Securitization Sample

Sample Use-Case Parameters Blockchain application samples should include detail around the following items: Industry, Use-case, and High-level description Participants, Assets, and Transactions Integrations (Not included here) Reference network topology or architecture diagram (Not included here) Blockchain network .bna file (Not included here)

Identifying a Good Blockchain for Business Use Case Questions to ask: Is there a business network involved? Blockchain solutions for business require a network of organizations in order to be useful. Is information shared across multiple organizations? Shared ledgers are at the core of blockchain solutions. Are assets exchanged between organizations? Is there a need for business network consensus? Blockchain provides a method of transaction validation. Is there a need to track asset provenance? Blockchain solutions provides a method for creating audit trails. Is ledger immutability necessary? Blockchain solutions provide capabilities for tamper proof transactions. How important is transaction finality? Blockchain solutions reduce transaction disputes. Is there a large market value surrounding the use case? Indicates that a business network may be willing to invest in the technology infrastructure needed to solve the problem.

Example: Securitization

Securitization Overview What is Securitization? The process of transforming illiquid assets into a security. Why is it done? A security is more trade-able than the asset itself, and therefore more liquid than the underlying loan or receivables. Securitization can lower risk, add liquidity, and improve economic efficiency.  Sample Participants: Loan Originator Special Purpose Vehicle Investors Rating Agency Trustee Financial Guarantee Provider What can be securitized? Any asset capable of producing cash flows Asset Examples: Residential Mortgage Loans Commercial Mortgage Loans Bank Loans and Businesses Commercial Debt Student Loans Credit-Card Debt Automobile Loans Royalties Advertising Revenue Public-sector assets

Mortgage-Backed Securities Use-Case: Mortgage-Backed Securities Business Need Jones Financial Co. would like to securitize a subset of its mortgage loan assets in order to reduce leverage on the company’s books. What Happens? Jones Financial Co. will need issue securities to investors, backed by a pool of mortgage assets, through a Special Purpose Vehicle, which is an organization set up specifically for the purpose of issuing securities. The Special Purpose Vehicle will own and hold the mortgages to be securitized and will be the entity that will issue securities to investors. Assets Mortgage Loans Mortgage-Backed Securities Cash Payments Participants Jane Lee (Consumer) Jones Financial Co (Loan Originator) Jones Special Purpose Vehicle (Special Purpose Vehicle) ABS Investors (Investors) R&O Rating Agency (Rating Agency) Smith Trustee (Trustee) Main St. Guarantee (Financial Guarantee Provider)

Participants and Roles Jane Lee – Consumer Purchase homes via mortgage from the Financial Company Jones Financial Co – Loan Originator Originates mortgage loans to consumers Sells mortgage loans to Special Purpose Vehicle Services mortgage loans Jones Special Purpose Vehicle – Special Purpose Vehicle Organization set up by Financial Company specifically for the issuance of mortgage-backed securities. Owns the pool of mortgage loans that are to be securitized, and issues the securities ABS Investors – Investors Purchases the securities from the Special Purpose Vehicle Receives payments from securities C&O Rating Agency – Rating Agency Rates the pool of assets which are to be securitized Smith Trustee – Trustee Responsible for administering the Special Purchase Vehicle Main St Guarantee – Financial Guarantee Provider Enhance the credit rating of the assets

Securitization: Initial Set-up and Exchanges

Securitization: Initial Set-up and Exchanges Jane Lee purchases a home and finances it with a mortgage originated by Jones Financial Co. Jane Lee Cash Primary Participant Jones Financial Co Secondary Participant Cash Mortgages Securities

Jones Special Purpose Vehicle Securitization: Initial Set-up and Exchanges Jones Financial Co. sets up an organization named Jones Special Purpose Vehicle, solely for the purpose of securitizing its assets. Jane Lee Cash Primary Participant Jones Financial Co Jones Special Purpose Vehicle Secondary Participant Cash Mortgages Securities

Jones Special Purpose Vehicle Securitization: Initial Set-up and Exchanges Jones Special Purpose Vehicle must be a completely separate entity from Jones Financial Co, so Smith Trustee is brought in to handle all administration of the organization. Jane Lee Cash Primary Participant Jones Financial Co Jones Special Purpose Vehicle Secondary Participant Cash Mortgages Securities Smith Trustee Trust Agreement

Jones Special Purpose Vehicle Securitization: Initial Set-up and Exchanges Jones Financial Co pools the subset of mortgage assets which it would like to securitize, and transfers ownership to Jones Special Vehicle. Jane Lee Cash Primary Participant Jones Financial Co Jones Special Purpose Vehicle Secondary Participant Cash Mortgages Mortgage Assets Securities Smith Trustee Trust Agreement

