FRM Part II · FRM Exam Part II · Credit Derivatives
A bank holds a portfolio of senior loans and wants to transfer the credit risk of the portfolio to an investor while keeping the loans on its balance sheet and without notifying borrowers. Which structure is most consistent with this objective?
A synthetic CDO fits best, because it transfers credit risk through credit default swaps while the bank keeps legal ownership of the loans. Borrowers are not notified and no assignment is needed, unlike a true sale, syndication or participation that moves the assets themselves.
- AA true-sale cash securitisation with assignment of loans to an SPV
- BA synthetic CDO in which credit risk is transferred using credit default swapsCorrect
- CA loan sale through syndication with borrower consent
- DA whole-loan participation with full legal transfer
Explanation
A synthetic CDO transfers credit risk through CDS or similar contracts, so the loans stay on the originator's balance sheet and borrowers are not involved. True sale, syndication and legal transfer all move the legal ownership of the assets, which requires assignment and often borrower consent.
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