Challenges and solutions for securities portfolios

Dima Babykin

Debt securities are financial assets that entitle the holder to receive interest payments and principal at maturity. This type of tradable asset is widely known, and this chapter will provide an overview of the typical challenges that institutions can encounter when implementing CECL guidelines for debt security portfolios, and a number of common solutions and recommendations will also be presented. First, there will be an overview of securities, including their accounting treatment under CECL, followed by a look at several of the most common challenges, which is subdivided into data, modelling and special types of security.

SECURITIES IN THE CECL FRAMEWORK

Securities overview

Generally accepted accounting principles (GAAP) defines a debt security as any security representing a creditor relationship with an entity. Debt securities are typically tradable financial assets that give the holder the right to receive interest payments and principal at maturity. At the origination of a security, the lender provides the principal amount to the borrower and in exchange receives a guaranteed interest and principal payments before maturity. Common security agreements include terms