Study guide
12.6 Split Shares & Asset-Backed Securities
Canadian Securities Course CSC
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1 Introduction & Exam Overview
About the CSC Exams
2 Chapter 1: The Canadian Investment Marketplace
1.1 The Canadian Securities Industry & the Investment Dealer's Role 1.2 Financial Intermediaries: Banks, Trusts, Credit Unions, Insurers & Pension Funds 1.3 Financial Market Trends 1.4 Investment Capital, Financial Instruments & Financial Markets 1.5 Canadian Exchanges, ATSs, Dark Pools & the Order Protection Rule 1.6 Canadian Securities Regulators, the CSA & CIRO 1.7 Investor Protection: OSFI, CIPF and CDIC 1.8 Ethics, Standards of Conduct & the Client Focused Reforms 1.9 Conflicts of Interest, Complaint Handling & Remediation
3 Chapter 2: The Economy
2.1 Economics Foundations & Measuring Economic Growth 2.2 The Business Cycle & Economic Indicators 2.3 Inflation & Interest Rates 2.4 The Labour Market & Unemployment 2.5 The Bank of Canada & the Inflation-Control Target 2.6 Implementing Monetary Policy: The Operating Band, Market Operations & Transmission 2.7 Fiscal Policy, Deficits & the Challenges of Government Policy 2.8 International Finance & Trade: The Balance of Payments and the Canadian Dollar
4 Chapter 3: Features and Types of Fixed-Income Securities
3.1 The Fixed-Income Marketplace, Bond Terminology & Security 3.2 Protective Covenants, Retirement Provisions & Extendible/Retractable Features 3.3 Government of Canada Securities: T-Bills, Marketable Bonds & RRBs 3.4 Provincial & Municipal Debt and Strip Bonds 3.5 Corporate Bonds, Credit Spreads & Bond Ratings 3.6 Money Market Instruments, Floating-Rate Notes & International Bonds 3.7 Other Fixed-Income Securities & Reading Bond Quotes
5 Chapter 4: Pricing and Trading of Fixed-Income Securities
4.1 Bond Pricing, Price–Yield Relationships & Accrued Interest 4.2 Yield Calculations & Return Measures 4.3 The Term Structure of Interest Rates & Yield Curve Theories 4.4 Fundamental Bond Pricing Properties: Volatility Rules, Duration & Convexity 4.5 Bond Market Trading & Bond Indexes
6 Chapter 5: Common and Preferred Shares
5.1 Common Shares: Ownership Rights, Voting & Restricted Shares 5.2 Dividends, DRIPs, Stock Splits & Consolidations 5.3 Preferred Shares: Features, Cumulative Dividends & Taxation 5.4 Preferred Share Variations: Convertible, Callable, Retractable, Floating & Rate-Reset 5.5 Fundamental Equity Metrics & Ratios 5.6 Stock Indexes & Averages
7 Chapter 6: Equity Transactions
6.1 Order Types, Execution & Market Mechanics 6.2 Margin Trading: Long Accounts & Borrowing 6.3 Short Selling & Short-Margin Requirements 6.4 Trading & Settlement Procedures: T+1, CDS & Confirmations
8 Chapter 7: Derivatives
7.1 Derivatives: Role, Underlying Assets & Users 7.2 Options Fundamentals: Calls, Puts & Moneyness 7.3 Option Strategies & Risk Management 7.4 Forward & Futures Contracts 7.5 Rights & Warrants
9 Chapter 8: Corporations and their Financial Statements
8.1 Corporate Structures & Corporate Governance 8.2 The Annual Report, Accounting Standards & the Auditor's Report 8.3 The Balance Sheet & Income Statement 8.4 The Cash Flow Statement & Earnings Quality 8.5 Public Company Disclosure, Investor Rights, Take-Over Bids & Insider Trading
10 Chapter 9: Financing and Listing Securities
9.1 Government & Corporate Financing: Underwriting and Syndicates 9.2 The Prospectus Process, Stabilization & Purchaser Rights 9.3 The Exempt Market & Private Placements 9.4 The Listing Process: TSX, TSXV & Capital Pool Companies 9.5 Continuous Disclosure, Material Changes & Insider Reporting
11 Chapter 10: Investment Analysis
10.1 Methods of Equity Analysis & Macroeconomic Analysis 10.2 Fundamental Industry Analysis 10.3 Company Analysis: Competitive Advantages, Governance & the Dividend Discount Model 10.4 Discounted Cash Flow & Relative Valuation Multiples 10.5 Financial Statement Ratio Analysis 10.6 Assessing Preferred Share Investment Quality 10.7 Technical Analysis: Charts, Trends & Patterns 10.8 Technical Indicators, Volume, Breadth & Sentiment
12 Chapter 11: Portfolio Analysis
