Significant Risk Transfers and Capital Relief Trades: Negotiating, Structuring; Legal and Regulatory Considerations

This program will provide an overview of significant risk transfers (SRTs) and capital relief trades (CRTs) and their increasing prevalence in the U.S. The panel will explain how these transactions work, the legal and regulatory challenges, and the benefits they provide banks and investors, as well as provide guidance for negotiating and structuring these complex transactions.

SRTs encompass several types of transactions including synthetic risk transfers, credit risk transfers, and regulatory CRTs. While there are common characteristics with these types of transactions, each transaction has unique aspects. Taken together, SRTs are one of the fastest growing areas in financial markets and are utilized by banks to manage risk and increase credit availability while also allowing investors to diversify their portfolios.

SRT transactions allow a bank to transfer the credit risk of certain loans to investors such as private credit funds and other private investors while keeping the loans on their books. In addition to reducing the bank's risk of loss in the underlying portfolio, they also reduce the amount of regulatory capital that the bank needs to hold. 

SRT transactions can be applied to a variety of assets including fund finance products, corporate loans, commitments, receivables, derivatives, debt and equity securities, and mortgages. In the U.S., the most common structures for these transactions are indirect or credit-linked notes. 

Executing an SRT transaction requires navigating a number of legal and regulatory issues such as the Volcker Rule, the Dodd-Frank Wall Street Reform Act, insurance recharacterization risks, and Regulation Q's bank capital rules, among others, depending on the structure of the transaction. In September 2023, the Federal Reserve Board (FRB) released FAQs clarifying the rules around Regulation Q and the capital treatment of structured debt involving the sale of credit-linked notes. The FRB's guidance confirmed that when properly structured, these transactions are viewed as valid capital management tools. 

Listen as our authoritative panel examines the current trends and developments with SRTs and CRTs and their most common structures. The panel will also provide tips for avoiding and addressing potential pitfalls with these transactions.