to reduce risk, improve liquidity, and increase investor confidence.