In finance, the full form of OTD is Originate-to-Distribute.
Understanding Originate-to-Distribute (OTD)
The Originate-to-Distribute (OTD) model is a business strategy where a financial institution (like a bank) originates a loan or other asset, and then quickly distributes it to other investors or financial institutions, rather than holding it on its own balance sheet until maturity. This distribution is typically achieved through securitization or syndication.
Key Characteristics of OTD:
- Origination: The financial institution creates the asset (e.g., mortgage, corporate loan).
- Distribution: The asset is sold to other investors, often through packaging it into a security.
- Risk Transfer: The originating institution transfers the credit risk associated with the asset to the investors who purchase it.
- Fee Income: The originating institution earns fees from originating and distributing the asset, rather than relying on interest income over the life of the loan.
How OTD Works:
- Loan Origination: A bank originates a mortgage loan for a homebuyer.
- Packaging: The bank packages together a large number of similar mortgage loans.
- Securitization: The package of mortgages is transformed into a mortgage-backed security (MBS).
- Distribution: The MBS is sold to investors in the capital markets.
Potential Issues with OTD:
The OTD model has been criticized for potentially creating a "moral hazard," where the originating institution may have less incentive to carefully assess the creditworthiness of borrowers, since it is not holding the asset on its balance sheet. This can lead to lower lending standards and increased risk in the financial system, as seen in the lead-up to the 2008 financial crisis.
Example
As referenced by Trade Finance Global, VOXPOP cited Marcus Miller commenting on the originate-to-distribute (OTD) model.
