Ring-fence is a legal structure that isolates the assets of a securitisation from the assets of the originator. In the context of securitisation, ring-fencing is used to protect investors from losses in the event of the originator's bankruptcy.
Ring-fencing is typically achieved by creating a special purpose vehicle (SPV) to hold the assets of the securitisation.
The SPV is a legal entity that is separate from the originator. This means that the assets of the SPV are not subject to the claims of the originator's creditors in the event of bankruptcy.
Ring-fencing is an important part of securitisation, as it helps to protect investors from losses.
Here are some applications of ring-fence in securitisation:
- Mortgage-backed securities: In a mortgage-backed security, the underlying mortgages are typically ring-fenced from the assets of the originator. This means that investors in the mortgage-backed security are not exposed to the risk of the originator's bankruptcy.
- Collateralized debt obligations: In a collateralized debt obligation, the underlying debt securities are typically ring-fenced from the assets of the originator. This means that investors in the collateralized debt obligation are not exposed to the risk of the originator's bankruptcy.
Ring-fencing is a complex legal process, and it is important to ensure that the ring-fence is properly implemented.