A trust is a legal arrangement that is used to hold the underlying assets in a securitisation. A trust is sometimes referred to as a "fiduciary arrangement" or a "trusteeship".
A trust is important in securitisation because it ensures that the investors in the securitisation have a valid claim to the cash flows from the underlying assets. The trust holds the underlying assets in a separate legal entity, which means that the assets are not subject to the claims of the originator or any other creditors.
There are a number of different types of trusts that can be used in securitisation. The most common type of trust is a "special purpose vehicle" (SPV). An SPV is a company that is specifically created for the purpose of holding the underlying assets in a securitisation.
Here are some of the applications of trusts in securitisation:
- To create a separate legal entity: The trust creates a separate legal entity that holds the underlying assets. This means that the assets are not subject to the claims of the originator or any other creditors.
- To provide transparency: The trust provides transparency to the investors by ensuring that they have a clear understanding of the underlying assets.
- To reduce risk: The trust can reduce risk by ensuring that the investors have a valid claim to the cash flows from the underlying assets.
- To improve liquidity: The trust can improve liquidity by making it easier to sell the securitisation to investors. This is because investors will be more confident in the securitisation if they know that the underlying assets are held in a trust.
Trusts are a valuable tool for securitisation. They can be used to create a separate legal entity, provide transparency, reduce risk, and improve liquidity.