Response to discussion on the Significant Risk Transfer in Securitisation
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From ESBG’s point of view, in order to save costs and resources the competent authority must notify the originator when the transaction achieves or does not achieve SRT ahead of the execution of the transaction based on the information provided and subject to an implementation substantially in line with the provided documentation.
Also, the Authority’s response deadline should be more specific than just within a reasonable time"."
A pure sequential amortisation increases as in §87(a) the cost of credit protection over lifetime and reduces the ability to pass the new proposed comprehensive SRT test in favourable economic environment with low portfolio losses and thus a relatively increasing first loss tranche. A pure pro rata amortisation across all tranches will be difficult to be placed with investors and will at least increase the amount of guarantee premiums.
The proposal of including 4 triggers for a pro rata transaction increases the complexity and the modelling of the transaction for self-assessment stress tests and would be in contrast to the intended simplicity target of the new STS regulation.
Moreover, if early losses in a transaction lead to a switch to sequential with small losses thereafter, the problem explained above for sequential amortisation of high cost of credit protection and failure of SRT later in the transaction occurs.
b. ESBG disagrees. In §121 EBA mentions that the trapping of excess spread counteracts SRT to a larger extent than the use-it-or-lose-it mechanism. ESBG does not understand why under the proposals in §123(a)(II) EBA proposes to trap the excess spread not absorbed by losses. As the trapping counteracts SRT, especially the new proposed comprehensive SRT test (trapped excess spread would be added to a funded reserve account thus increase retained positions in the calculation in our understanding) in scenarios with low losses, ESBG prefers the use-it-or-lose-it mechanism or like in a traditional securitisation an excess that can be used to fill up a reserve amount to a percent of the outstanding portfolio.
b. In case of unfunded future excess spread to be deducted from capital, originators will not use excess in synthetic securitisation transactions anymore and as indicated in §116 transactions would achieve lower RWEA savings with no excess spread structured in the transaction.
The cost of guarantee premiums if the clause is banned would significantly increase which would make securitisation transaction uneconomical compared to alternative instruments.
- The calculations assume that specified shares of UL (2/3) and collateralised loans (50%) shall be included in the formal work without any further explanation as to why exactly those shares have been selected.
- It does not seem logical to multiply aggregate collateralised loan (which is a stock size) with average maturity to find expected loss over the duration of the commitments (which is a change size).
In general, ESBG thinks that the suggested quantitative tests under 3.3 are too complex compared to the current test under CRR.
Moreover, the ongoing fulfillment of all the proposed tests over the lifetime of the transaction under different scenarios will be challenging. If for example a transaction redeems all tranches pro rata due to only minor front loaded losses and has a portfolio credit risk (EL + UL) deterioration due to weaker loans remaining in the pool, the proposed first and mezzanine tests will fail if calculated during the transactions life (even with decreasing lifetime EL due to lower remaining WAL of securitized exposures).
On the other hand in a low loss scenario with an improving remaining portfolio in terms of EL and UL the proposed new comprehensive test will fail during the transactions life due to the falling EL and 50% of UL being lower than the capital of retained positions. It will be very difficult to structure transactions that can fulfill all these tests under different scenarios and through the transactions lifetime.
Question 3: What are your views on the proposals on the assessment process set out above? Are any other changes necessary to further improve the process?
ESBG appreciates the proposed standardisation of the SRT assessment process but would like to add that according to ECB public guidance on the recognition of SRT letter of 24 March 2016, originators should notify the ECB at least three months in advance of the expected closing of the transaction in contrast to the 1 month mentioned in the EBA proposal of the SRT notification to the competent authority in §74(a).From ESBG’s point of view, in order to save costs and resources the competent authority must notify the originator when the transaction achieves or does not achieve SRT ahead of the execution of the transaction based on the information provided and subject to an implementation substantially in line with the provided documentation.
Also, the Authority’s response deadline should be more specific than just within a reasonable time"."
Question 5: Should a standardised SRT notification template be developed, for submission by originators to competent authorities, in order to facilitate the SRT assessment process? If yes, should this template be different for traditional and synthetic securitisation? (Please provide examples of templates, as appropriate).
A standardised SRT notification template would be appreciated. As an example, the ECB public guidance letter mentioned in question 3 Annex I includes the information to be provided to the ECB by the originator.Question 6: Could you provide suggestions as to how a template for monitoring SRT compliance should look like (e.g. by potential amendments of the current COREP framework)?
