Clifford Chance

Synthetic Securitisations and Significant Risk Transfer

7 December 2021

A key motivation for banks to execute synthetic securitisations is to reduce the amount of regulatory capital the bank is required to hold in respect of the underlying portfolio. Where the transaction satisfies the requirements for significant risk transfer under the Capital Requirements Regulation (“CRR”), the bank is able to substitute the pre-securitisation capital requirement for each underlying exposure with an aggregate capital calculation based on the securitised tranches.

The requirement for each tranche, will be based on the credit risk of that tranche, with the first loss tranche being viewed as high risk and the senior tranche receiving a significantly lower risk weight. By transferring the exposure to some or all of the riskiest tranches to investors, as is typically the case for synthetic securitisations, the reduction in regulatory capital for originators can be significant.

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