Risk Retention

As is widely known in the market, risk alignment is implemented via a minimum twenty percent retention requirement in our transactions. This has been engrained as a hard requirement in our transactions since the inception of our mandate in 2006.

We believe that for the CRS transactions we invest in, which reference the riskiest tranche (first loss or second loss) of a synthetic securitisation, a twenty percent retention ensures that the bank originating the credit risk has sufficient skin in the game. It is essential that the originator of the credit risk wants to continue to hold that risk, instead of originating it to sell as fast and as much as possible. We believe it is important that our risk sharing partner banks remain incentivised to continue to run their loan management process as if there was no risk transfer hedge in place. Any lower level of alignment would open up the risk that fees and coupons received in the early years of the loan sufficiently make up for any potential loss on the retained part further down the line. We believe that a sufficiently high risk retention level – at least twenty percent - could further safeguard opportunistic behaviour by originators and therewith is beneficial for stakeholders other than the investor as well.

Our minimum twenty percent risk retention requirement is stricter than the regulatory minimum requirement of five percent. We have been implementing our requirement in all of our transactions since 2006, predating the European regulatory minimum requirement by seven years. We note that the regulatory requirements applies to the entire spectrum of securitisation transactions, which for a large part consists of senior tranches of true sale securitisations. We believe there is a significant difference in risk profile between a true sale securitisation’s senior – or ‘last loss’ - tranche and a synthetic securitisation’s first loss tranche. Many times with true sale securitisations, the issuing bank holds the first loss tranche on its balance sheet. This is then additional skin in the game, ensuring more than five percent alignment in practice. We want to reiterate our belief that for CRS transactions, where the investors typically invest in a much riskier tranche than with true sale securitisations (first loss versus senior ‘last loss’ tranche), a higher alignment of interest is appropriate.