U.S. Consumer Finance Companies and Fintechs Seeking Bank Charters: Overview, Trends, and Considerations UK BNPL Regulation: Opening the Door to Securitisation? DSCR Loan Fraud Risk: What Warehouse Lenders and Non-QM Originators and Acquirers Need to Know Now Leveraging Credit-Linked Note Transactions to Manage the Cost of Bank Capital and Increase Equity Returns VAT Costs on Loan Servicing in the European and UK Securitisation Markets 2026 FX Definitions: Modernizing the Industry-Standard Foreign Exchange Documentation Framework SUMMER 2026
STRUCTURED FINANCE SPECTRUM, SUMMER 2026 | 1 Editor’s Note Welcome to the Summer 2026 edition of the Structured Finance Spectrum. We hope this issue finds you enjoying this busy summer season and, when possible, taking time to recharge before we head into the fall market. As the second half of the year begins, market participants are surging forward across asset classes and funding structures, but with a sharper focus on structures that can withstand scrutiny, adapt to changing economic and regulatory environments, and preserve flexibility as conditions evolve. This issue examines several of these trends shaping today’s market. We begin with the growing number of consumer finance and fintech companies pursuing bank charters and the implications this continued convergence of bank and nonbank models may have for funding strategies, regulatory oversight, and securitization markets. We also explore the United Kingdom’s new framework for buy now, pay later (BNPL) products and consider what increased regulatory certainty could mean for the future development of BNPL securitization. We next highlight the continued hot topic of fraud risk in the context of DSCR lending. Our article examines recent fraud schemes affecting the non-QM market and offers practical considerations for lenders, originators, aggregators, and securitization participants seeking to strengthen diligence and risk controls. On the capital markets side, we examine the growing use of credit-linked note (CLN) transactions as a tool for banks to manage regulatory capital, credit risk, and return on equity. We also discuss recent developments affecting VAT treatment of loan servicing in European and UK securitization transactions and the potential implications for market participants operating across jurisdictions. Our last article discusses the publication of the 2026 FX Definitions, a significant milestone for the foreign exchange derivatives market. The modernization and consolidation of the industry-standard framework serves as a reminder that even long-established regimes must continue to adapt to changing products, technologies, and operational expectations. We are also pleased to welcome two additions to our team: Cheryl Isaac, a U.S. derivatives expert who joins our Financial Services Group in Washington, D.C., and Satvi Vepa, who joins our Tax Group in the fast-growing London office. Both bring extensive experience in their fields, and we are thrilled to feature their contributions in this issue. We hope this issue of the Structured Finance Spectrum provides a helpful overview of the current opportunities and challenges shaping the market. As always, we look forward to continuing the conversation as you navigate this evolving environment, and we hope you enjoy these final weeks of summer. Valerie Clark Counsel, Finance Lindsay Klein Senior Associate, Finance SPOTLIGHT ON GROWTH: Welcome to Alston & Bird Cheryl Isaac Partner, Washington, DC Financial Services Satvi Vepa Partner, London Tax
STRUCTURED FINANCE SPECTRUM, SUMMER 2026 | 3 U.S. Consumer Finance Companies and Fintechs Seeking Bank Charters: Overview, Trends, and Considerations By: Tara Castillo, Partner, Finance Barry Hester, Counsel, Financial Services Derek Marks, Counsel, Finance Susan Thurman, Counsel, Finance JP Mahoney, Senior Associate, Financial Services Stephan Harris, Associate, Financial Services Rob Lorentzen, Associate, Finance The past year has seen a sharp increase in the number of consumer finance and fintech companies seeking and receiving regulatory approval to obtain bank charters in the United States. This trend reflects the convergence of both an increased demand for the benefits of bank funding, including lower cost of funds and expanded product offerings, and a recently favorable regulatory environment for new entrants. While obtaining a bank charter remains a complex and resource-intensive undertaking and invites heightened regulatory scrutiny, given the benefits and favorable regulatory conditions in the second Trump Administration, this trend is likely to continue for consumer finance and fintech companies as an alternative to other arrangements such as the bank-partnership model. Rise in Charter Applications The trend of companies applying for bank charters started in the auto industry with two auto companies receiving conditional approval from the Federal Deposit Insurance Corporation (FDIC) in January 2026 to establish FDIC-insured Utah “industrial loan company” (ILC) bank subsidiaries. Multiple leading payments and digital finance companies have also taken steps to pursue bank charters. Federal regulators reported a marked increase in new charter filings by nontraditional applicants in 2025, with the Office of the Comptroller of the Currency (OCC) receiving at least 18 new charter applications—exceeding the total received in the prior four years combined. Many of these applicants were fintech, digital asset, and nonbank financial firms. Nondepository specialty state charters have also been featured as part of the trend, including custodial and merchant acquirer limited purpose banks. Lower Cost of Funds Low-cost funding is a significant economic driver for consumer finance and fintech companies looking into obtaining bank charters. Historically, nonbank finance companies relied on warehouse facilities, securitizations, or other forms of wholesale funding, which can be expensive and sensitive to market volatility. By contrast, traditional and certain nontraditional banks can fund lending activities through insured deposits, Federal Reserve Bank borrowings (the discount window), and Federal Home Loan Bank advances. An insured depository charter may function as a potential replacement for warehouse and other third-party bank channels for funding and create a more stable platform for origination, servicing, and balance-sheet management. For structured finance participants, the bank charter path also has a clear securitization logic; chartered institutions may originate loans with stronger state-law positioning (such as stronger usury laws), transfer loans into the secondary market, and diversify funding between deposits, secured facilities, whole-loan sales, and asset-backed security (ABS) execution. That combination can enhance pricing, scalability, and resilience across rate cycles. Low-cost funding is a significant economic driver for consumer finance and fintech companies looking into obtaining bank charters. For non-early-stage or growth-focused firms, a bank charter can fundamentally change the cost structure of the business. The ability to match asset and liability durations, manage balance sheet risk, and optimize funding costs is a powerful incentive for consumer finance and fintech companies to pursue bank charters. A bank charter also improves the chartered firm’s bargaining power around securitization itself. A lender with deposits can hold loans longer, optimize collateral pools, avoid forced securitization timing, and issue ABS opportunistically. That flexibility can improve execution and reduce reliance on volatile capital-markets windows. Access to Payment Systems A bank charter also enables direct access to core payment systems. Nonbank firms often rely on sponsor banks to access payment rails such as ACH, wire transfer systems, and check clearing networks. These arrangements can introduce operational friction, additional fees, and regulatory complexity for nonbank entities. A bank charter vertically integrates a consumer or fintech firm, allowing it to circumvent bank-partner arrangements and directly access payment systems, improving speed, reliability, and control over payment operations. For consumer or fintech firms that couple loan offerings with consumer-facing payment, wallet, or deposit-like products, this control can be essential to delivering a seamless customer experience and scaling efficiently.
