Synthetic Securitizations and Derivatives Transactions by Banks

Abstract

With the growth in over-the-counter derivatives markets in recent years and the corresponding development of synthetic securitization technology, the regulatory issues surrounding structured finance transactions by United States banks and thrifts have become increasingly complex. In part because of this, securitization activities of banks have been increasingly a focus of regulatory concern. The use of derivatives by banks raises particular insolvency issues in transactions in which it is important to achieve credit de-linkage of the issuing entity's assets from the credit or insolvency risk of the sponsor. It also raises important non-insolvency issues related to such matters as the regulatory capital treatment of such transactions and the application to such transactions of the rules governing transactions with affiliates. This article seeks to address the repudiation rights of the FDIC with respect to qualified financial contracts, the regulatory capital treatment of credit default swaps and synthetic securitizations, and the treatment of credit derivatives under the rules governing transactions between banks and their affiliates.

TOPICS: Asset-backed securities (ABS), information providers/credit ratings, options