An interesting and unexpected provision included in the Basel II guidelines could effectively nullify previously recognized synthetic risk transfers, if the protection seller is a special purpose entity.

Such is the case in the bulk of balance sheet synthetic CDOs, which have been a popular form of regulatory capital management over the past several years, particularly in Europe. In the U.S., many banks have begun synthetically referencing large portfolios of consumer assets as a method to shed exposure. If the risk is transferred to an SPE, as is usually the case, the Basel guidelines indicate this should not be recognized as a true transference of risk from a bank's balance sheet.

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