Forward flow agreement, also known as FFA, is an important legal document that is commonly used in the financial industry. It is a type of agreement that enables financial institutions, such as banks, to sell their loans to third-party investors. The purpose of the FFA is to ensure that the loans are sold in a standardized and transparent manner, with clearly defined terms and conditions.
In an FFA, the financial institution is referred to as the Originator and the third-party investor is referred to as the Buyer. The agreement stipulates that the Originator will sell a certain number of loans to the Buyer at a predetermined price. The loans are typically packaged into pools, which are then sold to the Buyer as a group.
One of the main benefits of an FFA is that it enables financial institutions to manage their risk exposure. By selling their loans to third-party investors, the financial institution can reduce their exposure to default risk. This is because the loans are no longer on their balance sheet, and any losses incurred as a result of a default will be borne by the Buyer.
Another benefit of an FFA is that it provides a source of liquidity for the financial institution. By selling their loans, they can generate cash that can be used for other purposes, such as lending to new customers. This can help to support the growth of the financial institution, as well as benefit the broader economy.
The terms of an FFA can vary depending on the specific requirements of the financial institution and the third-party investor. However, there are certain key elements that are typically included in the agreement. These include the purchase price, the composition of the loan pool, and the terms of the sale.
In summary, an FFA is an important legal document used in the financial industry to facilitate the sale of loans between financial institutions and third-party investors. It provides a standardized and transparent process for selling loans, which can help to manage risk exposure and generate liquidity. As such, it is a key tool for financial institutions looking to manage their balance sheet and support their growth.
