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

A bank originates a pool of residential mortgages and sells them to a special purpose vehicle (SPV), retaining no exposure and providing no implicit support. Under the Basel securitisation framework, what must be demonstrated for the bank to exclude the underlying exposures from its risk-weighted assets?

The originator must show significant risk transfer and satisfy the operational requirements, such as a true sale and no implicit support. Only then can the securitised exposures be removed from risk-weighted assets. Domicile, a AAA rating or low pool risk weights do not establish capital relief.

  1. ASignificant risk transfer has been achieved and the transfer meets the operational requirements for the saleCorrect
  2. BThe SPV is domiciled in the same jurisdiction as the originating bank
  3. CThe securitisation notes have been issued with an external rating of AAA
  4. DThe pool contains only exposures with a risk weight below 50%

Explanation

Capital relief for an originator depends on achieving significant risk transfer and meeting operational requirements such as true sale and no implicit support. Domicile, a AAA rating or low risk weights are not the tests. A rating on the notes does not itself show that risk has left the originator.

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