In a synthetic securitisation, the originator keeps the receivables. What is transferred is the credit risk — through a credit derivative or guarantee, under a so-called protection agreement.
Key points
- No sale of the receivables — the assets remain with the originator.
- Risk transfer is effected through credit derivatives or guarantees under a protection agreement.
- Originator acts as protection buyer; the SSPE (or guarantor) as protection seller.
- In return for a premium, the protection seller undertakes to make a compensation payment if a pre-defined credit event occurs.
- The primary purpose is typically regulatory capital relief on the reference portfolio.
How the structure works
Whereas in a traditional securitisation the credit risk is transferred through the insolvency-remote sale of the receivables, in a synthetic securitisation the receivables remain with the originator. Risk transfer is effected under a protection agreement by means of credit derivatives or guarantees.
The risk position whose credit risk is transferred is the reference asset. The originator is the protection buyer and the SSPE (or guarantor) is the protection seller. Under the protection agreement, the originator pays a protection premium to the protection seller; in return, the protection seller undertakes to make a payment — the compensation payment — if a contractually defined credit event occurs.
Why a synthetic?
The typical rationale for a synthetic securitisation is regulatory capital relief. By transferring the credit risk of the reference portfolio to the protection seller, the originator can — subject to the significant risk transfer test — reduce the regulatory capital required against those exposures.
Synthetic securitisations are also attractive where the legal or operational burden of a true sale is disproportionate — for example, where assignment of the underlying receivables is contractually or practically difficult. Corporate loan books and SME portfolios are classic candidates.
Balance-sheet STS: the synthetic quality label
The 2021 amendment to the Regulation extended the STS label to on-balance-sheet synthetic securitisations — often referred to as "balance-sheet STS". The framework builds on the general STS concepts and adapts them to the synthetic context. Core requirements include:
- The originator may not hedge its exposure to the credit risk of the underlying receivables beyond the protection obtained through the protection agreement.
- The underlying exposures must meet pre-defined, clear and documented eligibility criteria — no active discretionary portfolio management.
- Homogeneity: a pool may only contain exposures of a single asset class.
- The pool may not contain derivatives, except interest-rate or currency-risk hedges documented on the basis of common international financial standards.
- The originator must maintain an up-to-date reference register identifying reference obligors, reference obligations and, for each underlying exposure, the covered and outstanding notional amount.
- Specific requirements apply to the design of the protection agreement and the mechanics of the compensation payment.