Synthetic securitisations as a credit risk management tool for banks and non-bank financial institutions in the UAE

As UAE banks and finance companies have experienced strong loan portfolio growth in 2025 and early 2026, coupled with a moderation in capital buffers, there is growing interest in the United Arab Emirates ("UAE") in synthetic securitisations. By enabling regulatory capital relief and credit risk management, synthetic securitisations also offer an attractive private-market tool to support the UAE Central Bank's ("CBUAE") Proactive Financial Institution Resilience Package, which offered temporary capital buffer relief in early 2026 to UAE banks and non-bank financial institutions.

What are Synthetic Securitisations?

Synthetic securitisations allow financial institutions to transfer the credit risk of a selected portfolio of exposures by means of a credit protection instrument to a third-party investor. Under the credit protection instrument, the investor agrees to make good on specified losses suffered by the financial institution if a credit event occurs in relation to an exposure forming part of the securitised portfolio, usually up to a specified cap (i.e. the investment amount). The investor does so in consideration for a protection fee. In contrast to a true sale securitisation, there is no legal transfer of the exposures forming the portfolio to a special purpose vehicle. The exposures remain with the financial institution.

In the UAE, synthetic securitisations can serve as both a credit risk management and capital relief tool for UAE banks and non-bank financial institutions ("UAE Financial Institutions") and a potential investment opportunity for credit-focused investors.

State of the Market

The synthetic securitisation market globally has grown significantly since the global financial crisis, with issuance volumes increasing from USD 60 billion in 2016 to over USD 250 billion in securitised pool sizes in 2026. European banks have driven much of the market growth due to greater capital constraints, whilst North American issuers have significantly increased their activity since 2022.

The UAE market is currently in its infancy, with no reported synthetic securitisations as of today. However, driven by strong loan portfolio growth and moderating capital buffers, UAE financial institutions are increasingly exploring ways to manage concentration risk and capital adequacy, including via synthetic securitisation.

Benefits for Financial Institutions

Regulatory Capital Relief

Despite exposures remaining on the balance sheet of the financial institution, synthetic securitisation may achieve regulatory capital relief. This is the case to the extent they are structured to satisfy the requirements for significant credit risk transfer under the applicable regulatory standards. Hence, synthetic securitisations may serve as an effective tool for solving regulatory capital concerns affecting UAE financial institutions subject to capital adequacy requirements.

Credit Risk Management

The portfolio composition for a synthetic securitisation will be negotiated on a case-by-case basis between the investor and the financial institution. Recently, concentrated portfolios and so-called single-name transactions have increased in popularity. As such, synthetic securitisations can be effective tools for UAE financial institutions to manage their large exposure positions and concentration risk in certain sectors. This is of particular relevance for UAE financial institutions facing sector or counterparty concentration challenges.

Relationship Preservation

Cash securitisation may have an impact on the relationship between the financial institution and its client as counterparty to a securitised exposure, owing to notification requirements, changes to payment channels or, in a default scenario, changes in the servicing entity. Because synthetic securitisations transfer credit risk without a transfer of the securitised exposure, they can achieve capital and risk management objectives whilst having no impact on the client relationship, allowing valuable client relationships to be maintained. We see this as a key advantage in relationship-driven markets such as the UAE.

Administrative Cost Effectiveness

Market participants often consider synthetic securitisation structures to be less burdensome and more cost-efficient from both an administrative and operational perspective as they (i) do not necessarily involve a special purpose vehicle ("SPV"), (ii) do not trigger customer notification requirements, (iii) do not require changes to payment channels, and (iv) involve limited third parties.

Investor Appeal

Access to a Financial Institution's Credit Portfolio

Synthetic securitisations provide investors with the opportunity to gain exposure to asset classes they are otherwise unable to access due to (i) regulatory restrictions, (ii) operational constraints, or (iii) inaccessible client relationships. Notably, the investor does not fund the whole underlying exposure; instead, the protection fee - an independent payment based on the expected likelihood of credit events occurring in the portfolio - is paid.

