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

A bank wants to reduce the credit risk and regulatory capital on a EUR 2 billion portfolio of corporate loans without selling the loans or notifying borrowers. It buys protection on a tranche of the portfolio from investors through credit-linked notes and credit default swaps. Which description best characterises this transaction?

This is a synthetic securitisation. Credit risk of the loan portfolio is transferred to investors through credit derivatives or credit-linked notes, while the loans stay on the originator's balance sheet and legal ownership is unchanged, so borrowers need not be notified.

  1. AA true-sale securitisation in which legal title to the loans is transferred to a special purpose vehicle
  2. BA synthetic securitisation in which credit risk is transferred while the loans remain on the originator's balance sheetCorrect
  3. CA covered bond issuance in which the loans are ring-fenced in a cover pool
  4. DA whole-loan sale with full recourse to the originator

Explanation

In a synthetic securitisation, credit risk is transferred through credit derivatives or guarantees, while the assets stay legally with the originator. Borrowers are not affected. A true sale requires transferring title to an SPV, which is not described here.

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