11.1 Measuring Investment Return 11.2 Measuring Risk: Types of Risk, Standard Deviation & Downside Measures 11.3 Portfolio Risk & Return: Correlation and Diversification 11.4 Beta, the Capital Asset Pricing Model & the Security Market Line 11.5 Portfolio Manager Styles: Equity & Fixed Income 11.6 The Portfolio Management Process: Objectives, Constraints & the IPS 11.7 Asset Mix, Monitoring, Performance Evaluation & Rebalancing
13 Chapter 12: Alternative Investments, Other Managed, and Structured Products
12.1 Alternative Investments: Structures, Fees & Liquid Alternatives 12.2 Alternative Strategies, Performance Measurement & Due Diligence 12.3 Segregated Funds, Labour-Sponsored Funds & Listed Private Equity 12.4 Income Trusts, REITs & Closed-End Funds 12.5 Structured Products: PPNs & Market-Linked GICs 12.6 Split Shares & Asset-Backed Securities
14 Chapter 13: Mutual Funds
13.1 Managed Products & Mutual Fund Structure 13.2 Pricing Mutual Fund Units: NAVPS & Forward Pricing 13.3 Mutual Fund Fees, Sales Charges & Unit Series 13.4 Mutual Fund Regulation, Fund Facts & Account Opening 13.5 Types of Mutual Funds & Fund Management Styles 13.6 Redemptions, Withdrawal Plans & Measuring Fund Performance
15 Chapter 14: Exchange-Traded Funds (ETFs)
14.1 ETF Origins, Structure, Tax Efficiency & ETF Facts 14.2 ETF Creation, Redemption & Arbitrage 14.3 Types of ETFs & Advanced Strategies 14.4 Comparing ETFs, Mutual Funds & Individual Securities
16 Chapter 15: Working with the Institutional Client
15.1 The Institutional Marketplace & Institutional Clients 15.2 Institutional Investment Guidelines, Styles & Restrictions 15.3 Buy Side & Sell Side: Trading Desks, Revenue, Clearing & Best Execution 15.4 Block Trading, Dark Pools & Algorithmic Trading
17 Chapter 16: Fee-Based Accounts and Working with the Retail Client
16.1 Fee-Based Accounts: Managed & Non-Managed Models 16.2 Fee Transparency, CRM2 & Total Cost Reporting, and MWRR vs. TWRR 16.3 The Financial Planning Approach & the Life Cycle 16.4 Behavioral Finance, Sequence-of-Returns Risk & Client Coaching 16.5 Estate Planning Basics
18 Chapter 17: Canadian Taxation
17.1 The Canadian Taxation System 17.2 Taxation of Investment Income 17.3 Capital Gains, Losses & The Superficial Loss Rule 17.4 Registered vs Non-Registered Tax-Advantaged Accounts 17.5 Tax Planning Strategies, Pension Plans & the RDSP
12.6 Split Shares & Asset-Backed Securities
Key Takeaways Explain This Topic AI
A split share corporation holds a portfolio of shares and issues preferred shares (fixed dividends, priority on capital) and capital shares (residual value and leveraged upside).
Capital shares magnify gains and losses in the underlying portfolio; preferred shareholders are protected by asset coverage.
Asset-backed securities are created when a pool of loans or receivables is sold to a special purpose entity that issues securities backed by the pool's cash flows.
Tranching gives senior classes first claim on cash flows; junior and equity tranches absorb losses first.
Canada's 2007 non-bank ABCP crisis showed the liquidity, complexity and transparency risks of asset-backed products.
Last updated: October 2026
Structured products repackage the cash flows of underlying assets to create securities with different risk and return profiles. Principal-protected notes and market-linked GICs were covered earlier; this section covers split shares and asset-backed securities.
Split Share Corporations
A split share corporation buys a portfolio of common shares (often a group of Canadian banks or other dividend payers) and finances it by issuing two classes of shares, usually sold together as units:
Class What holders receive Risk profile
Preferred shares A fixed (or reset) dividend and a fixed redemption amount at termination; first claim on the portfolio Lower risk, protected by asset coverage
Capital (Class A) shares Whatever is left after the preferred shareholders are paid: remaining dividends plus all capital appreciation Higher risk, effectively leveraged
Most split share corporations have a set termination date, when the portfolio is sold and the preferreds are redeemed first. Many suspend distributions on the capital shares if the portfolio's net asset value per unit falls below a set level, to protect the preferred shareholders.
