What are Mbs,abs and CDO?

1. All Assets Securitization Products

There is a saying on Wall Street that "if you want to increase future cash flow, make it into securities." If you want to run a risk, make it a security. " Essentially, both Mbs,abs and CDO are asset securitization products. According to the U.S. Securities and Exchange Commission (SEC) definition, asset securitization refers to the creation of such a security, which is mainly supported by a particular pool of receivables assets or other financial asset pools (backed) to ensure reimbursement. The value of these assets securitization product p can be expressed by the following formula:
where n is the payback period for accounts receivable or other financial assets in the asset pool. It is not difficult to see that the value of asset securitization products p is affected by future cash flow and market interest rate R, when the interest rate R rises, p will decline, when the cash flow decreases, p will also decline, and vice versa. MBS, the real estate mortgage-backed securities (mortgagebackedsecurities), which refers to the issuer to remit real estate mortgage claims into an asset pool (Assetpool), Securities issued on the basis of the cash flow generated by the pool (mainly the bonds that are regularly repaid). The cash flow generated by the loan (including principal and interest reimbursement, early repayment, etc.) is prorated to the investor each month by the service agency responsible for collecting the cash flow after deducting the relevant fees. As a result, the monthly payments paid by buyers are the basis for the repayment of MBS.

ABS, or asset-backed securities (assetbackedsecurities), is an asset pool issued by assets other than the real estate mortgage claims, which is actually the promotion and application of MBS technology in other assets.

CDO, the collateralised debt certificate (collateralizeddebtobligation), is a new type of ABS, which is based on mortgage debt credit, which is structured to restructure the assets such as bonds and loans, and to re-divide the return on investment and the risk by means of various asset securitization technologies. Innovative derivative securities products to meet the needs of different investors.

The core design concept of CDO is grading, which is to develop different levels of credit risk products on the same mortgage asset pool:
★ Priority (SENIORTRANCHES) ★ Intermediate level (MEZZANINETRANCHES) ★ Equity level (Equitytranches) product reimbursement order from first to after priority, intermediate level and equity level, that is, once the mortgage defaults and other losses, losses will first Absorbed by the equity level, then the intermediate level, and finally the priority. Among them, the buyer of the priority CDO includes the low-risk institutional investors such as commercial banks, insurance companies, mutual funds and pension funds, and the buyers of middle-level and equity-level CDOs are mainly investment banks and hedge funds pursuing high-risk and high-yielding institutional investors. This is also the first class of institutional investors to fall in this crisis.

2. The difference between the three abs,mbs and the CDO is mainly reflected in the following three aspects.
First, the underlying assets of the three (i.e. assets within the asset pool) are different:
(1) The asset pool of MBS is a property mortgage loan claim
(2) the ABS (narrow) asset pool is a creditor's rights other than mortgage loans, such as:
★ Credit Card Accounts receivable
★ Rental Rent
★ Car loan claims, etc.
(3) The asset pool of CDO is mainly a number of debt instruments, such as:
★ High Yield bonds (highyieldbonds)
★ Emerging Market Corporate Bonds (EMERGINGMARKETCORPORATEDEBT)
★ National Bonds (SOVEREIGNDEBT)
★ Bank loan (Bankloans)
★ Narrow sense of abs★mbs, etc.
Second, the number of debtors is different:
(1) MBS or traditional ABS creditors have at least thousands of
(2) CDO creditors are about 100~200, or even less than 100 are common
Finally, the relevance requirements for the underlying asset are different:
(1) Traditional MBS or ABS assets pay attention to consistency (homogeneous), the nature of the creditor's rights, due date are similar, and even want to originate from the same founder, in order to grasp the form of cash flow moderately
(2) The various claims of CDO require a heterogeneous, the source cannot be the same, and the correlation between each other is smaller and better, so as to meet the requirement of fully dispersing the risk.
ABS refers to asset-backed securities; The narrow-sense ABS does not include CDO;CDO refers to the guarantee debt certificate, MBS refers to the real estate mortgage loan support securities; CMBS refers to commercial real estate mortgage-backed securities; RMBS refers to residential real estate mortgage-backed securities

According to the different types of securitization assets that generate cash flow, asset securitization can be divided into mortgage securitization (mortgage-backed securitization, MBS) and asset backed securitization (asset-backed securitization, Referred to as ABS) two major categories. The difference is that the underlying asset of the former is the home mortgage loan, while the latter's underlying asset is other than the home mortgage loan.

