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

A bank originates a pool of residential mortgages, sells it to a special purpose vehicle (SPV), and retains no meaningful exposure to the pool. Under the Basel securitisation framework, which feature is most important for the originating bank to obtain regulatory capital relief on the pool?

The originator obtains capital relief when significant credit risk has been transferred to third parties and the assets are legally isolated from the bank, so it has no control over them. Ratings, sale price or domicile do not establish risk transfer.

  1. AThe SPV issues tranches that carry external credit ratings of at least AA
  2. BSignificant credit risk associated with the pool has been transferred to third parties and the bank has no control over the assets soldCorrect
  3. CThe pool is sold at a price above its book value
  4. DThe SPV is domiciled in the same jurisdiction as the originating bank

Explanation

Capital relief for an originator depends on a true sale and significant risk transfer: the underlying exposures must be legally isolated from the bank and significant credit risk must pass to third parties. Ratings, sale price and SPV domicile do not by themselves determine relief.

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