FRM Part I · FRM Exam Part I · Credit Risk Transfer Mechanisms
In a funded synthetic securitization used by a bank to transfer credit risk on a reference loan pool, which feature distinguishes it from a traditional true-sale securitization?
In a synthetic securitization the loans stay on the originator's balance sheet and only the credit risk is transferred, typically via credit derivatives. A true-sale structure instead moves legal ownership of the assets to a special purpose vehicle.
- AThe loans remain on the originator's balance sheet while risk is transferred via credit derivativesCorrect
- BLegal ownership of the loans moves to an SPV
- CThe originator loses all servicing rights
- DInvestors receive no credit exposure
Explanation
Synthetic securitization transfers credit risk through credit derivatives or guarantees while the assets stay with the originator. True sale moves legal title to an SPV. Investors do take credit exposure in both structures.
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