The UK’s Prudential Regulation Authority has given the green light to unfunded synthetic securitisations with a policy statement that was released on July 17 2025. Industry participants have welcomed the development which was expected following an October 2024 consultation that raised prospects. However, the PRA still considers unfunded credit protection as a ‘’complex’’ feature and the existing CRR requirements in relation to the use of unfunded credit protection in synthetic securitisations still apply.
Jeremy Hermant, structurer at Alantra notes: ‘’Unfunded investors are now allowed as protection providers which will offer cheaper protection in some cases depending on risk appetite.’’
The UK’s PRA never had a black letter restriction prior to the October 2024 consultation and the latest policy statement. Hence, there was nothing to repeal or amend before the policy change took effect, but market participants had in practice encountered resistance from the PRA when it comes to the utilization of the unfunded format, although there was an exception for tranches attaching above the mandatory SRT risk transfer thresholds.
The policy statement confirms a sea change in attitudes as the UK shifts its focus to competitiveness in line with international trends.
Jo Goulbourne Ranero, consultant at A&O Shearman comments: ‘’the PRA’s decision to permit the use of unfunded credit protection (UFCP) in synthetic SRT transactions was expected in light of October’s consultation proposing the change (CP13/24), but remains a highly significant development, likely to improve UK competitiveness, potentially unlock additional deal-flow and improve investor diversification.”
She continues: ‘’Yet the PRA still regards unfunded credit protection as a ‘complex feature’ to be discussed by a firm with its supervisor at an early stage, and expects originators-as part of the monitoring and stress-testing of SRT transactions-to assess the risk of a downgrade of the protection provider and the implications for the effectiveness/eligibility of the unfunded credit protection and to reflect this in their capital planning.’’
Moreover, the existing CRR requirements in relation to the use of unfunded credit protection in synthetic securitisations also still apply. The latter include mechanics to account for the residual credit risk on the unfunded credit protection provider and credit rating requirements such as A- or better at inception and BBB- or better thereafter.
Ranero explains: ‘’in the UK, unlike in the EU, the credit rating requirements continue to apply to domestic insurers. Beyond these provisions, however, the PRA does not propose any Basel super-equivalent restrictions.’’
The policy change will take effect from one January 2026 so not as soon as the industry had hoped. However, “it’s helpful that the PRA hasn’t held up the reform with the CRR3.1 delay to other matters covered in October’s consultation” says Ranero.
The PRA delayed the implementation of CRR 3.1 to one January 2027 and due to this the supervisor has split the securitisation related content of its October consultation (CP13/24) between matters it regards as linked to CRR 3.1 such as p factors, asset risk weight limits for prudential STS eligibility, and refinements to the credit risk mitigation approach hierarchy for securitisations as well as the prudential treatment of HMT MGS treatment.
“The CRR3.1-related topics will be addressed in a subsequent policy statement and only matters the PRA does not regard as conceptually linked to CRR 3.1 are addressed here’’ states Ranero.
Another reform in the policy statement relates to the senior managers who can sign off on SRT trades.
Ranero notes: ‘’The latter includes a requirement for oversight and approval by the chief finance function (SMF 2) and any senior manager holding Prescribed Responsibility (PR) O or AA and CC if a different person.’’
However, in light of industry concerns about the bottlenecks this could create in large institutions, the PRA has amended the draft expectations to clarify that a Senior Manager, while retaining accountability for the oversight and approval of these transactions, may rely on expert input and/or delegate the act of signing and submitting notifications, where this is consistent with the PRA’s expectations on reasonable steps and delegation.
