Asset-backed commercial paper

Asset-backed commercial paper (ABCP) is a form of

commercial paper that is collateralized by other nancial
assets. Institutional investors usually purchase such instruments in order to diversify their assets and generate
short-term gains.

Invented by Citigroup in 1988, SIVs were large investors

in securitisations. Some SIVs had signicant concentrations in US subprime mortgages, while other SIV had no
exposure to these products that are so linked to the nancial crisis in 2008.[2] After a slow start (there were
only 7 SIVs before 2000) the SIV sector tripled in assets between 2004 and 2007 and at their peak just before the nancial crisis in mid 2007, there were about
36 SIVs[1][3] with assets under management in excess
of $400 billion.[4] By October 2008, no SIVs remained
active.[5]

ABCP is typically a short-term instrument that matures

between 1 and 270 days (average of 30 days) from issuance and is issued by an Asset-backed commercial paper program or Conduit. A conduit is set up by a sponsoring nancial institution. The sole purpose of a conduit
is to purchase and hold nancial assets from a variety of
asset sellers. The conduit nances the assets by selling
asset-backed commercial paper to outside investors such
as money market funds or other safe asset investors like
retirement funds. The conduit is referred to as a structured investment vehicle.

The strategy of SIVs is the same as traditional credit

spread banking. They raise capital and then lever
that capital by issuing short-term securities, such as
commercial paper and medium term notes and public
bonds, at lower rates and then use that money to buy
longer term securities at higher margins, earning the net
credit spread for their investors. Long term assets could
include, among other things, residential mortgage-backed
security (RMBS), collateralized bond obligation, auto
loans, student loans, credit cards securitizations, and bank
and corporate bonds.

A structured investment vehicle (SIV) is a non-bank

nancial institution established to earn a credit spread
between the longer-term assets held in its portfolio and
the shorter-term liabilities it issues with signicantly
less leverage (10-15 times) than traditional banks (25-50
times). They are simple credit spread lenders, frequently
lending by investing in securitisations but also by investing in corporate bonds and funding by issuing commercial paper and medium term notes, which were usu- 1 List of Structured Investments
ally rated AAA until the onset of the nancial crisis. They
Vehicles (SIVs)
did not expose themselves to either interest rate or currency risk and typically held asset to maturity. SIVs differ from asset-backed securities and collateralized debt
2 Structure
obligations in that they are permanently capitalized and
have an active management team. They do not winddown at the end of their nancing term, but roll liabilities ABCP is typically a short-term instrument that matures
between 1 and 270 days (average of 30 days) from isin the same way that traditional banks do.[1]
suance and is issued by an Asset-backed commercial paThey are generally established as oshore companies and
per program or Conduit.[6][7]
so avoid paying tax and escape the regulation that banks
and nance companies are normally subject to. In addi- A conduit is set up by a sponsoring nancial institution.
tion, until changes in regulations around 2008, they could The sole purpose of a conduit is to purchase and hold often be kept o the balance-sheet of the banks that set nancial assets from a variety of asset sellers. The conduit
them up, escaping even indirect restraints through regula- nances the assets by selling asset-backed commercial
tion. Due to their structure, the assets and liabilities of the paper to outside investors such as money market funds
[8]
SIV was more transparent than traditional banks for in- or other safe asset investors like retirement funds.
vestors. SIVs were given the label by Standard & Poors -- The nancial assets that serve as collateral for ABCP
Moodys called them Limited Purpose Investment Com- are ordinarily a mix of many dierent assets, mostly
panies or LiPICs. They are considered to be part of asset-backed securities (ABS), residential mortgages,
the non-bank nancial system, which has two parts, the commercial loans and CDOs. Most of the assets are
shadow banking system comprising the bank sponsored AAA-rated, some are un-rated assets generated by the
SIVs (which operated in the shadows of the bank sponsors sponsor nancial institution, the mixture are jointly
balance sheets) and the parallel banking system, made up judged to have a low risk of bankruptcy by a ratings
from independent (i.e. non bank aligned) sponsors.
agency. The asset origins are mostly United States (68%),
1

Germany (15%) and United Kingdom (10%).[9] Many

large institutions heavily invested in these assets because
ABCP represented a very attractive investment opportunity: prior to August 2007 this instrument had never encountered diculties, it beneted from high ratings from
agencies and, nally, institutions had important cash assets to invest following a protable period.[10] However,
in 2007-2008 many of these assets performed poorer than
expected, making buyers much less willing to purchase
ABCP or rollover.[9]

REFERENCES

4 See also
Asset-backed commercial paper program
Financial crisis of 20072010
Structured investment vehicle
Asset-backed security

