CRT deals have a few features in common:

• The originator will transfer the credit risk in respect of the relevant assets to the investor using a guarantee, credit derivative, credit-linked note or other similar risk transfer instrument.
• If an asset in the portfolio defaults or writes down, resulting in a loss to the originator, the investor compensates the originator for that loss (or a prescribed portion thereof).
• Unlike true-sale structures, the assets continue to be legally and beneficially owned by the originator (which typically continues to service the assets as it had prior to the transaction).
• The proceeds of the assets are unlikely to be used to directly fund the return to the investors, with the originator instead paying some kind of fee or coupon for the credit protection; however, the investment remains fundamentally “asset-backed”, as the assets’ failure results in the investor covering the resulting loss.

Given the core of a CRT trade is the transfer of credit risk, these instruments also lend themselves to flexibility. While some transactions look and feel very similar to traditional securitizations, differing only in that they involve a synthetic transfer of credit risk on the underlying assets to a special purpose vehicle (SPV) rather than an actual sale, other transactions can take a very different form.

Many CRT trades do not involve an SPV at all (the originator issues the notes itself) and others do not even involve a securities issuance (with the cashflows of a note either being replicated in some other format or, potentially, removed entirely).

This flexibility also translates into accommodating virtually any asset class. Given that the trade focuses on the assets’ credit performance, trades on different assets can look surprisingly similar to each other, compared to equivalent cash deals.