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In response to continued increases in regulatory capital requirements, banks and other institutions are looking to securitisation as a capital relief tool. ‘Significant risk transfer’ (SRT) transactions have the potential to help firms manage their balance sheets in a sensible manner. The transfer of risk is subject to strict regulatory requirements and supervision, and there are other factors to take into account beyond the tests set down in the governing legislation. Francesca Segurini and Joy Amis, who specialise in securitisation at Herbert Smith Freehills, answer some questions regarding the regime.
In broad terms, where originator institutions (ie banks) transfer credit risk in relation to an asset or portfolio of assets to a securitisation vehicle (or, in the case of some synthetic transactions, directly to a counterparty via a derivative), they may achieve a reduction in their regulatory capital requirement in relation to the loans they securitised. With the transfer of such credit risk, originator institutions are able to redeploy the capital released. SRT requirements, associated guidance and supervisory process exist to ensure that the reduction in the capital requirement achieved by the relevant institution is commensurate with the risk transferred.
It is worth noting that although the transfer of risk to third parties is recognised by regulators as a legitimate means of risk mitigation and consequentially of reducing capital requirements, the securitisation framework includes a requirement that there is no arbitrage in relation to the treatment of securitised assets as off-balance sheet. The European Banking Authority (EBA) has published guidelines in relation to SRT as part of its focus on the creation of a European Single Rulebook, which highlight the importance for national competent authorities and originator institutions of considering a broad range of factors in determining whether SRT has been achieved.
SRT is regulated through the Capital Requirements Regulation (EU) 575/2013 (the CRR). In particular, CRR, Articles 243
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1.Banking and finance lawyer with experience in derivatives, debt capital markets, securitisation and structured finance in London and Paris
2.Likes ballet, playing the harp and holidays
3.Thinks the law is always changing!
Emma trained and qualified at Allen & Overy LLP and worked in their derivatives and structured finance teams in London and Paris. She then joined the foreign exchange prime brokerage legal team at Deutsche Bank before spending 4 ½ years with Crédit Agricole CIB advising the fixed income and derivatives desk.
0330 161 1234