Behind the Synthetic Capital Relief: Understanding the Litigation Risk Landscape

Herbert Smith Freehills Kramer LLP have published an article in Butterworths Journal of International Banking and Financial Law on synthetic capital relief transactions (SRTs) and the litigation risks which may arise from their use. 

The market for SRTs has expanded rapidly in recent years. While structurally diverse (often including guarantees, Credit Default Swaps, Credit-Linked Notes and other structured products), these transactions are used by banks to transfer credit risk and optimise regulatory capital, and by investors to access diversified credit exposure with attractive risk-adjusted returns.

Although terminology is not consistent across jurisdictions, "SRT" is often used in Europe as shorthand for transactions designed to achieve significant risk transfer for regulatory capital purposes, whether through synthetic or cash securitisation structures. In other markets, particularly the United States, similar transactions are more commonly described as credit risk transfers or synthetic risk transfers, even where no formal regulatory "significant risk transfer" designation exists.

In our article, we examine the increased scrutiny from regulatory bodies of SRTs, areas where potential disputes may arise and how such risks may be mitigated. 

This article can be found here: Behind the Synthetic Capital Relief: Understanding the Litigation Risk Landscape. This article first appeared in the July 2026 edition of JIBFL.