Annexes to COM(2020)284 - Creation of a specific framework for simple, transparent and standardised synthetic securitisation, limited to balance-sheet synthetic securitisation - Main contents
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| dossier | COM(2020)284 - Creation of a specific framework for simple, transparent and standardised synthetic securitisation, limited to balance-sheet ... |
|---|---|
| document | COM(2020)284  |
| date | July 24, 2020 |
As with true-sale STS securitisations, the synthetic STS label should not be taken to mean that the securitisation concerned is free of risks, but rather that the product respects a number of criteria and that a diligent protection seller and buyer, as well as a national competent authority, will be able to analyse the risk involved. The identified criteria take into account the different objectives of synthetic securitisations, i.e. done for capital/risk management purposes as opposed to funding, no true sale transfer of the underlying assets, exposure to counterparty credit risk, etc., and therefore seek to ensure protection for both originators and investors (as the originator is also an investor in the
transaction, retaining the senior tranche). By contrast, the true-sale STS framework aims to maximise protection for the investor only, as the sale of the assets to an SSPE makes protection for the originator less relevant.
5. Preferential capital treatment
From a prudential point of view, synthetic securitisations are currently treated as traditional (true-sale) non-STS securitisations. The only exception to this approach is provided in Article 270 of the CRR for the synthetic securitisations of SME loans. Article 270 targets the senior tranche retained by the originator of synthetic securitisations fulfilling a set of limitative criteria:
- at least 70% of the securitised exposures need to be exposures to SMEs, as defined in Article 501
of the CRR;
the securitisation meets the true-sale
STS criteria as applicable to a synthetic securitisation;
- the credit risk not retained by the originator is transferred through a guarantee, or counter
guarantee, which complies with CRR requirements on credit risk mitigation, and the guarantor/counter-guarantor is either a) a central government or central bank of a Member State, a multilateral development bank or an international organisation, and qualifies for a 0% risk-weight treatment under the standardised approach for credit risk; or b) an institutional investor provided that the guarantee or counter-guarantee is fully collateralised by cash on deposit with the originator.
Despite some constrains in terms of collected data and practical experience with the traditional STS securitisation framework, the technical analysis carried out by the EBA could allow to conclude that the inherent risks linked to BSSS complying with adjusted STS criteria could call for reviewing the CRR toward a more risk-sensitive capital treatement of the senior tranche of those instruments, aligning it with the preferential treatment of traditional STS securitisations. As observed by the EBA, this would be justified by the good performance of BSSS compared to arbitrage synthetic securitisation and traditional securitisation, with in particular low default and loss rates. In addition, the extention of the STS label would allow to better appreciate simpler, more standardised and more transparent synthetic securitisations, where reduced agency and modelling risks can be expected.
As mentioned by the EBA Report, BSSS are currently not part of the STS framework developed by the Basel Committee, which is centred on traditional securitisations. This deviation from Basel standards would be nonetheless prudentially motivated by data and technical analysis justifying the prudential soundness of an extension of the STS framework to BSSS.
The extension of the STS framework to BSSS would allow the latter to benefit from the established preferential capital treatment for the STS product. This could be nonetheless framed by a targeted review of Article 270 of the CRR ensuring a) an extension of the preferential capital treatment offered by this Article to all STS-compliant BSSS, independently from the type of underlying exposure (by deleting provisions currently restraining this article to BSSS composed of at least 70% of securitised exposures on SMEs), while b) maintaining the already existing limited scope of the preferential capital treatment to the senior tranche retained by the originator, deemed less risky. As a consequence of these adjustments, the senior tranche retained by the originator would be subject to a risk weight floor of 10%.
Overall, the combined review of the STS framework and the CRR in the case of BSSS, by allowing for a differenciated prudential treatment of STS compliant BSSS compared to non-STS compliant BSSS and arbitrage securitisation, would increase the risk sensitivity of the prudential framework and reinforce the attractiveness of the STS framework.
6. Conclusions
The analysis conducted by the EBA shows that it is possible to set standards for synthetic securitisation that allow mitigating the main drivers of structuring risk, such as agency and model risks, in the same way as for traditional securitisation, thereby creating a subset of synthetic securitisation that is comparable to STS traditional securitisation. In fact, evidence shows that historical performance of balance-sheet synthetic securitisation tends to exceed that of traditional securitisations for the same asset class. Indeed, from a technical perspective, there is no evidence that would suggest that synthetic securitisation structure inherently results in higher losses than traditional securitisation structure. A sound synthetic structure does not negatively affect the performance of the securitisation.
The analysis does not point to any material negative consequences that could be foreseeably generated by the creation of a specific STS framework for balance-sheet synthetic securitisations. On the other hand, reviving the synthetic securitisation market and ensuring that it develops within the robust STS framework entails a number of positive benefits for banks, financial market and financial stability in general. The risk transfer from banks to the non-banking sector is one of the main objectives of the Capital Markets Union and by facilitating the availability of credit to those who need it, could promote economic growth.
Based on the EBA analysis, it is possible to create a specific framework for STS balance-sheet synthetic securitisations and to establish a differentiated regulatory treatment, limited to adjusting the prudential floor for the senior tranche, that should be retained by the originating credit institution, to a level equivalent to the traditional STS framework.
