Every new asset class invariably poses its own particular legal challenges. Whether as a result of the characteristics of the receivable itself, or of the business culture in which it arises, each receivable type can be expected to give rise to a distinct set of legal, tax or regulatory issues. The CDO is no exception in requiring the securitization team to address legal issues that seldom arise in mainstream securitizations.
As an asset type, the CDO is in some ways quite similar to more traditional collateral pools of payment obligations owed by a diversified group of obligors. However, these obligations do exhibit a feature not normally associated with the standard consumer and corporate receivables that have to date been securitized in Canada, in that they arise from individually negotiated transactions. This inherent distinction of the classic CDO gives rise to a rather unique legal issue, one that causes little concern in the securitization of more traditional asset classes - namely, whether the underlying collateral pool has been effectively sold to the securitization vehicle.