STRUCTURED FINANCE SPECTRUM, SUMMER 2026 | 5 However, access to these rails poses unique challenges. Federal Reserve master account and payment card network membership is not a guarantee for bank applicants (particularly nontraditional bank applicants) and can in certain cases be more difficult to secure than charters themselves, but the cost and control benefits are measurable. Streamlining Regulatory Compliance Although banks are subject to comprehensive prudential regulation, operating under a single, primary banking regulator is often simpler for enterprise compliance than navigating the patchwork of state licensing regimes (and corresponding examinations) lenders and money services businesses must face. Streamlined regulation reduces compliance cost and operational complexity. In particular, federal bank charters preempt certain state-law requirements, providing greater regulatory consistency across jurisdictions and certainty around interest rate exportation and other key lending terms that are critical to scalable consumer credit models. To be sure, for all their benefits, bank charters also impose significant limitations on organizations accustomed to nonbank operations. Banks must abide by activity restrictions, such as those prohibiting or limiting certain product offerings (under anti-tying rules), the combination of banking and commerce, and affiliate transactions. Banks owned in whole or in part by a bank holding company also require oversight by the Board of Governors of the Federal Reserve System. Still, the more unified regulatory oversight of bank charters generally offers a reduced regulatory burden than the state-by-state regulation applied to nonbank entities. Broader Product Offerings Many finance firms initially enter the market through banking-as-a-service (BaaS) or similar partnerships with established banks, leveraging those banks’ charters to offer regulated products. While this model enables rapid innovation in product offerings, the costs and dependencies associated with these partnerships can constrain growth and strategic flexibility. For example, banks often impose contractual limitations, pricing constraints, or product approval requirements that diverge from the objectives of consumer finance providers and fintechs. Moreover, recent regulatory crackdowns and enforcement actions on BaaS arrangements, paired with market participant failures, spotlight the operational and counterparty risks that arise from these arrangements. Operating under a single, primary banking regulator is often simpler for enterprise compliance than navigating the patchwork of state licensing regimes. Bank charters also enable a broader array of permissible financial activities. In addition to lending and deposittaking, banks can offer payment services and other financial products that are difficult or impossible for nonbanks to provide directly. The expanded product set available to banks supports customer retention and cross-selling, particularly in consumer-facing platforms. For firms that have outgrown the partnership model, a bank charter can represent a more complete platform and a natural next step in organizational maturity. Types of Charters and the Application Process Companies seeking to become or acquire a bank generally must choose between pursuing a federal charter or a state-issued charter. Each option carries distinct regulatory implications, supervisory relationships, and operational considerations. Federal banking and credit union charters are overseen by federal banking regulators and provide nationwide authority under a more unified regulatory framework. By contrast, individual state charters often involve joint supervision with federal agencies, depending on the institution’s structure and deposit insurance status. But both federal and state banking regulators can authorize limited or special-use charters, such as those required for national trust banks and ILCs. For example, digital asset providers have pursued national trust bank charters to vertically integrate custody offerings. And ILCs have historically attracted interest because they allow commercial enterprises to conduct banking activities (including all major forms of lending) through a subsidiary without federal bank holding company supervision. Meeting the information security, anti-money laundering, and other compliance program requirements of the bank charter application process may represent a greater initial operational investment than the uplift associated with nonbank parallels. In addition, to obtain FDIC deposit insurance, applicants must apply to the FDIC and satisfy statutory criteria focused on capital, management, earnings prospects, risk to the deposit insurance fund, community needs, and others. Public comment periods and other unique steps may apply. These requirements can slow charter execution and make new applications demanding, but they also create supervisory legitimacy that many capital-markets counterparties value. Regulatory Landscape The Trump Administration has openly expressed a more favorable outlook on prospective approval of new charters and nonbank acquisitions of chartered institutions. This openness extends to nontraditional entrants, such as consumer finance and fintech firms. In fact, Comptroller of the Currency Jonathan Gould publicly stated: New entrants into the federal banking sector are good for consumers, the banking industry and the economy. They provide access to new products, services and sources of credit to consumers, and ensure a dynamic, competitive and diverse banking system. The OCC will continue to provide a path