MBS is the earliest securitization type in the history of asset securitization. It is the process of financing the issuance of securities (mostly bonds) through financial markets, based on the credit assets of home mortgages, backed by the cash flow generated by borrowers repaying their loans.

On the one hand, MBS could transform illiquid long-term mortgage loans held by financial institutions such as banks into higher-liquidity securities, which greatly improved the liquidity of these institutions. Moreover, if MBS chooses the form of off-balance sheet financing, it will not increase the debt ratios of these institutions and can also release capital. Therefore, this securitization product is very popular with financial institutions. On the other hand, because the base assets of MBS are mortgages with lower default rates, cash flows are relatively stable and predictable, so market investors are also very fond of this investment tool.

ABS is a securitization financing method supported by non-housing mortgage assets, which is actually the promotion and should be shipped of MBS technology in other assets. Because one of the basic conditions of securitization financing is that the underlying assets can produce predictable and stable cash flows, there are many assets that have such characteristics besides mortgage loans, so they can also be securitised. With the development of securitization technology and the continuous expansion of the securitization market, the types of abs are becoming more and more diverse, which can be subdivided into the following varieties: (1) automobile consumer loan, student loan securitization, (2) commercial, agricultural, medical property mortgage securitization; (3) Securitization of credit card receivables ; (4) Securitization of trade receivables, (4) Securitization of equipment leasing costs, (5) Securitization of infrastructure charges, (6) entry into securities of tickets, (7) Securitization of club dues, (8) Securitization of premium income, (9) SME loan support securitization, (10) Securitization of intellectual property, etc. And with the development of asset securitization technology, the scope of securitization assets is expanding continuously.

The mortgage debt equity market has developed rapidly since 1996, almost twice times the credit card securitization market, with MBS becoming the most mature asset securitization market. In Europe, MBS and CDO are two of the fastest-growing markets in asset securitization. Compared with MBS, the underlying assets, SPV structure and regulation of CDO are more diversified.

CDO products have their unique investment characteristics. First, the strength and stability of the structure: because the credit rating agencies in the rating process of the conservative premise and the CDO structure "extraordinary collateral" characteristics, so CDO not only has the general ABS characteristics, and its structure has considerable strength and stability. Second, transparency is high: banks that sell underlying assets in CDO transactions are usually big commercial banks. Therefore, it is relatively easy to get information about them. Priority bond investors take a very low risk by simply analyzing some of the market's overall data. Subordinated bond investors need to specifically analyze the risks, benefits, and legal provisions of CDO and pay close attention to the factors that affect the return on investment. Thirdly, standardization is high: Although the CDO products start late, but after several years of development, the standardization of products gradually improve, Europe and the United States market increasingly perfect regulations and regulatory experience can be used for reference. The liquidity is high: as more and more banks are involved in asset securitization, the issuance and trading of CDOs has developed rapidly. Around the world, the CDO market accounts for about 40% of all asset securitization transactions. Higher yield: CDO has a higher yield than traditional abs products with the same credit rating. Six, industry-related low: CDO has a low correlation with traditional abs. Credit rating agencies use CDO and traditional ABS as two different industries when calculating the discrete index of their portfolios. As a result, investment in CDOs can play a role in diversifying portfolios for investors.

The development of CDO products in China is in the initial stage. Our commercial banks ' off-sheet business has developed rapidly in recent years, and more and more reference is made to the practice advocated by the Basel Committee to supervise the off-sheet business by means of capital adequacy ratio. Therefore, the loan securitization is gradually becoming the focus of commercial Bank's business development.

1. MBS is the first choice for exchange-traded services

Asset securitization in Europe and the United States has more innovative, diversified products, rapid development and other characteristics. However, with the development of asset securitization in China, relevant legal system, asset characteristics and other factors, MBS is considered as the first choice to provide transaction services from the point of view of providing transaction services for asset securitization products.

In China, the real estate industry, as the "basic" industry supporting the development of MBS, is gradually becoming the leading industry of economic development with the development of national economy and the improvement of people's life. The housing industry has been developing rapidly since the late 90, with an average annual growth rate of 37. 8%.

From the trend of the improvement of Chinese residents ' life and the development of consumption structure, the potential demand of China's housing market is huge. In the appropriate policy environment, the potential demand will be translated into the real market demand, thus promoting the rapid development of the real estate industry.

