18 December 2015
The European Banking Authority (EBA) published today a report summarising the findings of its analysis and market practice assessment of the synthetic securitisation market. The EBA supports the limited extension of the prudential treatment granted to simple, standardised and transparent securitisations (STS) to banks that originate and retain certain SME balance sheet synthetic securitisation positions, as in the Commission's legislative proposal on securitisation. The EBA advises on the criteria that should determine eligibility of balance sheet synthetic transactions, specifying, among others, under which conditions originator banks may transfer the risk of eligible transactions to public or private investors.
Following the publication of its advice on qualifying securitisation in July 2015, the EBA has carried out an analysis and market practice assessment on synthetic securitisation. In light of the evidence available to date, the EBA supports the extension of STS capital requirements on senior synthetic tranches of SME portfolios that banks decide to retain when transactions benefit from financial guarantees by public bodies or credit default swaps provided by private investors that are fully cash collateralised. Based on an assessment of the market practice of synthetic securitisation, the EBA advises the Commission to introduce a list of eligibility criteria that take into account the specificities of synthetic securitisation and to include, among eligible transactions, those in which private investors provide credit protection in the form of cash.
Synthetic securitisation can be structured in many different ways depending on various factors. A major distinction arises with respect to the objectives of the transaction, whereby two main types of synthetic securitisations can be identified: ‘balance sheet' synthetic transactions and ‘arbitrage' synthetic transactions. In balance sheet transactions the originating credit institution uses financial guarantees or credit derivatives to transfer to third parties the credit risk of a specified pool of assets that it holds on its balance sheet while the main objective of arbitrage synthetic securitisation is one of arbitraging between the higher spread received on underlying lower credit quality debt or products indices and the lower spread paid on the resulting structured and credit-enhanced CDO note.