STRUCTURED FINANCE SPECTRUM, SUMMER 2026 | 7 for both traditional and innovative approaches to financial services to ensure the federal banking system keeps pace with the evolution of finance and supports a modern economy. This represents a marked departure from the more cautious approach adopted by banking regulators following the financial crisis of the late 2000s. New federal licensing and charter paths are also available to regulators, including through ongoing implementation of the federal GENIUS Act and state counterparts regulating payment stablecoin issuers. Notwithstanding the administration’s open stance, federal and state regulators continue to emphasize robust governance, experienced management teams, strong compliance frameworks, and realistic business plans. Regulators also continue to look for strong risk management and consumer protection controls and the ability to operate safely and soundly at scale. Conclusion As U.S. consumer finance companies and fintech firms scale, the limitations of nonbank status—and of reliance on bank partnerships—can become more pronounced. For the right institutions, a bank charter can unlock lower funding costs, operational control, regulatory clarity, and expanded product offerings. For the right institutions, a bank charter can unlock lower funding costs, operational control, regulatory clarity, and expanded product offerings. At the same time, becoming a bank is not a universal or costfree solution. The regulatory burden is substantial—and the commitment to operating prudentially as a regulated institution is significant—requiring enough scale to both handle the upfront investments needed to meet charter requirements and the ongoing compliance costs following charter attainment. Companies considering this path must weigh the strategic benefits against the costs and complexities involved. Nevertheless, the trend is likely to continue as consumer finance and fintech companies seek durable, long-term business models. As regulators and market participants grow more comfortable with nontraditional entrants to the banking system, bank charters may increasingly be viewed not as an exception, but as a viable and in some cases preferable endpoint for both established players and financial services innovators. UK BNPL Regulation: Opening the Door to Securitisation? By: Steven Krivinskas, Partner, Finance From 15 July 2026, buy now pay later (BNPL) arrangements fall within the UK Financial Conduct Authority’s (FCA) regulatory perimeter as ‘deferred payment credit’. In recent years, BNPL has become a mainstream consumer credit product, supported by e-commerce growth, digital payments, and consumer demand for flexible checkout options. Until now, however, parts of the market have operated outside the full consumer credit framework in the UK. For lenders, the immediate challenge will be adapting to the new regulatory landscape. This will include implementing product information requirements, affordability assessments, and consumer duty compliance. For funding markets, the question is whether regulation will make deferred payment credit and BNPL receivables easier to finance through securitisation and, over time, capable of supporting a deeper asset-backed securities (ABS) market. Overall, our view is that the new regulation will be supportive, but not transformative on its own. It should improve confidence in origination standards, customer treatment, data quality, and regulatory certainty – features that are important to warehouse lenders, rating agencies, and ABS investors. However, BNPL remains a distinctive asset class, with short-dated receivables, merchant and platform concentration, limited long-term performance data, and operational risks that may be more prominent than in established consumer ABS sectors, so rating agencies and investors will be assessing potential portfolios and structures very carefully. The Regulatory Shift The new UK regime applies when a third-party lender finances the purchase of goods or services from a merchant through deferred payment credit that is an interest-free form of credit, repayable in 12 or fewer instalments, over 12 months or less. Merchant-provided deferred payment
STRUCTURED FINANCE SPECTRUM, SUMMER 2026 | 9 arrangements remain outside scope, as does credit broking by merchants for in-scope products. The FCA has adopted a proportionate regime rather than simply applying the full traditional consumer credit rulebook. Key requirements include clear pre-contract information, creditworthiness and affordability assessments, fair treatment of customers in financial difficulty, complaintshandling rules, access to the Financial Ombudsman Service, regulatory reporting, and application of the consumer duty. The UK reforms sit alongside wider European developments. The revised EU Consumer Credit Directive brings BNPL more clearly within the European consumer credit framework, including enhanced disclosures, creditworthiness assessments, and advertising requirements, but national implementation and product differences will continue to be a significant factor for any potential securitisations involving cross-border platforms. From Warehouses to Public ABS BNPL lenders have recurring funding needs. The receivables are originated at high velocity, usually have short maturities, and are typically generated through repeat merchant and consumer relationships. Securitisation can convert those granular receivables into scalable financing, first through revolving warehouse facilities and, once performance history and investor appetite develop, potentially through term ABS take-outs. Overall regulation should help that process. Securitisation depends on confidence in receivable enforceability, originator and servicer robustness, and reliable portfolio data. A regulated product framework, clearer customer disclosures, creditworthiness assessments, and formal arrears processes should contribute to a more familiar diligence framework for prospective funders. These factors should also reduce perceived policy risk by replacing some of the uncertainty that has surrounded this product with a more settled rulebook. However, it is also possible that increased compliance costs and potential constraints on underwriting may affect profitability and origination volumes for some BNPL providers. In the near term, private warehouses are likely to remain the main securitisation option. They allow lenders to fund receivables on a revolving basis, build data, refine eligibility criteria, and test reporting before approaching the public market. They also allow funders to manage concentration, seasoning, delinquency, and charge-off triggers dynamically. This does not mean that warehouse securitisation will be the only funding route for BNPL providers – some will continue to use forward-flow arrangements, including whole-loan sale or similar purchase arrangements, to fund origination outside a securitisation structure. In the near term, private warehouses are likely to remain the main securitisation option. Public term ABS presents more of a challenge, particularly for the short-term, interest-free products offered by BNPL providers. These assets have a compressed weighted average life and limited static pool history and require rapid replenishment to maintain collateral levels. Public execution will depend on disciplined eligibility criteria, concentration limits, performance triggers, and granular reporting that includes vintage and cohort data, arrears, roll rates, refunds, merchant disputes, chargebacks, and