An Asset-Backed Security (ABS) is a financial security that represents an ownership interest in a pool of financial assets. These assets can include a diverse range of income-generating loans, receivables, or other financial instruments. The cash flow generated by the underlying assets is used to make payments to the ABS holders. ABS are typically issued by special purpose vehicles (SPVs) or trusts that hold and manage the underlying assets.

Here are key features and components of Asset-Backed Securities (ABS):

1. **Underlying Assets:** The most defining characteristic of ABS is that they are backed by a pool of financial assets. These assets can include auto loans, credit card receivables, student loans, mortgages, or other types of loans and receivables.

2. **Securitization:** The process of creating ABS involves securitization, where a financial institution bundles a pool of assets and transforms them into a tradable security. This process allows the issuer to raise capital by selling securities backed by the cash flows from the underlying assets.

3. **Special Purpose Vehicle (SPV):** ABS are typically issued by special purpose vehicles or trusts, which are legal entities created to hold and manage the underlying assets. The SPV isolates the ABS from the financial condition of the issuer, providing a degree of bankruptcy remoteness.

4. **Tranches:** ABS are often divided into tranches, each representing a different level of risk and return. Senior tranches are the first to receive payments from the underlying assets and have lower risk but lower yields. Subordinated tranches absorb losses first but offer higher potential returns.

5. **Cash Flow Structure:** The cash flows generated by the underlying assets are used to make periodic payments to ABS holders. These payments may include interest and principal, and the structure of cash flows is defined in the offering documents.

6. **Credit Enhancement:** To enhance the credit quality of ABS, issuers may use credit enhancement mechanisms. This can include overcollateralization (holding more assets than the ABS value), subordination (structuring different tranches), and guarantees from financial institutions.

7. **Ratings:** Credit rating agencies assess the creditworthiness of ABS and assign ratings based on the perceived risk associated with each tranche. Higher-rated tranches are considered more secure and receive better credit ratings.

8. **Market Liquidity:** ABS are traded in the secondary market, providing liquidity to investors. However, liquidity can vary depending on market conditions and the specific characteristics of the ABS.

9. **Types of ABS:** There are various types of ABS, including mortgage-backed securities (MBS), collateralized debt obligations (CDOs), and asset-backed commercial paper (ABCP). Each type represents a different pool of underlying assets.

10. **Regulatory Considerations:** The ABS market has faced regulatory changes and increased scrutiny, especially in the aftermath of the financial crisis of 2007-2008. Regulations aim to enhance transparency, disclosure, and investor protection.

Asset-Backed Securities play a significant role in capital markets by facilitating the efficient transfer of risk and capital. They provide a means for financial institutions to convert illiquid assets into marketable securities, thereby raising funds and diversifying risk.