Getting to grips with significant risk transfers (SRTs)

While capital relief transactions have been around since the 1990s, their use has evolved over time with a sharp rise in the last few years via Significant Risk Transfers (SRT). Once a niche tool for capital relief with a limited investor base, issuance has increased over the last few years, reflecting greater demand for private credit products in the fixed income market. In 2024, there was a 30% increase from the previous year, with a total issuance of EUR 21.4 billion worth of transactions referencing EUR 260 billion in underlying loans.

Recent market events have brought the broader private credit sector under closer regulatory scrutiny, with two bankruptcies resulting in significant losses across the financial sector. While not directly related to SRTs, they share the same underlying risks such as the quality of underwriting standards and the use of complex financing or risk transfer solutions. Moving forward, firms will be under increased pressure to demonstrate effective governance, oversight and regulatory compliance of complex transaction, including SRTs. 

What are significant risk transfers in finance? 

While securitisation and SRTs follow the same fundamental structure, they serve different purposes. Securitisation is a widely used financing tool where pools of loans are tranched into differing risk classes with the senior classes sold to investors, who finance the risk until its optional redemption date. On the other hand, SRTs are a synthetic securitisation used for capital management, where only the junior risk is transferred to investors (with the bank retaining the senior classes). This allows issuers to reduce their capital requirements and improve their capital efficiency while keeping the loan reference pool on the balance sheet. 

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Identifying systemic risk 

The recent US bankruptcies had a significant impact on the financial sector, bringing renewed focus on underwriting stands and complex financing vehicles. Key impacts on the credit and leverage loan markets include: 

• US leverage loan and CLO ETFs had the first outflow in six months (around USD 1.5 billion) 
• a G-SIB took a USD 170 million charge, which was tied to one of the bankruptcies.

While these bankruptcies and the wider financial impact are currently seen as idiosyncratic events, Andrew Bailey, Governor of the Bank of England, has warned of parallels with the financial crisis. In 2008, initial defaults were also seen as idiosyncratic before their frequency revealed systemic issues. Key considerations for businesses, risk managers and senior management functions includes:

• underwriting quality and potential exposure to ‘hidden’ correlation risks and concentrated exposures created by the use of credit derivatives  
• ensuring that SRTs offer effective risk transfer in normal and stressed market conditions
• having sufficiently detailed management information to monitor consolidated exposures across the firm, including the interlinked nature of lending to private equity and private credit sponsors (for example through credit exposure to NAV loans, interest rate swaps, credit facilities or direct loan origination).

Increased regulatory scrutiny 

Given the potential for systemic events, regulators are putting SRTs under greater scrutiny and we could see a rise in regulatory enquiries. Key regulations in this space are outlined below. 

PRA expectations

In July the PRA issued an update to SS9/13 ‘Securitisation: Significant Risk Transfer’, which takes effect on 1 January 2026. The updates expand on several key points, namely: 

• clarity on the ‘substance over form’ test to ensure the reduction in RWA isn’t simply a legal or structural change and is commensurate with the transfer of risk – particularly for high-cost protection transactions
• additional requirements for unfunded credit protection including monitoring creditworthiness of the credit protection seller (in relation to SS7/13 on ‘Credit risk mitigation’)  
• clearer transaction documentation to demonstrate the reason for loan exposure exclusions or repurchasing SRTs, and the implications of this implicit support on capital relief. 

These updates reflect concerns outlined in the PRA’s Dear CFO letter on ‘Significant risk transfer financing: Prudential expectations’, from April 2025. The letter highlighted the need for capital treatments to match the economic substance and liquidity of the underlying exposures, rather than their packaging or legal form. Key concerns include misclassification of illiquid SRTs; inadequate collateral-eligibility assessment; repackaging illiquid loans or structured notes to appear liquid; and inconsistent control and governance processes.

Basel 3.1 and CRR/CRD VI 

These regulations introduce important changes for SRT issuers, including:

• reduced capital relief from issuing SRTs due to revised credit risk and IRB calibrations
• an output floor that limits the divergence of IRB capital compared to SA – this reduces the benefit of an SRT transaction but increases its importance as a capital management tool for IRB firms
• more detailed Pillar 3 disclosures including greater reporting of underlying credit exposures, credit enhancements, capital calculations and ESG/sustainability factors – requiring greater transparency over SRT transactions, risk retention and portfolio exposures
• supervisory dialogue over changes to material models, which may include SRT models as they require recalibrations of LGD, EAD and correlation. 

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Key challenges for issuers

Issuers need to effectively manage SRT transactions throughout their lifecycle, supported by a strong risk culture, with effective governance and monitoring frameworks. While maintaining regulatory compliance is crucial, firms need to focus on continuous transaction monitoring (particularly for repeat issuances), recognising the increasing volume of SRTs and their potential materiality.

Exposure monitoring

Chief risk officers, risk managers and traders need a clear picture of their first and second order risks. Firms need to consider multiple SRT issuances across varying portfolios compositions, tenors, and structures with varying leverage ratios. 

Looking beyond capital relief calculations, it’s also important to consider correlated exposures to financed SRTs. For example, investing in third-party issued SRTs or structured financing transactions backed by SRTs (via repurchase agreements or total return swaps). 

Model risk management

SRT issuers need effective model management, in line with the PRA’s SS1/23, including independent challenge, back-testing, and escalation of model deficiencies. For SRT, this includes all models and assumptions used to justify risk transfer, including loss distributions, correlation assumptions, tranche pricing and stress testing. 

Model changes connected to securitisation must follow the same change control, back-testing, and governance as any other capital model, and firms must disclose the residual risks. 

Data quality

As there’s no observable market for SRT transactions or underlying loan portfolios, high-quality data is essential for valuing mark-to-model products. This includes detailed data on the underlying pool of legacy loans, with clear data lineage throughout the transaction lifecycle.  

Counterparty risks and capital adequacy

Unfunded protection for SRT structures increases the leverage and complexity of the transaction, and the associated credit risk. Firms need to stress test the counterparty credit correlation to the underlying portfolio (especially for wrong-way risks). They must integrate that exposure into the firm’s capital planning through ICAAP and SREP assessments, with the appropriate stresses applied. 

Sustainability-linked transactions

SRT transactions need to be factored into issuers’ sustainability frameworks. This includes the anti-greenwashing rule and alignment to the labelling regime and marketing rules under the Sustainability Disclosure Requirements (SDR). It’s important to reflect changes to the portfolio composition over the transaction lifecycle, disclosing them as necessary. Firms should also consider how SRTs align with broader sustainability pledges and goals. 

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Next steps

Moving forward, SRT issuers will be under greater regulatory scrutiny and must be able to demonstrate a robust risk management and control framework. This includes evidence of effective capital optimisation to give stakeholders confidence that firms are identifying and managing their credit risk appropriately. To get started, risk management teams can: 

• review current risk management frameworks to ensure they reflect PRA, Basel 3.1 and SDR requirements with oversight that’s proportionate and aligned with broader risk culture objectives
• assess data aggregation and management information frameworks for a real-time, non-siloed view of risk across multiple SRT portfolios and structures to support timely decision-making processes
• ensure all SRTs are supported by robust model risk management processes, with appropriate validation, governance and oversight processes
• identity counterparty exposures, integrate stress scenarios for wrong-way risks, and align these outcomes with ICAAP and SREP capital planning
• review all SRTs and ensure they align with broader sustainability goals – with processes in place to update this over time. 

For further information on SRTs, contact Kantilal Pithia, Supriya Manchanda or Rebecca Deane.