modified receivables. Investors are likely to remain cautious while BNPL-specific market practice develops, particularly given concerns around merchant and platform concentration, underwriting model stability, servicing portability, and operational dependency on the BNPL platform. The Rating Agency Lens Those structural challenges are likely to feed directly into rating agency analysis. Recent rating agency commentary suggests that BNPL securitisation activity in Europe may increase as origination volumes grow and investors seek diversification. But the analysis is likely to remain transactionspecific. BNPL shares features with traditional consumer loans and credit cards, but it also has a different business model and risk profile. Operational risk is likely to be a central factor. BNPL platforms often rely on highly automated origination, digital customer interfaces, proprietary scoring models, merchant integrations, and fast-moving product changes. These features can support scale and efficiency, but they increase the importance of systems, controls, outsourcing, cyber resilience, management continuity, and servicing portability. Back-up servicing may be more challenging for BNPL portfolios than for longer-dated consumer loan portfolios, particularly when full systems or platform integration is required to continue servicing the assets. The short-dated nature of BNPL receivables can also mean that a replacement servicer has less economic incentive to take on the portfolio than would be the case for longer-term consumer loans. Rating agencies may therefore focus closely on cash sweep mechanics, account control, pledges, and other protections designed to reduce disruption risk. Key Structuring Issues These risks will need to be addressed in the transaction structure, rather than simply analysed at the diligence stage. Many BNPL providers offer a range of product types such as interest-bearing instalment loans as well as short-term, interest-free loans. However, even though some of these products share certain features of traditional consumer loans, BNPL securitisations need to be structured around the asset class rather than forced into a standard consumer ABS template. Eligibility criteria will need to address features like the customer type, merchant category, product model, tenor, and payment status, as well as returns and cancellations. Revolving period controls will be critical because the receivables amortise quickly and the pool must replenish rapidly to avoid fast pay-down. Data will be equally important and, if long, seasoned BNPL data is limited, comparisons with other consumer credit sectors may help, but only if product design, underwriting approach, customer profile, and jurisdiction are properly understood. Public BNPL securitisation is unlikely to be driven by regulation alone. Consumer protection risk also needs to be built into the structure. Set-off, refunds, merchant disputes, purchase protection rights, redress risk, Financial Ombudsman exposure, and non-compliant origination can all affect receivable value and transaction performance. Structures will need clear repurchase mechanics, exclusion criteria, and servicing standards aligned with regulatory requirements. Conclusion FCA regulation is likely to be positive for the financing of UK BNPL receivables. It should give lenders, funders, and investors a clearer framework for assessing origination quality, conduct risk, and regulatory resilience, and may help BNPL move from balance sheet and private warehouse funding towards a broader securitisation market. However, public BNPL securitisation is unlikely to be driven by regulation alone. The market will need robust performance history, transparent data, credible servicing, carefully calibrated replenishment mechanics, and meaningful alignment of interests and structures that address consumer, merchant, platform, operational, and product-model risks. Regulation may not create the BNPL ABS market, but it could help provide the credibility, discipline, and data foundation needed for BNPL to develop into a mainstream securitised asset class.
STRUCTURED FINANCE SPECTRUM, SUMMER 2026 | 11 By: Lindsay Klein, Senior Associate, Finance Debt-service coverage ratio (DSCR) lending has grown quickly over the last several years and is now a core nonqualified-mortgage (QM) product for warehouse lenders, private credit funds, and securitization sponsors. But the same features that make DSCR loans attractive (streamlined underwriting based on projected rental income as opposed to borrower income verification) have also made them easier to exploit. A 2025 Baltimore scheme proved the risk in real terms. A group of investors obtained approximately $100 million in DSCR cash-out refinance loans from about a dozen private lenders. The scheme relied on artificially inflating equity via inflated appraisals on cash-out refinances and repeated transfers of properties among affiliated LLCs to reinforce those values. DSCR Loan Fraud Risk: What Warehouse Lenders and Non-QM Originators and Acquirers Need to Know Now Now over half that portfolio is in default or foreclosure. Losses were ultimately passed on to securitization investors through repurchase demands under mortgage loan purchase agreements (MLPAs), with the scheme’s fake valuations having bypassed investigation by any originator or warehouse lender. This case is not an outlier—the market is seeing increased fraud risk, especially to investment properties. How DSCR Fraud Typically Works DSCR underwriting depends on two inputs: projected rent and appraised value. Although both are simple in concept, both are susceptible to manipulation. Most schemes typically involve one or more of the following: Appraisal Inflation. Appraisers are directed to support above-market values. In the Baltimore case, this was done through coded payment arrangements. Properties transferred among affiliated entities—creating a loop of inflated comparables—appear legitimate on paper. Rent Fabrication. Borrowers submit fabricated or inflated leases to meet lenders’ minimum DSCR thresholds. This often goes undetected until performance deteriorates or the loan defaults. Lack of Entity Transparency. DSCR loans are often made to LLCs, concealing the beneficial ownership, existing leverage, and credit history of the individuals behind the LLC. This opacity allows related parties to borrow from multiple lenders at once without detection. Key Risks for Warehouse Lenders Repurchase Exposure. Warehouse lenders that fund DSCR loans supported by inflated appraisals may face repurchase or indemnification