Structured Notes & Synthetic Credit
Independent analysis, IFRS 9 classification, and risk modelling for India's structured note market — market-linked debentures, credit-linked notes, and emerging synthetic risk transfer structures.
Market context and instrument landscape.
India's structured note market covers MLDs issued by NBFCs and banks, CLNs referencing Indian corporate debt, and emerging synthetic risk transfer structures. SEBI's 2023 MLD revisions restricted principal-at-risk structures to sophisticated institutional investors, pushing yield-seeking issuers toward CLN formats. SRT is nascent but material: global banks exploring Indian credit portfolio risk transfer face RBI guidance that differs from Basel III in key respects, creating capital-treatment uncertainty that will likely resolve over the next three to five years.
- ▸Market-Linked Debentures (MLDs)
- ▸Capital-Protected MLDs
- ▸Credit-Linked Notes (CLNs)
- ▸Synthetic Risk Transfer Structures
- ▸First-Loss / Second-Loss Tranches
- ▸Principal-at-Risk Structured Notes
- ▸Total Return Swaps on Credit
- ▸Covered Bonds
What practitioners face in this market.
IFRS 9 SPPI test
Structured notes typically fail SPPI, forcing FVTPL classification and mark-to-market P&L volatility. Some instruments are engineered for cosmetic SPPI compliance — genuine consistency with a basic lending arrangement requires careful business model assessment.
Reference entity and trigger analysis
Indian CLN credit event definitions adapt ISDA standards with local modifications. Whether PCASMA restructuring or IBC admission constitutes a credit event under specific documentation affects both expected loss modelling and hedge effectiveness.
Regulatory capital treatment
RBI has not issued comprehensive SRT-specific guidance equivalent to the EBA's framework, creating uncertainty for selling banks. Capital analysis sits at the intersection of Basel III master directions, structured finance guidelines, and specific risk transfer mechanics.
Valuation without observable prices
Structured notes trade infrequently or not at all. Fair value relies on OAS or hazard rate models with unobservable inputs — independence requires explicit documentation showing how model parameters are anchored to market observables.
Post-SEBI 2023 structural adaptation
The 2023 amendments restricted principal-at-risk MLDs to qualifying institutional investors. Issuers and holders of pre-2023 MLDs face a portfolio management challenge — understanding precisely where capital-protected structures end and prohibited instruments begin.
Counterparty and basis risk in synthetic structures
Synthetic structures introduce counterparty risk on the protection seller and basis risk between the reference portfolio and any hedging instrument. India's limited CDS liquidity makes basis risk significant and difficult to price.
Arrowbanc's work in this asset class.
IFRS 9 classification and measurement
Structured SPPI testing with audit-ready documentation and instrument-level classification recommendations. Portfolio-level summary matrices enable efficient audit review across instrument categories.
Instrument valuation
OAS and hazard-rate valuation for MLDs, CLNs, and structured notes — calibrated to NCD spreads, MIFOR/OIS curves, and credit bureau data. Each memorandum includes methodology, calibration evidence, and sensitivity.
Structure review
Independent review of trigger mechanics, credit event definitions, payment waterfalls, and optionality. For CLNs, we specifically test credit event definitions against RBI's restructuring and default frameworks.
Regulatory capital analytics
SRT recognition assessment and risk-weight floor calculations under Basel III and RBI guidelines. For structures in development, we advise on modifications that improve recognition probability and quantify achievable capital relief.
MLD portfolio transition advisory
Legacy MLD assessment against the SEBI 2023 framework, compliance categorisation, and advisory on hold-to-maturity, early redemption, or secondary sale — with tax and accounting implications of each.
CLN and SRT investor analytics
Reference portfolio analysis, expected loss modelling, and correlation stress testing for first-time Indian CLN/SRT investors. Output is an investment memorandum covering structure, event probability, severity, and return distribution.
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