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Diversification
The primary hallmark of securitizations, whether public or private, is the concept of aggregating a pool of distinct cash flows from a variety of underlying obligors to achieve inherent diversification within the deal structure. Underperformance from some assets within the distinct pool is mitigated by expected performance or even outperformance from other assets within the same distinct pool. As such, cash flows from the distinct pool tend to be statistically predictable in nature and can be adequately relied on to support the interest and principal payments associated with a debt instrument purchased by investors that is reliant on these cash flows.

Cash flowing financial assets are aggregated into a singular legal entity. The originator does so directly by this singular legal entity or transfers them into this legal entity through a number of methods such as an outright sale, assignment or participation. These assets and the rights to their cash flows reside within this legal entity. In typical securitizations, the pools of assets are well diversified, have explicit eligibility criteria so the originator cannot originate and/or contribute assets that are not within pre-determined criteria. The result is a legally protected pool of cash flows available to support the interest and principal payments on the debt instrument that securitization investors purchase that is issued by this singular legal entity.
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