claims, depending on how fraud risk is allocated under the warehouse agreements and related MLPAs. Advance Rate Integrity. When advance rates are tied to appraisal value, an inflated appraisal directly undermines credit assumptions. Advance rates should be stress-tested against scenarios with values discounted by as much as 20–30%. Concentration Risk. DSCR fraud can cluster by geography, originator, or appraiser. Concentrations should be reviewed with this risk in mind rather than treated as coincidental. Key Risks for Non-QM Originators Origination controls y Require desk or field review for DSCR cash-out refinances y Flag properties that have transferred within the prior 24 months y Require independently verified lease documentation y Maintain independent appraisal panels Entity borrower know your customer y Beneficial ownership verification for LLC borrowers is a FinCEN customer due diligence (CDD) requirement and a basic fraud control y Apply heightened scrutiny to layered, offshore, or recently reorganized ownership structures Secondary market readiness y Aggregators and securitization sponsors are applying increased scrutiny to DSCR collateral, especially borrower entity structures, appraisal history, and property transfer history y Originators that cannot support this level of diligence may see wider spreads, increased kick-outs, or enhanced representation and warranty obligations Practical Checklist 5 Review fraud-related representations and Warranties across warehouse agreements and MLPAs 5 Audit advance rate methodologies for DSCR cash-out refinance collateral 5 Assess portfolio concentration by originator, geography, and appraiser 5 Evaluate entity borrower know your customer (KYC) protocols against FinCEN CDD requirements 5 Confirm appraiser independence 5 Test whether fraud detection tools identify property cycling and rapid-flip patterns
STRUCTURED FINANCE SPECTRUM, SUMMER 2026 | 13 By: Susan Thurman, Counsel, Finance This article focuses on credit-linked notes issued by U.S. banks and not synthetic risk transfers more broadly. Since 2023, there has been an uptick in the issuance of credit-linked notes (CLNs) by banks in the U.S. asset-backed securities (ABS) market. CLN transactions are increasingly leveraged by banks to enhance and support capital and credit risk management. Market interest has been driven in part by the Federal Reserve’s issuance of Frequently Asked Questions about Regulation Q (Sept. 28, 2023), which resulted in requests from banks to regulators seeking approval for a reduced risk weight for the risk protection sold to investors in a CLN. Leveraging Credit-Linked Note Transactions to Manage the Cost of Bank Capital and Increase Equity Returns This overview outlines the types of bank-issued CLN transactions in the market, including direct and indirect structures, and key structural and operational considerations. What Is a CLN Transaction? CLNs involve the issuance of a series of unsecured notes. To date, issuers have issued these notes pursuant to Rule 144A and Regulation S under the U.S. Securities Act of 1933. CLNs are credit-linked to the performance of a reference pool of assets, also referred to as the “reference obligations.” A CLN transaction is distinguished from a traditional asset-backed securitization, in which a seller of a portfolio of assets sells the portfolio directly or indirectly to a special purpose entity, which then issues securities backed by the portfolio of assets. Instead, CLNs are unsecured obligations of the bank issuer. The investor’s return on the notes is linked to a synthetic guaranty or financial contract that directly relates to the credit performance of the reference pool, as set forth in the related note issuance agreement. A bank may leverage a direct CLN or indirect CLN structure. In a direct CLN structure, the bank is the issuer of the notes. CLNs issued by a bank differ from other debt securities the bank may issue in the ordinary course because, in a CLN transaction, the payment of principal is tied to the net credit losses on the reference pool, as defined by the embedded synthetic guaranty or financial contract in the related note issuance agreement. Typically, in the synthetic guaranty, the issuer retains the initial first net credit loss, which is sized to be at least equal to the expected credit losses of the reference obligations. The investors bear the risk of net credit losses, after those retained by the issuer, in one or more tranches. These are sometimes referred to as unexpected net credit losses. The issuer retains the remaining net credit losses resulting from the performance of the reference obligations. Under Federal Reserve guidance, directly issued CLNs may not qualify as synthetic securitizations under its capital rules. Bank issuers regulated by the Federal Reserve should therefore confirm the capital risk-weighted treatment through a direct request to the regulator for reduced capital treatment. If reduced capital treatment is approved by the bank’s regulator, a bank issuer may sell to investors its unexpected net credit losses in exchange for the cost of the issued CLNs. This credit risk transfer can drive a significant reduction in the overall risk weight of the reference obligations, which can exceed 60%. The material reduction in the capital risk weight of the reference obligations decreases the issuing bank’s cost of capital and, therefore, increases the return on equity of the subject reference obligations. In an indirect CLN structure, the bank forms and leverages a bankruptcy-remote special purpose entity to issue the CLNs. Typically, the special purpose entity invests the proceeds of the issuance in high-quality liquid collateral, such as government securities, in a transaction-specific trust account. The bank then enters into a synthetic financial guaranty with the issuing entity. Transactions structured as an indirect issuance of CLNs more clearly qualify as a synthetic securitization under applicable Federal Reserve capital rules, and the bank sponsor therefore benefits from a lower capital risk weight. Bank Management of Cost of Capital and Return on Equity A bank issuer that has received approval from its regulator to treat a CLN transaction as a synthetic securitization, or has determined that regulatory approval is not needed, typically in the case of an indirect CLN issuance, will achieve the following capital risk weight reduction for a reference pool of auto loans. The illustration below is based on a representative CLN transaction in which the reference pool of assets is auto loans.
