The European Banking Authority (“EBA”) recently published a report (the “Report”) setting out its proposals for developing a simple, transparent and standardised (“STS”) framework for synthetic securitisation.
Article 45 of the Securitisation Regulation (Regulation (EU) 2017/2402) requires the EBA to publish a report on the feasibility of a specific framework for STS synthetic securitisation, limited to balance-sheet securitisation. The EBA published a related discussion paper in September 2019; the Report builds on that paper and on analysis of the responses received from stakeholders.
Based on its assessment, the EBA recommends establishing a cross-sectoral framework for STS synthetic securitisation limited to balance-sheet securitisation.
The Report sets out a list of STS criteria for synthetic securitisation, following the structure of the STS criteria for traditional non-ABCP securitisation that were introduced in the new EU securitisation framework in 2018. As such, they include requirements on simplicity, standardisation and transparency that are adapted to the specificities of synthetic securitisation when appropriate.
The criteria also include a number of synthetic-specific requirements not found in the STS traditional framework, such as requirements: i) mitigating the counterparty credit risk inherent in synthetic structures; ii) on eligible protection contracts, counterparties and collateral; iii) addressing various structural features of the securitisation transaction; and iv) ensuring that the framework targets only balance-sheet synthetic securitisations.
The Report notes some matters for caution. In particular, it states that: i) there are limitations to the performance data on which the analysis is based; ii) there is limited experience with the STS traditional framework so far; and iii) the risk of overusing synthetic securitisation exists, which would potentially lead to a large-scale replacement of regulatory capital by risk mitigation strategies and the consequent overleveraging of banks. In addition, the Report points out, the preferential regulatory treatment is not included in the international Basel standards.
The Report suggests that the European Commission should consider a potentially differentiated capital treatment for STS balance-sheet synthetic securitisation, which would match the historical performance of synthetic securitisation, ensure better alignment with the STS traditional securitisation framework and help overcome the constraints of the current limited STS risk-weight treatment of some SME synthetic securitisations.
Further, the Report proposes that any potential future proposal for STS synthetic securitisation should be accompanied by a mandate to the EBA to monitor the functioning of the STS synthetic market.
Article 45 of the Securitisation Regulation requires that the European Commission provide a report to the European Parliament and Council on all of the EBA proposals.