ANNEXES
Annex I: Summary
comparison of synthetic market pre- and post-crisis
| Synthetic market pre-crisis | Synthetic market post-crisis | |
| Market | Public | Private or bilateral |
| Type of securitisation | Arbitrage and balance sheet | Almost exclusively balance sheet |
| Private/Public | Mostly public and rated | Mostly private and bilateral |
| Assets | Mostly corporates | Mostly corporates, diversification and addition of new asset classes |
| Originators | Larger to mid-tier banks, standardised banks moving to IRB | Large banks, mostly SIFIs |
| Investors | Broad, ABS mainly | Narrow, alternative mainly |
| Structure | Full synthetic structure (senior + junior) | Mezz/junior only |
| Credit protection mechanism | Unfunded | Funded, and unfunded for public |
Source: EBA, Integer Advisors
Annex II: Overview of STS criteria and comparison with STS criteria for traditional securitisation
| Criterion | Comparison with criteria for traditional (non-ABCP) securitisation (references to Articles in Securitisation Regulation) |
| Simplicity | |
| Criterion 1: Balance sheet synthetic securitisation, credit risk mitigation | Replacement of the criterion on true sale/assignment/assignment at later stage, clawback provisions, representations and warranties on enforcement of true sale (Art. 20(1) – (5) of the Securitisation Regulation) – with definition of balance sheet synthetics and requirement to ensure robustness of credit protection contract (credit risk mitigation criteria) |
| Criterion 2: Representations and warranties | Adaptation of the the criterion on representations and warranties (Art. 20(6): extension of the required representations and warranties and adaptation of their objective and content |
| Criterion 3: Eligibility criteria, no active portfolio management | Adaptation of the criterion on eligibility criteria, no active portfolio management (Art. 20(7)): adaptation of allowed portfolio management techniques, inclusion of additional conditions for removal of the underlying exposures in securitisation |
| Criterion 4: Homogeneity, enforceable obligations, full recourse to obligors, period payment streams | Similar (Art. 20(8)) |
| Criterion 5: No transferable securities | Similar (Art. 20(8)) |
| Criterion 6: No resecuritisation | Similar (Art. 20(9)) |
| Criterion 7: Underwriting standards and material changes thereto | Adaptation of the criterion on underwriting standards and material changes thereto (Art. 20(10): additional clarification with respect to the types of eligible obligors and with respect to the underwriting of the underlying exposures |
| Criterion 8: Self-certified loans | Similar (Art. 20(10)) |
| Criterion 9: Borrower’s creditworthiness | Similar (Art. 20(10)) |
| Criterion 10: Originator’s expertise | Similar (Art. 20(10)) |
| Criterion 11: No defaulted exposures or exposures subject to outstanding disputes | Similar (Art. 20(11)) |
| Criterion 12: At least one payment made | Similar (Art. 20(12)) |
| NEW criterion: Credit protection premiums | Specifying that the credit protection premiums should be contingent i.e. the actual amount of premium paid should be a function of the size and the credit risk of the protected tranche. No guaranteed premiums, upfront premium payments, rebate mechanisms or other mechanisms of similar nature are to be allowed |
NEW criterion: Early
Specifying
an exhaustive, limited number of early
| termination events termination events | |
| Standardisation | |
| Criterion 13: Risk retention requirements | Similar (Art. 21(1)) |
| Criterion 14: Appropriate mitigation of interest rate and currency risks | Adaptation of the criterion on appropriate mitigation of interest rate and currency risks (Art. 21(2)): to further specify measures for appropriate mitigation of interest rate and currency risks, adapted to synthetic securitisation |
| Criterion 15: Referenced interest payments | Similar (Art. 21(3)) |
| Criterion 16: Requirements after enforcement/acceleration notice | Adaptation of the criterion on requirements after enforcement/acceleration notice (Art. 21(4)): adapted to reflect that not all synthetic securitisations use SSPE |
| Criterion 17: Allocation of losses and amortisation of tranches | Adaptation of the criterion on requirements for nonsequential priority of payments (Art. 21(5)): adapted with additional requirements for pro rata amortisation and allocation of losses |
| Criterion 18: Early amortisation provisions/triggers for termination of the revolving period | Adaptation of the criterion on early amortisation provisions/triggers for termination of the revolving period (Art. 21(6)): adapted with requirements for early amortisation only in the case of the use of an SSPE |
| Criterion 19: Transaction documentation | Adaptation of the criterion on transaction documentation (Art. 21(7)): with additional requirements for servicing standards and procedures |
| Criterion 20: Servicer’s expertise | Similar (Art. 21(8)) |
| Criterion 21: Reference register | Replacement of the criterion on definitions, remedies in the transaction documentation (Art. 21(9)): requirements for the transaction documentation to specify payment conditions is covered in separate criteria |
| Criterion 22: Timely resolution of conflicts between investors | Similar (Art. 21(10)) |
| NEW criterion: Credit events | Definitions of credit events, including reference to existing CRR text, and forbearance measures |
| NEW criterion: Credit protection payments | Criteria for credit protection payments, including that they should be based on the actual realised loss |
| NEW criterion: Credit protection payments following the close out/final settlement at the final legal maturity of the credit protection agreement | Specifying criteria for ensuring a minimum degree of timeliness in credit protection payments |
| NEW criterion: Synthetic excess spread | Specifying the conditions, under which the originator would be allowed to commit to synthetic excess spread in the transaction. The interplay between synthetic excess spread and a potential assessment by the supervisor of the achievement of significant and commensurate risk transfer should be specified. |
| NEW criterion: Eligible credit protection, counterparties and collateral | Specifying a clear set of rules for the credit protection arrangement and the collateral in the transaction. |
| Transparency | |
| Criterion 23: Data on historical | Similar (Art. 22(1)) |
| Criterion 24: External verification of the sample | Similar (Art. 22(2)) |
| Criterion 25: Liability cash flow model | Similar (Art. 22(3)) |
| Criterion 26: Environmental performance of assets | Similar (Art. 22(4)) |
| Criterion 27: Compliance with transparency requirements | Similar (Art. 22(5)) |
| NEW criterion: Verification agent | Establishing the need to appoint an independent third-party verification agent to verify specified elements of the credit notice for each underlying exposure. |
Source: EBA