Cash trapping
Asset-Backed Securities glossary · Cash Flow Waterfalls & Triggers
Definition
A mechanism that redirects cash flows that would otherwise go to the residual or sponsor to build or maintain credit enhancement.
Cash trapping in plain English
Normally the leftover cash at the bottom of the deal goes to the sponsor (the company that set it up) as their profit. Cash trapping is a safety rule that says: if the loans start performing badly, stop handing that profit out and instead lock it inside the deal as a cushion to protect the investors. Think of it like a lemonade stand that usually pays the owner every night, but if sales look shaky it holds back the cash in a jar in case a bad week comes. That trapped cash builds up 'credit enhancement' — extra protection so bondholders still get paid even if some loans go bad.
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