Ask someone outside the securitisation world what makes a securitisation a securitisation and they will probably start with assets being transferred to an SPV and securities being issued to investors.

An unfunded significant risk transfer transaction can have neither.

The assets remain on the bank’s balance sheet. The credit risk on a defined tranche of those assets is transferred using a guarantee, credit derivative or insurance arrangement. No securities need be issued and no funding need be raised.

Looked at purely as a matter of contractual form, it can seem much closer to a derivative or insurance transaction than to conventional securitisation.

So why do we call it a securitisation?

The derivative, guarantee or insurance contract tells us how the credit risk is transferred. It does not, by itself, explain the architecture around that transfer: why a particular portfolio has been selected, how its credit risk has been divided into tranches, where protection attaches and detaches, what remains with the originator and whether the resulting allocation of risk will continue to work when losses actually arise.

And that last question is particularly important for unfunded SRT.

If the protection is only a promise to pay when losses arise, what does it take to make that promise genuinely “resilient”? And how far can regulators go in making it more robust before the safeguards themselves begin to undermine the attractions of the structure?

Those are the questions we explore in our new article https://www.nortonrosefulbright.com/en-in/knowledge/publications/fd0e5ff7/what-is-a-securitisation-without-securities