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FRM Part II · FRM Exam Part II · An Introduction to Securitisation

A bank originates a pool of mortgages, transfers them to a special purpose vehicle, and retains no meaningful exposure to the transferred assets. Under the regulatory approach to securitisation capital, which condition must be met for the originator to exclude the securitised exposures from its risk-weighted assets?

The originator can remove the securitised assets from risk-weighted assets only if significant credit risk has been transferred to third parties and it no longer controls the assets. Holding equity, consolidating the SPV or requiring AAA ratings are not the recognition conditions.

  1. AThe originator must hold the equity tranche for the full life of the transaction
  2. BSignificant credit risk associated with the underlying exposures must have been transferred to third partiesCorrect
  3. CThe SPV must be a subsidiary consolidated into the originator's accounts
  4. DThe securitisation must be rated AAA on all tranches

Explanation

Operational requirements for recognising risk transfer demand that significant credit risk is transferred to third parties and the originator does not maintain effective control over the assets. Consolidation of the SPV would defeat the purpose, and ratings or equity retention are not the test.

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