A special purpose entity (SPE) is a legal entity that is created specifically for the purpose of securitising assets. The SPE is typically a shell company that has no assets or liabilities of its own.
Here are some applications of an SPE in securitisation:
- To isolate assets: The SPE can be used to isolate the assets that are being securitised from the assets of the originator. This helps to protect the investors in the securitisation in the event that the originator defaults.
- To create tranches: The SPE can be used to create tranches of securities with different levels of risk. This allows investors to choose the level of risk that they are comfortable with.
- To manage the securitisation: The SPE can be used to manage the securitisation. This includes collecting payments from the borrowers, managing the assets, and enforcing the security interest in the event of a default.
Here are some examples of how SPEs are used in securitisation:
- Mortgage-backed securities: SPEs are typically used in mortgage-backed securities (MBS). This is because MBS are typically securitised by mortgages, and the SPE can be used to isolate the mortgages from the assets of the originator.
- Credit card securitizations: SPEs are also typically used in credit card securitizations. This is because credit card securitizations are typically securitised by credit card receivables, and the SPE can be used to isolate the credit card receivables from the assets of the originator.