Skip to content

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

A bank sponsors a funded synthetic securitisation. The SPV sells credit-linked notes of USD 100 million to investors and invests the proceeds in AAA-rated government securities, while selling the bank credit protection through a CDS. Compared with an unfunded structure where the bank buys protection directly from a single insurer, what is the main credit-risk advantage of the funded structure for the bank?

The collateral raised from note investors and held in high-quality securities backs the SPV's protection obligation, so the bank's counterparty risk on the protection seller is largely removed. In an unfunded deal the bank depends on the insurer's credit quality instead.

  1. AThe bank eliminates all basis risk between the reference portfolio and the protection
  2. BThe collateral held by the SPV largely removes the bank's counterparty risk on the protection sellerCorrect
  3. CThe bank's exposure to the reference portfolio increases, improving diversification
  4. DThe structure removes the need for any legal documentation of credit events

Explanation

Funded notes mean the protection seller's obligation is backed by cash invested in high-quality collateral, so the bank has little counterparty exposure. An unfunded deal relies on the insurer's creditworthiness. Basis risk and documentation remain in both structures.

Did you get it right without looking?

One question tells you little. A timed set on An Introduction to Securitisation shows your real accuracy, how long you take and where you lose marks.

Practise An Introduction to SecuritisationFree diagnostic mock

More An Introduction to Securitisation questions