Question

1. Why would you expect securitisation to take place only in highly developed capital markets?

Answer 1

Following factors are prerequisite for a good securitization market:

Strong legal and regulatory framework:

• Securitization involves various stakeholders including issuer, investor, trusts, guarantors etc. Each of them has rights or obligation on future cashflow in different ways.
• Further, securitization adds several layers on the loan contracts by selling its cashflow. So, risk on the actual cashflow be hidden. In order to address these concerns, a robust legal and regulatory framework is necessary. Usually, developed countries have a sound legal enforcement practices and regulatory structure and developing countries lacks it.

Existence of secondary debt market:

• Developed economies used to have an established secondary debt market. A secondary market provides an easy entry and exit for investors in securitization transaction. Further, it brings interest of various participants such as state-owned banks, provided funds etc. Usually, developing economies lacks liquid secondary debt market.

So, due to above factors securitization transaction is prevalent in developed country.