Securitization is the process of converting non-liquid assets into liquid assets in the capital market through marketable securities. The rise in the practice of securitization has led to the growth of short-term instruments backed by the cash flows from other assets, known as asset-backed commercial paper (ABCP). The assets themselves are transferred from the original owner (known as the originator) to a specially created legal entity known as a special purpose vehicle (SPV). This is done primarily to make the originator less vulnerable to bankruptcy.

ABCP conduits can also invest in securities like asset and mortgaged backed securities, corporate and government bonds and Commercial paper issued by other entities.

The advantage of opting for an asset-backed commercial paper is very simple. Let us suppose there are many originators who need cash for short-term requirements against their trade receivable. What these originatore do is, they sell these receivables to a conduit which in return issues the commercial paper. They are basically short term paper of maturity lying between 90 days to 180 days corresponding to present value of such receivables. When they mature, the originator is required to collect the receivables and pass them to the holders of the paper through the conduit.

Entities use the Commercial Paper market so as to have secured permanent financing with minimum chance of defaulting over individual issues. Not only this, issuing asset-backed commercial paper enables an originator to benefit from money market financing, which the securities may otherwise not enjoy of their weak credit rating. Banks generally issues ABCP for balance sheet or funding reasons. However, an ABCP trades exactly as conventional commercial papers).