Understand the regulation

While our global report is deliberately jurisdiction-agnostic and therefore draws out common themes, the structures and transaction features available to any particular issuer are totally dependent on the applicable regulatory regime. The rules around what is necessary and what is prohibited in a capital relief trade are not always crystal clear and can change regularly; experienced advisors can help you understand where the red lines really are. For both issuers and investors, knowledge of the underlying regulation is key to understanding why CRT trades look and feel the way they do.

Partnership

Established market participants repeatedly emphasize the idea of CRT trades as a partnership. The investor is generally placing a significant degree of faith in the issuer: the portfolio will usually be serviced in line with the issuer’s usual servicing standards and workouts are conducted in line with its usual credit and collections policies, all with little information passed on to the investor about their actual conduct. Accordingly, the originator is incentivized to work closely with their chosen investor(s) to help get them comfortable with its approach to these issues. After a particular originator and investor have worked together once and built some institutional familiarity, repeat trades can become easier to execute.

Data

It will come as no surprise that accurate and complete data is pivotal for getting a CRT trade off the ground. This is the case for both the historical performance data that the issuer will compile and for the issuer’s ability to accurately translate the losses it records in its systems to the claims it makes against the investor’s credit protection. Building the IT systems capable of giving life to a CRT trade can be time-consuming.

Disclosure

Some portfolios may be fully disclosed, i.e. the investor receives the identity and documentation related to the underlying loans. However, this is generally unusual, and portfolios are more typically “blind” for reasons of confidentiality. Data is presented on an aggregated and / or anonymized basis. The investor will always receive some information in relation to the loans and, while it may be anonymized, it may still be non-public (for example, the occurrence of a credit event on a private-side loan). The originator will have to be comfortable making those disclosures, and the investor will have to be comfortable receiving them, on the agreed basis.

Project management

A first CRT trade is a serious undertaking, especially for an issuer. Significant engagement is required across many internal functions, from management to risk, and IT to accounting. External specialists are also likely to be important, including arranger banks, auditors, technical consultants and lawyers. Advisers can also assist with more specific tasks, such as helping an issuer with its regulatory engagement process, including guidance as to timing and content of notifications, and developing the internal policy framework that may be required to support a CRT program. Any new structure will also need to be diligenced from a tax and accounting perspective.