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

A risk manager reviews a deal in which the originator, to obtain accounting and regulatory derecognition of the loan pool, must demonstrate that the transfer to the SPV is a true sale. Which feature would most weaken the claim of a true sale?

Full recourse to the originator for credit losses weakens the true sale claim. The originator would still bear the loans' credit risk, so the transaction resembles secured financing and the assets may not be considered legally or economically separated from the originator.

  1. AThe originator retains full recourse to reimburse the SPV for any credit losses on the transferred loansCorrect
  2. BThe SPV is funded by notes sold to third-party investors
  3. CThe servicing is performed by an independent third party
  4. DThe pool consists of homogeneous assets

Explanation

A true sale requires that credit risk is transferred out of the originator and that the assets are beyond its creditors' reach. Full recourse for credit losses keeps the risk with the originator, so the transfer looks like secured borrowing. The other features are consistent with, or neutral to, a true sale.

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