Worked Example: The Leverage in Capital Shares
A split share corporation holds $20 of bank shares for each unit. Each unit consists of one preferred share with a $10 redemption value and one capital share.
Starting point: capital share value = 20 − 10 = 10 20 - 10 = 10 20 − 10 = 10 dollars; preferred asset coverage = 20 / 10 = 2.0 20 / 10 = 2.0 20/10 = 2.0 times.
Portfolio rises 20% to $24: capital share value = 24 − 10 = 14 24 - 10 = 14 24 − 10 = 14 dollars, a gain of 40% .
Portfolio falls 20% to $16: capital share value = 16 − 10 = 6 16 - 10 = 6 16 − 10 = 6 dollars, a loss of 40% ; preferred coverage falls to 16 / 10 = 1.6 16 / 10 = 1.6 16/10 = 1.6 times.
A 20% move in the portfolio produces a 40% move in the capital shares: the preferred shares act like borrowed money for the capital shareholders. If the portfolio fell below $10 per unit, the capital shares would be worthless and the preferreds would not be fully repaid.
Taxation: the corporation passes through Canadian dividends (eligible for the dividend tax credit) and capital gains. Risks include concentration in a few issuers, leverage for the capital shares, distribution suspensions, and early redemption or extension of the termination date.
Asset-Backed Securities (ABS)
Securitization turns illiquid loans into tradable securities. The steps are:
An originator (a bank, finance company or retailer) makes loans or generates receivables: credit card balances, auto loans, equipment leases, mortgages or trade receivables.
It sells a pool of these assets to a special purpose entity (SPE) , often a trust, which separates the assets from the originator's own credit.
The SPE issues asset-backed securities , which are paid from the pool's cash flows.
Tranching and Credit Enhancement
ABS are usually issued in tranches with different priorities:
- Tranche Priority Typical rating
- Senior Paid first; last to absorb losses AAA or high investment grade
- Mezzanine Paid after senior Lower investment grade
- Equity (first-loss) Paid last; absorbs losses first Unrated, often kept by the originator
For example, a $100 million pool might fund $80 million of senior notes, $15 million of mezzanine notes and a $5 million equity piece. If the pool suffers $8 million of losses, the equity tranche is wiped out ($5 million) and the mezzanine tranche loses $3 million, while the senior notes are untouched.
Other credit enhancements include overcollateralization (the pool is larger than the securities issued), reserve accounts , excess interest spread, and third-party guarantees. Government-backed mortgage securities (NHA MBS and Canada Mortgage Bonds) are a special case because CMHC guarantees them.
Common Asset Types
Credit card receivables: major Canadian banks fund part of their card balances through credit card trusts that issue term notes.
Auto loans and leases: banks and the finance arms of car makers securitize car loans and leases.
Equipment leases and dealer floorplan loans: financing for businesses and car dealers.
Residential mortgages: NHA MBS, guaranteed by CMHC, are by far the largest Canadian securitization market.
Covered bonds are a related bank funding tool. They are obligations of the issuing bank and are also backed by a ring-fenced pool of mortgages, so investors have a claim on both (dual recourse). Unlike most ABS, the assets stay on the bank's balance sheet.
Who Should Hold ABS?
Most ABS are sold to institutional investors that can analyze the collateral and structure; retail investors usually gain exposure through bond funds. Before recommending any asset-backed product, an advisor must understand the collateral, the tranche's place in the payment priority, and how easily the security can be sold.
The 2007 ABCP Crisis
Asset-backed commercial paper (ABCP) is short-term paper issued by conduits that hold longer-term assets. In August 2007, the Canadian market for non-bank-sponsored ABCP froze: investors stopped rolling over the paper, the liquidity backstops did not work as expected, and the underlying assets were complex and opaque. About $32 billion of paper was frozen until it was restructured into longer-term notes under the Montreal Accord . The crisis led to tighter rules for short-term debt exemptions and greater attention to liquidity, complexity and conflicts in structured products.
Key ABS risks: credit risk of the underlying borrowers, prepayment risk (especially for mortgages), liquidity risk, model and rating risk, and the complexity of the structure.