STRUCTURED FINANCE SPECTRUM, SUMMER 2026 | 15 Choosing a Reference Pool Issuers may find that CLNs are often suited to reference pools where the actual anticipated losses are lower than the required regulatory capital requirements. Many issuers assess the value of CLNs by comparing the cost of the protection, including expenses, to the value of the anticipated reduction in capital risk weight. Issuers may manage their regulatory capital burden by choosing a reference pool of assets based on historical performance. Selection of a reference pool with low expected net credit losses can reduce the size of the first loss retained by the bank issuer, which carries the highest risk weight. Issuers may find that CLNs are often suited to reference pools where the actual anticipated losses are lower than the required regulatory capital requirements. Key Pre-Issuance Considerations For an inaugural CLN transaction, the readiness process— including seeking and obtaining regulatory approvals (if necessary); structuring; drafting and negotiating program documentation; and marketing—may take longer than six months, subject to regulatory approvals, institutional operational readiness, and certain marketing considerations. From a readiness perspective, key pre-issuance considerations include the following: 1) If the bank seeks to reduce the capital risk weight for the reference obligations, an issuer must carefully consider whether it requires regulatory approval and, if so, submit a formal request outlining the transaction and the scope of the proposed synthetic guaranty. This process may take weeks, but increasing bank issuer requests in the market have shortened many potential issuers’ expected wait times. If the issuer is subject to two different bank regulators, it will need to undertake that process with each regulator or potentially have a different risk weight for each regulatory authority. 2) Many publicly available bank approval letters impose a limit on the reference pools, and therefore the creditlinked notes, that an issuer may issue. As a result, a bank will need to create a monitoring mechanism to ensure compliance with any limitation. 3) The bank should identify and engage an experienced structuring agent and one or more underwriters to sell the CLNs. Preliminary work with an experienced structuring agent will support estimated outcomes and ensure seamless transaction execution. 4) The bank should identify a reference pool of assets with seasoned loss history that is lower than the regulatory capital requirements. 5) The bank should calculate the expected cost of the protection (i.e., issuance of the notes), including expenses, and the regulatory capital relief benefit. 6) The bank should engage internal and external accountants and confirm the accounting treatment for the embedded derivative or financial guarantee, which links the prospective issuer’s net losses on the reference pool and the payment of principal on the notes. CLNs can help manage a bank’s cost of capital, credit risk, and concentration limits without some of the operational and compliance requirements of a traditional asset-backed securitization. In planning a prospective CLN issuance, a bank should confirm and test that it has the reporting infrastructure and systems to identify the reference pool assets generally and can accurately and timely track the credit losses, net of recoveries, for these reference obligations. For a bank that has not issued ABS or is not a seasoned ABS issuer, the bank should undergo a gap analysis and internal audit to determine whether it needs to build out, refine existing systems, or build out a system to calculate the principal and interest on the CLNs that are required to be reported monthly in compliance with the related program documents. The ability to correctly tie to the reference pool of assets’ performance is critical to deal execution and ongoing compliance. Conclusion CLNs can help manage a bank’s cost of capital, credit risk, and concentration limits without some of the operational and compliance requirements of a traditional asset-backed securitization. To manage capital, banks have successfully sought approval, where required, to reduce the risk-weight of reference pools related to a CLN transaction, thereby reducing the cost of capital and improving returns on equity for the related reference pool. If bank issuers of CLNs continue to experience a low cost of capital risk weight reduction, the market of CLNs is expected to strengthen and increase in issuance activity. Bank regulators’ potential clarification that CLNs qualify for the capital risk weight reduction would remove an additional bar to entry for new bank issuers to enter the market and therefore benefit from their enhanced capital treatment and increased equity returns.
