Asset-backed commercial paper

Asset-backed commercial paper (ABCP) is a form of commercial paper that is collateralized by other financial assets. Institutional investors usually purchase such instruments in order to diversify their assets and generate short-term gains.

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 financial institution. The sole purpose of a conduit is to purchase and hold financial assets from a variety of asset sellers. The conduit finances 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.

A structured investment vehicle (SIV) is a non-bank financial institution established to earn a credit spread between the longer-term assets held in its portfolio and the shorter-term liabilities it issues with significantly 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 usually rated AAA until the onset of the financial crisis. They did not expose themselves to either interest rate or currency risk and typically held asset to maturity. SIV's differ from asset-backed securities and collateralized debt obligations in that they are permanently capitalized and have an active management team. They do not wind-down at the end of their financing term, but roll liabilities in the same way that traditional banks do.

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