Financial institutions face unprecedented times as the Covid-19 pandemic wanes and the economy rebounds – especially in capital markets. At the height of the crisis, organizations pivoted to digital. Exchanges shifted to remote trading, trading apps saw record volumes, and firms looked for any way they could make processes contactless and electronic.
Today, financial institutions recognize that digitized processes are here to stay – because they’re efficient, secure and reliable, and because they deliver excellent customer experiences. Those benefits extend to securitizing assets for sale in the secondary market.
But to achieve success with digitizing securitization, you need the right digital platform.
Straight Line to Securitization
A digital asset that moves through the eOriginal® platform can be originated through various channels. It can be executed directly in the platform, electronically deposited by a partner after signing, or entered through our Paper In® process from a “wet” ink signature.
Once the loan is executed, the platform secures, encrypts and tamper-seals the asset. Managed in this way, digital contracts hold all the legal and enforcement rights of paper chattel. The platform’s eVault manages assets throughout their lifecycle until they have matured or they are terminated, paid off or moved into the secondary market.
The eVault affords the necessary protection to securely manage the electronically originated documents and assets. For financial institutions in particular, acceptance is assured. Issuers, legal counsel and rating agencies that support secondary-market transactions have accepted eVault solutions as meeting securitization requirements.
Here’s a typical workflow for digital securitization on the eOriginal platform:
- The borrower electronically signs the contract. The eOriginal platform captures the eSignature and binds it to the document using public-key infrastructure (PKI) – the same technology behind blockchain.
- The originator deposits the digital loan in the platform’s eVault. The platform digitally signs every document with a vault-specific third-party digital certificate. It secures the digital original and watermarks all copies throughout the document’s lifecycle.
- The platform provides lifecycle management through granular access control. A document-specific audit trail records every action the platform or any stakeholder takes. Recorded details include authentication methods, consent, display of review copy, signature collection mode, signature method, signature binding and distribution copies.
- When the originator wants to securitize, the eOriginal platform makes it simple to identify assets for the securitization pool.
- Depending on the trust agreement, the platform can move assets through an aggregation eVault and then into a securitization eVault. That process transfers control and ownership to the legal entity or trust that will hold the assets.
- The eVault regulates who can control the assets. The trustees have a right to the assets, as does the custodian or servicer who manages the assets.
- Throughout the process, the eOriginal platform provides an immutable chain of custody and digital asset certainty. That capability affords lenders and investors the same legal assurance as chattel paper.
Digital ABS
Securitization is one of many areas in capital markets that benefit from digital transformation. Both digitally creating the underlying assets and digitally securitizing those assets increases efficiencies, improves transparency, and strengthens security. It also delivers better experiences to originators, issuers, rating agencies, trustees, investors, legal firms, underwriters, and regulators.
Ratings agencies recognize the potential for digitizing securitization, but they caution that managing risk depends on the right digital solution. The need for proper execution places a premium on investing in an effective solution for eAsset management. To meet U.S. legal requirements, for example, Moody’s emphasizes the need for “creating electronic vaults that store e-contracts in a way that ensures an authoritative copy of the agreements is maintained and its owner is clear.”
Financial institutions can realize numerous advantages through securitization. They can reduce risk by removing debt from their balance sheets. They can increase regulatory capital – the assets that regulations require institutions to hold to remain solvent. And they can achieve higher credit ratings and reduce funding costs.
“In most cases, securitization trusts have implemented vault systems provided by third-party vendors designed to allow only the appropriate legal entity to control the collateral by managing authoritative versions of the contracts. This practice is credit positive because it meets the criteria described above. Such systems have an audit trail of all actions, ownership record management, and disaster recovery capabilities. The systems also ensure that once a lender buys and funds a contract, ownership is transferred to the new lender within the secured vault. These systems, however, are untested over long periods and technology continues to evolve.”1
Data transparency lowers the risk of fraudulent modifications to loans and allows stakeholders to easily follow the pool of loans throughout the securitization lifecycle.
eOriginal enabled the industry’s first digital asset-backed security (ABS) rated by S&P in 2005. Since then, eOriginal has remained the growth leader in digital ABS in the United States. The platform has enabled more than 340 ABS receiving 485 credit ratings from all five major rating agencies, with more than $129 billion in asset value.
ECCAs & SPV
In most securitization cases, a legal entity known as a special-purpose vehicle (SPV) purchases the assets from the originator and issues the ABS to investors. The SPV serves the singular purpose of acquiring and issuing debt. It also organizes the ABS into tranches differentiated by assets, interest rates and risk profiles.
With the eOriginal platform, non-mortgage securitizations are secured under the auspices of an electronic collateral control agreement (ECCA). An ECCA is a multiparty agreement between eOriginal, a customer and/or certain customer affiliates, and a third party, such as a secured party or trustee, that has unilateral rights to take control of the collateral.
Upon instructions from the secured party, eOriginal can terminate the originators’ access to the eVault and, through springing control, simultaneously transfer access and control to the secured party. eOriginal created ECCAs to enable the rapid adoption of digital transactions and security interests in digital collateral by lenders without their having to negotiate or implement a software license or administer operations.
Digitizing securitization improves transparency, efficiency and security. The benefits extend to originators, issuers, rating agencies, trustees, investors, legal firms, underwriters, servicees, servicers, regulators and other participants in the securitization lifecycle. At each stage of that lifecycle, the eOriginal platform provides the purpose-built solution for tamper-proof asset storage and centralized data management of digital ABS.
The Digital ABS Solution You Need
Digital securities are poised to grow in popularity as more originators, asset managers, and investors recognize their advantages. Market players that invest in the right enabling technology will reduce the time and cost of securitization, increase transparency, maintain and even improve regulatory compliance, and mitigate risk.
Financial institutions that invest in digital ABS will take an important new step in their journey toward end-to-end digital transformation. In the process, they’ll position themselves to compete and win in an increasingly digitized financial services industry.
