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

A bank wants to transfer the credit risk of a portfolio of corporate loans to investors without selling the loans or notifying the borrowers. It buys credit protection on the portfolio from investors through credit-linked notes issued by a special purpose vehicle. Which feature best describes this structure?

This is a synthetic securitisation. Credit risk on the loan portfolio is passed to investors through credit derivatives or credit-linked notes, while the bank keeps legal ownership of the loans on its balance sheet, so borrowers need not be told or give consent.

  1. AA synthetic securitisation, in which credit risk is transferred while the loans stay on the originator's balance sheetCorrect
  2. BA true-sale securitisation, in which legal ownership of the loans moves to the SPV
  3. CA covered bond, in which the loans stay on balance sheet and investors keep a claim on the bank
  4. DA whole-loan sale, in which borrowers must consent to the transfer of their loans

Explanation

In a synthetic securitisation, credit risk is transferred through credit derivatives or guarantees, while the reference assets remain with the originator. No legal transfer of the loans is needed, so borrowers are unaffected. A true sale requires legal transfer of the assets to the SPV.

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