Securitisation and synthetic risk transfers under scrutiny

Given the key role securitisation played in the financial crisis of 2008, regulators are conscious of the systemic risk it presents and are keen to maintain close supervision. This extends to synthetic securitisation, in the form of synthetic risk transfers, which have become an integral tool to improve capital efficiency. As such, the Prudential Regulation Authority (PRA), the Financial Conduct Authority (FCA) and the Basel Committee for Banking Supervision (BCBS) have recently published papers, to highlight the risks and maintain good practice.

UK securitisation rules are changing

The PRA and FCA have published CP2/26 and CP26/6 respectively, with streamlined regulatory expectations for securitisation, and a less prescriptive, more proportionate approach. Collectively, these consultations signal a move towards a more transparent, risk sensitive approach that allow firms to assess and manage securitisation risks effectively while supporting the UK’s competitiveness across global markets.

Streamlined due diligence requirements

Current securitisation due diligence requirements are complex but don’t necessarily improve an investor's understanding of the risks. As such, the PRA and FCA propose to reduce verification obligations and remove both the prescriptive list of requirements prior to investment, and a broad range of ongoing expectations while holding a securitisation position. These will be replaced with more general requirements for investors to ensure they have adequate information to assess the risks, carry out effective due diligence and monitor performance.

In line with the above, the FCA also removes the requirement for investors to check if a securitisation meets UK Simple, Transparent and Standardised (STS) criteria and replaces verification requirements for risk retention and credit granting with a more principles-based approach.

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An L-shaped risk retention modality

The regulators plan to introduce an additional L-shaped modality to support securitisation risk retention. Moving forward, manufacturers can include a combination of vertical (cross-tranche) risks and horizontal (first loss tranche) exposures to a minimum combined value of 5% of securitised exposures. This offers greater flexibility and stronger alignment with international approaches to boost opportunities for growth.

Transparency and reporting requirements

With sector feedback noting high compliance costs associated with transparency and reporting, the regulators have proposed a streamlined approach. Key updates include changes to the underlying documentation, disapplied templates and deleted PRA templates, in favour of centralised FCA templates which will only apply to specific asset classes. The FCA is also introducing a new template for collateralised loan obligations.

The PRA and FCA also plan to remove most distinctions between public and private securitisation, abolish the need for a securitisation repository, and establish a consistent definition of non-performing securitisation.

Changes to resecuritisation restrictions

Current rules prohibit resecuritisation, but the regulators have proposed two exemptions to improve capital management and liquidity, without introducing material prudential risk:

• securitisation based on tranched credit protection, where that protection applies on an individual exposure basis (such as mortgage guarantee scheme loans)
• resecuritisation of senior securitisation positions, which hold the highest-quality credit.

For a proportionate approach, these exemptions would be subject to an alternative capital treatment to that outlined in Article 269 of CRR, but they would not otherwise qualify for reduced capital requirements.

Clarifying credit-granting criteria

The PRA is amending the wording to the credit-granting criteria of Article 9(1) of the Securitisation Part. It aims to improve underwriting quality and maintain consistency across loans that are intended to be securitised and those that aren’t. The change will also be reflected in the FCA’s SECN 8.2.

Making securitisation rules more readable

The Securitisation Part of the PRA rulebook is still split into regulation and regulatory technical standards, reflecting the structure of pre-Brexit rules. The PRA is reorganising it to reduce duplication to make it easier to read and boost understanding.

Single loan mortgage securitisations for IRB-firms

The PRA is creating a new capital treatment for single loan residential mortgage securitisations, predominantly to allow for the Government’s Mortgage Guarantee Scheme (MGS). These mortgages offer 91-95% loan-to-value ratios, and from a capital perspective they’re treated as a pair of securitisation positions with a first loss guarantee. However, this is challenging for IRB-firms as their loss given default (LGD) models don’t recognise the first loss credit protection. As such, these securitisations can’t achieve significant risk transfer and firms can’t reduce their capital requirements accordingly.  

To address this, the PRA has proposed a new capital treatment to adjust the loss given possession element of the LGD, for the part of the exposure that’s not protected.

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Monitoring synthetic risk transfers

The BCBS has published a paper examining how banks and investors are using synthetic risk transfers, the associated risks and the supervisory expectations that arise from them. As a subset of significant risk transfers, synthetic risk transfers are increasingly integral to the economic landscape, particularly for capital relief for corporate credit risk.

The paper noted that banks often want to extend a lending relationship beyond a synthetic risk transfer’s maturity, and in these instances they would need to establish a new one, sell the loan exposures or raise equity to support regulatory capital requirements. These options are tied to non-bank financial institutions and their ability to take on credit risk, which could be reduced during periods of economic downturns, leading to procyclicality and constraining banks’ ability to lend.

There’s also bank-backed financing to consider. By lending to those investing in synthetic risk transfers, banks are limiting the extent of risk transfer and creating additional credit and counterparty risk. 

To mitigate these risks, banks can diversify the pool of investors, limit use of unfunded synthetic risk transfers, stagger synthetic risk transfers' maturity dates, match underlying loan maturities to synthetic risk transfers end dates and monitor bank-backed financing. However, this is tricky for supervisors due to the lack of data available, with limited transparency or disclosure requirements.

Looking ahead, supervisors may need to consider the extent of a bank’s reliance on synthetic risk transfers for capital management, and how much of its lending is protected by SRTs. It’s also important to consider the overall cost of that protection (with higher costs potentially signalling that the risks aren’t fully transferred), and whether maturity dates are effectively staggered.

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Next steps

The changes in the PRA and FCA consultations are extensive and will have a significant impact on firms’ securitisation practices, reporting and transparency processes. As such, firms can start with a gap analysis to identify areas of simplification and to start designing more proportionate compliance activity. When doing so, it’s essential to remember that the regulators aren’t reducing oversight of securitisation – they’re asking firms to hone their efforts in a more focused way.

This is supported by BCBS’s report on synthetic risk transfers, highlighting the importance of effective supervision over market participants. Most notably, a need for greater transparency over these transactions, including genuine risk transferal to investors, and oversight of procyclicality risks.

The PRA and FCA consultations are open until 18 May 2026.

For further information contact Kantilal Pithia or Rebecca Deane.