Yield

In synthetic securitisations, it is common for the financial institution to retain the senior tranche, whilst the junior and mezzanine tranches (i.e. the first and second loss pieces of the portfolio) are placed with investors. This provides investors with more attractive risk-adjusted returns.

Structural Benefits

As the underlying exposures are not transferred in a synthetic securitisation, investors are not exposed to the legal risks typically associated with such transfers (e.g. claw back, failure to notify or obtaining consent from the borrower). In addition, because direct cash flows are not passed through to investors (they are not used to fund the protection fee), risks pertaining to the cash flow (e.g. an interest rate mismatch or the risk of prepayments) are less relevant.

Structural Options

There are three common structures adopted on transactions in more established markets such as the European Union:

1. Funded Direct Issuance Structure

The direct issuance structure involves the financial institution issuing funded credit linked notes ("CLNs") directly to the investor. The issuance proceeds paid by the investor cover the losses on the specific tranche of the securitised portfolio placed with the investor. It offers several advantages: (i) no costs associated with setting up and managing an SPV, (ii) no risk of surprises in relation to tax, accounting and prudential aspects pertaining to the involvement of an SPV and (iii) no collateral needed if investors are prepared to take the credit risk of the financial institution.

2. Funded Indirect Issuance Structure

The funded indirect issuance model uses an intermediary SPV that enters into a financial guarantee or credit default swap with the financial institution and then issues back-to-back CLNs to investors. The issuance proceeds of the CLNs (covering the losses on the specific tranche of the securitised portfolio placed with the investor) remain with the SPV until a credit event occurs with respect to the securitised portfolio, at which point a payment is made under the financial guarantee or credit default swap. The SPV structure protects investors against the financial institution’s credit risk.

3. Unfunded Direct Structure

The unfunded direct structure involves a guarantee or credit default swap entered into by the investor and the financial institution with respect to the securitised portfolio. In the absence of an SPV and pre-funding requirements, this structure allows an investor to avoid providing upfront capital and eliminates exposure to the credit risk of the financial institution. However, under the Basel III rules, unfunded structures will only lead to regulatory capital relief in case the investor benefits from a specific classification.

Existing Legal and Regulatory Infrastructure in the UAE

The UAE's legal and regulatory framework is suited for this type of transaction structure:

Governing Law Considerations

Parties may opt for English law-governed transaction documents and English courts or arbitration, enabling transactions to be structured under a governing law that offers greater certainty for this type of financial transaction and is familiar to international investors. In addition, to the extent that local accounts are used to hold issuance proceeds, the UAE regime provides for well-established account security.

Special Purpose Vehicles 

The Dubai International Financial Centre ("DIFC") and the Abu Dhabi Global Market ("ADGM") both cater for the establishment of tax neutral SPVs. In the case of a funded indirect issuance, a local SPV could be utilised. This has a variety of benefits, including being familiar to the regulator and to third parties (such as account banks).

ISDA Netting Opinions 

ISDA netting opinions are available for the UAE onshore, DIFC, and ADGM jurisdictions. Given that synthetic securitisation structures frequently utilise credit derivatives, including credit default swaps, the availability of these netting opinions provides critical legal certainty regarding the enforceability of close-out netting arrangements. This is a key consideration for both financial institutions and investors in these types of transactions.

UAE Central Banks Capital Adequacy Regime 

The CBUAE has enacted a comprehensive capital adequacy regime for banks that is closely aligned to the Basel III framework and thus familiar to international investors. It caters specifically for risk transfer transactions.

White & Case's Experience

White & Case possesses longstanding extensive experience in synthetic securitisation transactions, including both innovative market-first structures and high-profile deals, and has been continuously advising on first-in-kind structured finance transactions in the UAE and GCC, offering a unique ‘on the ground’ team.

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_{This article is prepared for the general information of interested persons. It is not, and does not attempt to be, comprehensive in nature. Due to the general nature of its content, it should not be regarded as legal advice.}

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