5 References
3

Financial crisis of 200708

As the mortgage situation in the United States became more serious, market became unwilling to purchase ABCP. This caused trouble for nancial institutions that had relied on sales of ABCP to obtain funds
for use in longer-term investments (see Maturity mismatch). For example, as one form of the ABCP program, the structured investment vehicles (SIVs) set up
by some commercial banks nanced their longer-term,
higher-yield investing through sales of ABCP.[11] This
had been very protable when ABCP was considered safe
(so that ABCP buyers accepted a low interest rate). When
some asset prices dropped, investors were less willing to
buy or rollover ABCP. This forced SIVs to quickly liquidate their longer-term investments at a substantial loss.[9]
The losses together with the panic in liquidity market
formed a liquidity shock to the banking sector, which
helped the contagion of the crisis.[12]
In Canada, the nancial sector reforms undertook in the
years preceding the nancial crisis helped strengthen the
countrys banking system. However, and with an estimated value of CAD 33 billion in ABCP, the consequences of the collapse of the ABCP market could have
been very damaging if the Caisse de dpt et placement
du Qubec (CDPQ) and the Bank of Canada had not
stepped in. In the summer of 2007, Henri-Paul Rousseau,
then President and CEO of CDPQ had envisioned and
negotiated a unique Canadian solution that consisted in
converting the ABCP into long-term bonds[13][14] with
the major players signing the Accord de Montral.[15]
This agreement has prevented a forced liquidation, which
would have resulted in losses of CAD $20 billion.[10] In
the fall of 2008, Marc Carneys negotiation skills [16][17]
ensured the completion of what would be considered the
largest restructuring in Canadian history. In 2008, RBC
Dexia positioned the Caisse in the rst quartile for returns
amongst the large pension funds. [18] Recently, investors
that had purchased ABCP could recuperate as much as 95
cents for every dollar initially invested.[10][15][19][20][21] In
the end, the impact was minimal for institutions such as la
Caisse de dpt who recorded a negative impact of 0.1%
on the return of depositors.[22]

[1] Structured Investment Vehicle. Askville. Retrieved 25

August 2013.
[2] Citi Agrees to Acquire SIV Assets for $17.4 Billion (Update1)". Bloomberg. 19 November 2008.
[3] The Financial Crisis Inquiry Report (PDF). National Commission on the Causes of the Financial and Economic Crisis in the United States. 2011. p. 252.
[4] Neate, Rupert (7 July 2009). "$400bn SIV market sold
o in two years. The Daily Telegraph (London).
[5] http://www.ft.com/cms/s/0/
19db6e24-8fff-11dd-9890-0000779fd18c.html
[6] Covitz, Daniel, Nellie Liang and Gustavo Suarez (2009).
The conduit is referred to as a structured investment
vehicle. The evolution of a nancial crisis: Panic in the
asset-backed commercial paper market. Division of Research & Statistics and Monetary Aairs, Federal Reserve
Board.
[7] Board of Governors of Federal Reserve System. http://
www.federalreserve.gov/releases/cp/about.htm.
[8] Acharya, Viral, Philipp Schnabl and Gustavo Suarez
(2010). Securitization Without Risk Transfer, September
2010, NBER Working Paper No. 15730
[9] Acharya, Viral, Philipp Schnabl(2010). Do Global Banks
Spread Global Imbalances? Asset-Backed Commercial
Paper during the Financial Crisis of 200709. IMF Economic Review, 58(1), 37-73.
[10] Pierre Fortin :
Cinq ans aprs, le point
sur lannus horribilis de la Caisse de dpt
http://www.lactualite.com/blogues/le-blogue-economie/
cinq-ans-apres-le-point-sur-lannus-horribilis-de-la-caisse-de-depot/
[11] The Fundamentals of Asset-Backed Commercial Paper.
Structured Finance Special Report. http://www.imf.org/
external/np/seminars/eng/2010/mcm/pdf/rutan1.pdf
[12] Kalemli-Ozcan, Sebnem, Elias Papaioannou and Fabrizio
Perri(2012). Global banks and crisis transmission. Journal of International Economics.
[13] Restructuration des PCAA - Crawford donne
le crdit Rousseau.
http://www.ledevoir.
com/economie/actualites-economiques/236501/
restructuration-des-pcaa-crawford-donne-le-credit-a-rousseau

[14] Perspectives - Linuent gouverneur.

http:
//www.ledevoir.com/economie/actualites-economiques/
365118/l-influent-gouverneur
[15] Des papiers commerciaux payants.
http:
//www.ledevoir.com/economie/actualites-economiques/
401897/des-papiers-commerciaux-payants
[16] ABCP ascos silver lining. http://business.financialpost.
com/2013/02/18/abcp-fiascos-silver-lining/
[17] PCAA: un cauchemar logistique prend n.
http:
//www.ledevoir.com/economie/actualites-economiques/
229155/pcaa-un-cauchemar-logistique-prend-fin
[18] Des cowboys?
http://www.ledevoir.com/economie/
actualites-economiques/418124/des-cowboys
[19] Papier commercial - Des titres vendus presque
leur pleine valeur.
http://www.ledevoir.
com/economie/actualites-economiques/394968/
des-titres-vendus-presque-a-leur-pleine-valeur
[20] BlackRock Auctions C$1.5 Billion of Restructured
Short-Term
Debt
Bloomberg.
http://www.bloomberg.com/news/2014-03-13/
blackrock-auctions-c-1-5-billion-of-restructured-short-term-debt.
html
[21] Nouveau
dblocage
pour
la
Caisse
de
dpt.
http://www.ledevoir.com/
economie/actualites-economiques/414435/
papier-commercial-nouveau-deblocage-pour-la-caisse-de-depot
[22] http://www.ledevoir.com/economie/
actualites-economiques/404581/
la-debacle-de-2008-est-de-l-histoire-ancienne-pour-la-caisse-de-depot

External links
http://www.investopedia.com/terms/a/asset_
backed_commercial_paper.asp

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