STRUCTURED FINANCE SPECTRUM, SUMMER 2026 | 17 By: Satvi Vepa, Partner, Tax The VAT treatment of loan servicing in the context of securitisations has been the subject of an advocate general (AG) opinion delivered on 25 February 2026 and the A Oy judgment of the General Court of the European Union delivered on 17 June 2026. The AG opinion and the A Oy judgment scrutinise a set of facts concerning housing loans in Finland securitised by the original lender. That is, the original lender sells loans it has granted to a customer to a special purpose vehicle (SPV) which issues bonds secured by those loans. As the SPV merely issues the bond instrument and does not have any operational capabilities, the management of the loans remains the responsibility of the original lender, which has the resources to perform those services, in return for a servicing fee paid by the SPV. The key question considered in the AG opinion and A Oy judgment is whether the management of the portfolio of VAT Costs on Loan Servicing in the European and UK Securitisation Markets loans by the original lender after the transfer of the loans to the SPV is a service that attracts VAT or whether VAT-exempt status applies. In other words, is VAT payable on the servicing fee? Following the AG opinion, the A Oy judgment held that VAT is payable on the servicing fee because the servicing fee is consideration paid to the original lender for the ongoing management of credit provided by the original lender after the sale, which is an activity that does not qualify for exemption from VAT. This decision, although not binding, represents a significant change to the VAT treatment of these servicing fees which has broadly been applied by the European and UK securitisation market. VAT – A Quick Background VAT is a tax on the ‘value added’ at each stage of a supply chain and is intended to be passed on to the end consumer. The provisions of Directive 2006/112/EC establish a common VAT system across the EU, ensuring as far as possible some uniformity. Each EU Member State has transposed the VAT directive into national legislation. After Brexit, the UK VAT regime has been applied in accordance with UK VAT legislation and UK case law and now operates separately from the VAT system in the EU. However, EU case law decisions may continue to be persuasive sources on the interpretation of VAT legislation in the UK. VAT Exemption – ‘The Management of Credit by the Person Granting It’ Although a large part of the activities in the financial sector benefit from VAT-exempt status, the VAT finance exemptions do not apply generally, and the scope of the finance exemptions needs to be considered carefully in each case. The A Oy judgment focuses on the VAT finance exemption under Article 135(1)(a) through (g) of the VAT directive, which is broadly similar to the VAT finance exemption included in the UK’s VAT Act 1994. Of particular relevance to the UK market is the focus of the A Oy judgment on the VAT exemption for ‘the management of credit by the person granting it’. In the past, the European securitisation market has relied on the ‘management of credit’ exemption to conclude that servicing fees paid to an original lender in the context of a securitisation do not attract VAT. Similarly, H. M. Revenue & Custom’s (HMRC) published guidance states that when an original lender retains a legal interest in the transferred loans, HMRC will consider the servicing activities of the original lender to fall within the management of credit by the person granting it exemption – meaning the servicing fee will not attract UK VAT. The VAT-exempt status allows the servicing fee to be paid to the original lender, and no amount needs to be accounted to the tax authority for VAT. When the VAT exemption does not apply, the original lender needs to account for VAT to the relevant tax authority. The VAT can be taken out of the servicing fee (VAT-inclusive treatment) or be an additional payment due from the SPV (VAT-exclusive treatment). When the person paying the VAT element on the servicing fee (in this case, the SPV) is carrying out solely VAT-exempt activities or activities that are not within the scope of VAT, the SPV would not be entitled to recover any of the VAT paid to the original lender. The result is that the VAT paid on the servicing fee becomes a real cost to the SPV. For this reason, VAT-inclusive treatment is usually adopted so that this cost, if it arises, is borne by the original lender. There are a number of reasons why HMRC may not change its interpretation of the application of the VAT exemption in these situations. Key Takeaways for the UK The A Oy judgment, although not binding, provides key VAT points that need to be considered by originator servicers operating in the European securitisation market until tax authorities in each market provide more clarity. The A Oy judgment also raises the question of whether HMRC will re-visit its position currently set out in published guidance. HMRC’s guidance is not legally binding, but it is heavily relied upon by the market. There are a number of reasons why HMRC may not change its interpretation of the application of the VAT exemption in these situations. Whole-loan sales One of the key points discussed in the A Oy judgment is that the VAT exemption applies to the management of credit by the person granting it. However, if the loans have been sold to the SPV, the person granting the credit may no longer be the original lender after the sale. In European securitisations, it is common for the portfolio of loans to be sold to the SPV in totality. In these cases, the original lender does not retain a legal interest in the loans.
STRUCTURED FINANCE SPECTRUM, SUMMER 2026 | 19 This can be distinguished from UK securitisations where the original lender retains the legal interest and only transfers the beneficial interest in the loans to the SPV (this is in part to prevent having to notify customers of the change in lender). In the UK, there is an argument that because the original lender retains a legal interest in the loans, it is still managing credit that it has granted and should continue to qualify for the VAT exemption for its servicing activities. UK securitisation tax regime The UK has a specific tax regime for UK securitisation vehicles which ensures that they are subject to corporation tax only on a ‘retained profit’ amount. The regime simplifies the tax treatment of securitisation vehicles and is fundamental to the effectiveness of the securitisation structure. There are a number of key conditions that need to be satisfied to fall within the regime, including prescriptive rules on what activities the SPV may undertake. Broadly, the SPV should not be trading and, apart from incidental activities, should only be acquiring, holding, and (in certain cases) managing financial assets. Therefore, depending on the scope of the servicing activity and the type of securitisation vehicle, it may be difficult for the SPV to service the loans (even if it is fully subcontracting this activity) without falling afoul of the UK securitisation tax regime. Should the SPV be unable to provide the loan servicing, if HMRC did change its interpretation of the application of the ‘management of credit’ VAT exemption so that the original lender can no longer benefit from it, the outcome could be that neither the original lender nor the SPV is able to benefit from the VAT exemption. Effect on the securitisation market In the last few years, the UK has taken steps to encourage growth in the securitisation market. The changes to regulation have not been focused on tax, but they have aimed to provide more flexibility and competitiveness in the market. Denying VAT-exempt treatment to all originators that are carrying out loan servicing activities in securitisations would result in a 20% VAT cost to the original lender, and this seems to contradict broader policy objectives. Conclusion It will be interesting to see whether HMRC will seek to distinguish the facts of the case and continue to treat loan servicing carried out by original lenders that remain legal title holders of the loans as VAT-exempt. However, even if HMRC holds its position, key players in the UK securitisation market will still be interested to understand how different European jurisdictions interpret the A Oy judgment. If there is a divergence between how different European jurisdictions apply the VAT exemption to loan servicing in securitisations going forward and if there is a choice of jurisdictions to incorporate a securitisation vehicle (such as in deals with pan-European assets), perhaps some consideration will need to be given to VAT at the planning stage. 