China's real estate has become a highly dependent industry with the banking sector, about 70% of real estate development funds from bank loans support, such a structure determines the real estate loans in the financial institutions in the position and impact. Recently

The proportion of real estate loans in the new assets of financial institutions is rising, from 39% in 2001, the forecast will rise to 42% to 67% in 2005 and 45% to 62% in 2010. Therefore, the rapid development of the real estate industry at the same time, will have a great pressure on banks. The regulatory authorities are discussing a variety of real estate mortgage securitization programs, and it is expected that real estate mortgage securitization will soon have substantial progress.

2. CDO products are an asset securitization product that deserves attention

The CDO market, which has developed rapidly since 1996, is almost twice times the credit card securitization market and has become the most mature asset securitization market with MBS. In Europe, MBS and CDO are two of the fastest-growing markets in asset securitization. Compared with MBS, the underlying assets, SPV structure and regulation of CDO are more diversified.

CDO products have their unique investment characteristics. First, the strength and stability of the structure: because the credit rating agencies in the rating process of the conservative premise and the CDO structure "extraordinary collateral" characteristics, so CDO not only has the general ABS characteristics, and its structure has considerable strength and stability. Second, transparency is high: banks that sell underlying assets in CDO transactions are usually big commercial banks. Therefore, it is relatively easy to get information about them. Priority bond investors take a very low risk by simply analyzing some of the market's overall data. Subordinated bond investors need to specifically analyze the risks, benefits, and legal provisions of CDO and pay close attention to the factors that affect the return on investment. Thirdly, standardization is high: Although the CDO products start late, but after several years of development, the standardization of products gradually improve, Europe and the United States market increasingly perfect regulations and regulatory experience can be used for reference. The liquidity is high: as more and more banks are involved in asset securitization, the issuance and trading of CDOs has developed rapidly. Around the world, the CDO market accounts for about 40% of all asset securitization transactions. Higher yield: CDO has a higher yield than traditional abs products with the same credit rating. Six, industry-related low: CDO has a low correlation with traditional abs. Credit rating agencies use CDO and traditional ABS as two different industries when calculating the discrete index of their portfolios. As a result, investment in CDOs can play a role in diversifying portfolios for investors.

The development of CDO products in China is in the initial stage. China's commercial banks ' off-sheet business has developed rapidly in recent years, and more and more reference is made to the Basel Committee's approach to the regulation of off-sheet business by capital adequacy ratio. Therefore, the loan securitization is gradually becoming the focus of commercial Bank's business development. According to the 2003 report of the Fitch Credit Rating Corporation, Agricultural Bank of China successfully launched a private-equity form of synthetic CDO in May 2003. The report predicts that Chinese commercial banks will not only introduce more CDO products, but also become asset managers for the global CDO.

3. Pay close attention to the development of trust income right voucher market

In the case of asset securitization still faced with legal system obstacles, standardized MBS and CDO products have to be fully developed for a certain period of time, the trust proceeds right certificate can be the starting point of establishing the asset securitization product transaction service system. The main reasons are two: first, to provide a direct and effective transaction services for the right of return, can increase the liquidity of trust products, reduce the distribution costs, improve investment value. Second, the Trust income certificate has the basic characteristics of fixed income securities, such as maturity date, return rate, credit rating, and so on, the transaction service mode of establishing trust income right voucher can not only provide technical preparation for the future development of asset securitization products, but also accumulate transaction service and supervisory experience in practice.

4. Developing a trading platform for bond products in a planned manner

First, according to the product standardization degree and characteristic, establishes the multi-service model the transaction platform, for the asset securitization product transfer service. Second, establish a trading platform/system for bond products with institutional investors as the main players. As the ABS and MBS products trading market is based on institutional investors as the main players of the market, the establishment of a special fixed-income securities trading system, both can effectively for asset securitization products trading services, but also for institutional investors to invest in financial services. Third, the market organizers participate in the formation of securitization products, can be the standardization of products and tradable requirements, so that the organization of the transaction market is an important part of the process of asset securitization, and to the trading platform as the starting point, guide the standardization process of asset securitization products. In the process of building the trading platform, the market organizer should use the credit rating of the trading product as an important parameter of the trading system, promote the development of the functions of the relevant institutions such as credit rating and the regular credit rating report as one of the important conditions for providing the transaction service.

What are Mbs,abs and CDO?