Clifford Chance

Introduction to Synthetic Securitisation

17 September 2020

Synthetic securitisations first became popular in the early years of the 21st century, with their popularity reaching a high point just prior to the onset of the global financial crisis in 2008. From 2008 to 2011, synthetic securitisation markets in Europe were quiet, with relatively few transactions executed. However, from 2012 onwards, the market began to return, and in recent years has been one of the fastest-growing and most active segments of the European securitisation markets.

Increasing capital requirements, and the ever-present focus on efficient portfolio management, have resulted in many banks exploring synthetic securitisation as one tool which can be utilised alongside more traditional solutions such as capital raisings and portfolio sales. At the same time, there has been a significant increase in the number of investors who view synthetic securitisation as an attractive investment opportunity. Of particular note has been the emergence of insurers and reinsurers as investors in synthetic securitisation through the provision of tranched portfolio credit insurance.

While the growth trajectory of the past few years is unlikely to continue at quite the same pace, this is now a mature market which looks here to stay. Further, the recent European Commission proposals to extend the “simple, transparent and standardised” (STS) securitisation label to balancesheet synthetic securitisations will increase the economic efficiency of these transactions, and make synthetic securitisation a more viable portfolio management option, particularly for banks operating under the Standardised Approach under the Basel Capital Accord.

This guide provides an overview of synthetic securitisation, outlining the features of such transactions which are commonly seen in the market, as well as discussing some of the structuring and regulatory issues to be considered when putting a synthetic securitisation together.

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