John Cyriac’s Blog

Securitised1 transactions reached a total of $20 billion in 2006 compared to $6 billion in 2002 in Latin America, which is a rapid growth as per BIS September 07 quarterly report. But the average size of issues and their lack of secondary market liquidity are stated as reasons for grading it at infancy by the BIS report. But this trend of growth in securitisation suggests efficiency improvements in banks and financial markets as illiquid or risky assets are transformed into more liquid or less risky ones.

Latin American securitisation market evolved from a cross-border market prior to 1990s to a developed domestic market from 2003. Owing to the increasing political stability in the region securitisation has transformed from FFS in cross-border markets to ABS in the domestic market.  Also, CDO transactions has started in Latin America from 2006, but there is lot of room for progress as structured transactions are dominated by single asset classes like mortgages in Colombia, credit cards in Chile etc.

Latin American region still needs more legal frameworks for securitisation, more corporate information disclosure framework to assess credit risk. Also, conflict of interest associated with rating agencies, mortgage early repayments etc are some of the potential risks cited by the BIS report on Latin American securitisation. Recent experience of issues in the developed world in the area of securitisation can be a good indicator for Latin American securitisation in its earlier stages itself to implement the right infrastructure.
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1. Securitisation allows the issuance of securities through an off-balance sheet process involving a special purpose vehicle (SPV). Once the originator has selected a set of assets from its portfolio, they are then sold to an SPV. The SPV could be in an offshore location, if it is needed to avoid political risks. (These are called Future Flow securitisatons(FFS) where the future foreign currency receivables are transferred to the SPV outside the jurisdiction of the originator). Once the securities are issued, the interest and principal of the underlying assets are collected and managed by a “servicer” and rechannelled to investors through the SPV.