UK Law and Practice Contributed by: Guy O’Keefe, Richard Jones, Oliver Wicker and Kate Patane, Slaughter and May
5. Synthetic Securitisation 5.1 Synthetic Securitisation Regulation and Structure Synthetic securitisations are common in the UK; whilst this was a relatively quiet market in the immediate aftermath of the financial crisis, it has grown significantly in recent years. Synthetic securitisation is a form of structured finance where credit risks are transferred to investors using credit derivatives or guarantees rather than through the transfer of actual assets. The focus is on the transfer of risk rather than the transfer of the underlying assets themselves, as found in traditional securitisations. Synthetic securitisa - tions, like true sale securitisations, operate by virtue of general principles of English contract and property law, although the UK Securitisation Regulations Framework does apply. In terms of structure, a synthetic securitisation typically involves the following elements. • CDS or credit-linked notes (CLN) – the originator (usually a bank) enters into a credit default swap with an SPE or directly with investors. Alternatively, an SPE may issue credit-linked notes to investors, where the payments on the notes depend on the perfor - mance of the reference assets. • Reference portfolio – this comprises the assets whose risks are being transferred. The originator still holds the actual assets, and only the credit risk is shifted to the investors. • Tranching – like traditional securitisations, synthetic transactions are structured with different levels of risk, creating tranches that allow for varying degrees of protection for investors and different levels of return. It is worth noting, however, that bonds issued for the purpose of synthetic securitisation are not
eligible to use the designation “European Green Bond”.
6. Structurally Embedded Laws of General Application 6.1 Insolvency Laws The purpose of a securitisation is to give the investor exposure to the credit risk of underlying obligors, not the originator. Structural protections and contractual provisions are designed not only to insulate the SPE’s assets from creditors of the originator in the event of insolvency, but also to ensure that investors are exposed only to the obligors. In particular, steps are taken to reduce the possibility of an insolvency practitioner suc - cessfully unwinding the transfer of assets to the SPE in the insolvency of the originator (for example, by alleging that the sale amounted to a preference or a transaction at an undervalue). This is primarily achieved by ensuring that the transfer of assets is by way of a sale (and that it cannot readily be recharacterised as security) that occurs (other than in the case of NPL secu - ritisations) at the face value of the receivables. In addition, confirmations of the solvency of the originator at the time of sale, by way of directors’ certificates, are almost always sought. 6.2 SPEs The key consideration for an SPE is to ensure it is bankruptcy-remote and separate from the corporate group of the originator. This is typi - cally ensured by incorporating an SPE that has no prior history and no contractual relationships other than as part of the securitisation, and that is part of an orphan structure (rather than the corporate group of the originator). The directors of an SPE are typically provided by a corporate services provider that is appointed as part of
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