Jones Special Purpose Vehicle Securitization: Initial Set-up and Exchanges Main St Guarantee is brought in to perform third-party credit enhancement of the pool of mortgage assets, in advance of an asset credit rating. Jane Lee Cash Primary Participant Jones Financial Co Jones Special Purpose Vehicle Secondary Participant Cash Mortgages Mortgage Assets Securities Smith Trustee Main St Guarantee Trust Agreement Credit Enhancement

Jones Special Purpose Vehicle Securitization: Initial Set-up and Exchanges R&O Rating Agency performs a credit rating on the pool of mortgage assets, in order to make the assets more marketable. Jane Lee R&O Rating Agency Credit Rating Cash Primary Participant Jones Financial Co Jones Special Purpose Vehicle Secondary Participant Cash Mortgages Mortgage Assets Securities Smith Trustee Main St Guarantee Trust Agreement Credit Enhancement

Securitization: Initial Set-up and Exchanges With the credit rating performed, Jones Special Purpose Vehicle issues mortgage asset-backed securities to ABS Investors. Jane Lee R&O Rating Agency Credit Rating Cash Primary Participant Jones Financial Co Jones Special Purpose Vehicle ABS Investors Secondary Participant Cash Mortgages Mortgage Assets Mortgage Asset Backed Securities Securities Smith Trustee Main St Guarantee Trust Agreement Credit Enhancement

Securitization: Initial Set-up and Exchanges Jones Special Purpose Vehicle receives sale proceeds as a result of the ABS issuance. Jane Lee R&O Rating Agency Credit Rating Cash Primary Participant Jones Financial Co Jones Special Purpose Vehicle Sale Proceeds ABS Investors Secondary Participant Cash Mortgages Mortgage Assets Mortgage Asset Backed Securities Securities Smith Trustee Main St Guarantee Trust Agreement Credit Enhancement

Securitization: Initial Set-up and Exchanges To complete the initial process, Jones Special Purpose Vehicle transfers the sale proceeds received from ABS Investors to Jones Financial Co. Jane Lee R&O Rating Agency Credit Rating Cash Primary Participant Jones Financial Co Sale Proceeds Jones Special Purpose Vehicle Sale Proceeds ABS Investors Secondary Participant Cash Mortgages Mortgage Assets Mortgage Asset Backed Securities Securities Smith Trustee Main St Guarantee Trust Agreement Credit Enhancement

Securitization: Ongoing Exchanges

Securitization Process – Ongoing Exchanges Jane Lee makes her mortgage payments to Jones Financial Co Jane Lee Mortgage Payments Primary Participant Jones Financial Co Secondary Participant Cash Mortgages Securities

Jones Special Purpose Vehicle Securitization Process – Ongoing Exchanges Jones Financial Co transfers the asset pool’s mortgage payments to Jones Special Purpose Vehicle. Jane Lee Mortgage Payments Primary Participant Jones Financial Co Jones Special Purpose Vehicle Secondary Participant Cash Mortgages Mortgage Payments Securities

Securitization Process – Ongoing Exchanges Jones Special Purpose Vehicle transfers Mortgage Servicing Fees to Jones Financial Co, for servicing the mortgages to consumers like Jane Lee. Jane Lee Mortgage Payments Primary Participant Mortgage Servicing Fees Jones Financial Co Jones Special Purpose Vehicle Secondary Participant Cash Mortgages Mortgage Payments Securities

Securitization Process – Ongoing Exchanges Jones Special Purpose Vehicle makes payments to ABS Investors holding the Mortgage Asset Backed Securities. Jane Lee Mortgage Payments Primary Participant Mortgage Asset Backed Securities Payments Servicing Fees Jones Financial Co Jones Special Purpose Vehicle ABS Investors Secondary Participant Cash Mortgages Mortgage Payments Securities

Securitization Process – Ongoing Exchanges Smith Trustee continues to fulfill the responsibilities of the trust agreement to administer Jones Special Purpose Vehicle, and Main St Guarantee continues to fulfill responsibilities related to asset credit enhancement. Jane Lee Mortgage Payments Primary Participant Mortgage Asset Backed Securities Payments Servicing Fees Jones Financial Co Jones Special Purpose Vehicle ABS Investors Secondary Participant Cash Mortgages Mortgage Payments Securities Smith Trustee Main St Guarantee Trust Agreement Credit Enhancement

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