2026 FX Definitions: Modernizing the IndustryStandard Foreign Exchange Documentation Framework By: Cheryl Isaac, Partner, Financial Services Marcus Lovatt, Partner, Finance Anna Alpern, Associate, Investment Funds On March 3, 2026, the International Swaps and Derivatives Association (ISDA) and EMTA, the trade association for emerging markets, published the 2026 FX Definitions, an integrated framework for cleared and non-cleared foreign exchange (FX) derivatives transactions. The 2026 FX Definitions reflect almost three decades of market developments and will replace the 1998 FX and Currency Option Definitions. The 1998 FX Definitions will continue to be used until the expected industry transition date of November 22, 2027. In the interim, FX derivatives market participants will need to familiarize themselves with and work to implement the new 2026 FX Definitions. Why the 1998 FX Definitions Are Being Replaced The 1998 FX Definitions have been widely used by market participants to assist with the documentation of privately negotiated FX and currency option transactions, and are generally incorporated by reference into the 2002 ISDA Master Agreement and Schedule. Under this existing framework, the terms for a given FX transaction have been scattered across a patchwork of documents—including the core definitions booklet, annexes, additional provisions and supplements, and EMTA template terms and bilateral master confirmation agreements. This increasingly unwieldy body of documentation, which represents periodic efforts to address the growth and evolution of the FX and currency option markets, has
STRUCTURED FINANCE SPECTRUM, SUMMER 2026 | 21 highlighted the need for comprehensive consolidation and modernization, particularly in light of anticipated expansion of those markets. The 2026 FX Definitions address this through a dual effort: consolidating the documentation into a single unified framework and updating substantive provisions to meet changing market standards. Structure of the 2026 FX Definitions The 2026 FX Definitions, which are available on ISDA’s MyLibrary platform, are primarily composed of a main book and five supporting matrices. The main book serves as the central document, setting out the substantive operative provisions and definitions, while the matrices supplement it, providing additional currency- and transaction-specific detail. Each matrix plays a distinct role in the overall framework: Emerging Markets Currency Non-Deliverable Transactions Matrix. Sets out provisions applicable to each listed currency pair and non-deliverable transaction type (i.e., FX or FX option), consolidating information currently included in relevant EMTA documentation. Currencies/Financial Centers Matrix. Sets out currency codes, definitions of each currency, and principal financial centers. Developed Markets Currency Matrix. Identifies developed market currency pairs. A non-deliverable transaction qualifies as a “developed markets nondeliverable transaction” and is therefore subject to certain relevant provisions of the 2026 FX Definitions if the currency pair is listed within the matrix. Offshore CNY Disruption Fallback Matrix. Sets out fallback provisions—including the applicable fallback sequence—that apply when a disruption event occurs in an offshore Chinese yuan (CNY) transaction (i.e., a transaction involving CNY traded and settled in the offshore centers of Hong Kong, Singapore, or Taipei). Settlement Rate Options Matrix. Sets out settlement rate options provisions applicable to both emerging and non-emerging currency pairs. It replaces the long-form narrative descriptions found in the 1998 FX Definitions with a table-based format intended to make the relevant provisions easier to identify and apply. The 2026 FX Definitions are primarily composed of a main book and five supporting matrices. The 2026 FX Definitions employ a versioning mechanism that allows the framework to evolve alongside market developments. Updated versions, once published, will govern all FX transactions entered into on or after their effective date (including both new and rolled transactions), while prior transactions remain subject to the previous version. These operational updates are akin to the 2021 ISDA Interest Rate Derivatives Definitions, which consolidated various amendments and supplements to the original 2006 ISDA interest rate definitions and facilitated user-friendly, real-time updates. Substantive Updates in the 2026 FX Definitions Beyond structural consolidation, the 2026 FX Definitions introduce a number of substantive updates to key provisions. Disruption events and fallbacks The 2026 FX Definitions substantially overhaul the“disruption events”and“fallbacks”framework, addressing limitations and market developments that have emerged since the 1998 FX Definitions were introduced. Notable changes include: Set of Available Disruption Events and Disruption Fallbacks. The revised framework refines the array of disruption events and disruption fallbacks—removing those no longer in use, updating those carried over from the 1998 FX Definitions, and introducing new ones as needed. Presumed Disruption Events for Deliverable FX Transactions. For deliverable FX transactions, three disruption events are now presumed to apply automatically unless the parties otherwise agree—a significant departure from the 1998 FX Definitions, which included no default disruption events for deliverable FX transactions. Hierarchy rules clarify which disruption event applies when a single incident could trigger more than one. Disruption Fallbacks Architecture. The framework for disruption fallbacks has been revised and streamlined and now includes, among other updates, standardized waterfall sequences for both deliverable and nondeliverable FX transactions. Offshore CNY Transactions. Offshore CNY transaction provisions have been consolidated into a dedicated section within the main book, which references the offshore CNY disruption fallback matrix for certain key terms and provisions. This replaces the previously fragmented approach that relied on separate ISDA/EMTA documentation (e.g., the 2021 Additional Provisions for Offshore Deliverable CNY Transactions). Calculation agent provisions A new calculation agent standard requires calculation agents to act in good faith and use commercially reasonable procedures to produce a commercially reasonable result, consistent with the standard adopted in other ISDA documentation (e.g., the 2021 ISDA Interest Rate Derivatives Definitions). New elective dispute resolution provisions for joint calculation agents have also been introduced. Generally, when the parties have elected to act jointly as calculation agent but are unable to agree on a calculation within one business day, they must mutually select an independent leading dealer whose determination will be binding.
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