The popularity of synthetic securitisations has continued to expand in recent years, as evidenced by the growing number of originators and investors active in this market.
In our guide to synthetic securitisations, available below, we explore the key considerations for investors when navigating these complex transactions.
In a synthetic securitisation, unlike in a true sale securitisation, there is no sale or transfer of the underlying assets held by an originator. Instead, the originator, acting as a protection buyer, buys credit protection on a portfolio of loans from the investor, and the investor acts as protection seller under a bespoke credit default swap or guarantee. If, during the term of the synthetic securitisation, any obligation included in the reference loan portfolio defaults, the investor makes a payment to the originator to compensate for the corresponding loss subject to an agreed cap.
In a synthetic securitisation the investor does not have any proprietary or contractual rights over the cash flows under the reference obligations, hence the 'synthetic' nature of such securitisation. Unlike a true sale securitisation, a synthetic securitisation results in the transfer of only credit risks with respect to the reference portfolio, since the investor is not taking any market risks of the reference obligations. Since the reference obligations remain on the originator's balance sheet, there is no need to document their transfer from the originator to the investor, and therefore it is not necessary to consider any contractual limitations on transfer under the terms of the reference obligations. This reduces costs and increases the speed of execution.
The synthetic securitisation market was not particularly active until 2012, however the deal volume has grown rapidly since 2013. This has been mostly due to the increased regulatory capital requirements for banks under Basel III, prompting banks to consider alternative options for managing existing loan portfolios which were subject to punitive capital charges. Growth has accelerated since 2020 due to general regulatory acceptance of synthetic securitisation structures and corresponding capital relief being available to the banks. The upward trend has been even more profound since 2021 due to the inclusion of synthetic securitisation in the EU's simple, transparent and standardised framework.
Our guide aims to provide a comprehensive practical overview of synthetic securitisations for both seasoned investors and new investors considering entering this fast-growing market. It covers the fundamental mechanics of the typical legal structures and main risks, recent market trends, the applicable regulatory framework, typical collateral arrangements and the main negotiation points that investors will be expected to be aware of when negotiating the relevant legal documentation for these transactions.
Investors' guide to synthetic securitisations (20-page / 12.3MB PDF)
Contact an adviser