The requirement for ongoing reporting to the authorities should be limited to being merely a duty to report when such a material change has actually occurred in the transaction.Question 7: Do you agree with the assessment of the SRT implications of all the identified structural features? Are any material aspects missing from this representation?
The proposed measures to strengthen “equal competitive conditions” regarding the application of different characteristics of securities transactions against the requirement of significant risk transfer appear appropriate and relevant. Through the use of different characteristics and terms of the transaction, it is possible for companies to change the rate of SRT over time. However, the definition of credit events should be in line with ISDA’s definitions of credit events.Question 8: Do you agree with the proposed safeguards related to the use of pro-rata amortisation?
ESBG misses in addition to the quoted types of amortisation the pro rata redemption of all notes except the first loss tranche.A pure sequential amortisation increases as in §87(a) the cost of credit protection over lifetime and reduces the ability to pass the new proposed comprehensive SRT test in favourable economic environment with low portfolio losses and thus a relatively increasing first loss tranche. A pure pro rata amortisation across all tranches will be difficult to be placed with investors and will at least increase the amount of guarantee premiums.
The proposal of including 4 triggers for a pro rata transaction increases the complexity and the modelling of the transaction for self-assessment stress tests and would be in contrast to the intended simplicity target of the new STS regulation.
Moreover, if early losses in a transaction lead to a switch to sequential with small losses thereafter, the problem explained above for sequential amortisation of high cost of credit protection and failure of SRT later in the transaction occurs.
Question 9: Do you agree with the proposed safeguards related to the use of time calls? Do you agree with the different approach to time calls in traditional vs. synthetic transactions?
ESBG proposes to include the securitized portfolio’s prepayments during the transaction’s lifetime in the WAL calculation of the time call as the earliest admitted point for the call to be exercised.Question 10: Do you agree with the proposed safeguards on the use of excess spread in traditional securitisation?
ESBG agrees.Question 11: Do you agree with the proposed safeguards constraining the use of excess spread in synthetic securitisation? In particular, do you agree with: a. The proposal of only allowing a contractually fixed (pre-determined) excess spread commitment in synthetic transactions? b. The proposal to only allow a ‘trap’ excess spread allocation mechanism in synthetic transactions?
a. ESBG agrees, and this fixed excess spread should be less than the expected loss of the portfolio (§123(a)(IV)).b. ESBG disagrees. In §121 EBA mentions that the trapping of excess spread counteracts SRT to a larger extent than the use-it-or-lose-it mechanism. ESBG does not understand why under the proposals in §123(a)(II) EBA proposes to trap the excess spread not absorbed by losses. As the trapping counteracts SRT, especially the new proposed comprehensive SRT test (trapped excess spread would be added to a funded reserve account thus increase retained positions in the calculation in our understanding) in scenarios with low losses, ESBG prefers the use-it-or-lose-it mechanism or like in a traditional securitisation an excess that can be used to fill up a reserve amount to a percent of the outstanding portfolio.
Question 12: Do you agree with the proposed way to treat the excess spread commitment in synthetic securitisation transactions for the purposes of the quantitative assessment of SRT and commensurate risk transfer?
ESBG agrees, but only if no future unfunded excess spread is considered.Question 13: In relation to the further considerations for stakeholders’ consultation on the own funds treatment of excess spread: a. Do you agree that the unrealised/unfunded component of the excess spread commitment should become subject to Pillar I own funds requirements? b. What would be the impact on SRT transactions if Pillar I own funds requirements were recognised as suggested in Section 3.2?
a. ESBG strongly disagrees on the proposal that unfunded future excess spread should be subject to own funds requirements and be deducted from capital. Excess spread is future income after losses and expenses of an asset portfolio. Expected future income is also not added to capital, why then deduct it from capital?b. In case of unfunded future excess spread to be deducted from capital, originators will not use excess in synthetic securitisation transactions anymore and as indicated in §116 transactions would achieve lower RWEA savings with no excess spread structured in the transaction.
Question 16: What are your views on the use of originator’s bankruptcy as an early termination clause? How does this clause interact with the resolution regime (i.e. the BBRD framework)? Should this clause be banned?
ESBG is strongly in favour of the originator’s bankruptcy as an early termination clause as this is in line with derivative contracts that also include originator’s bankruptcy as an early termination clause.The cost of guarantee premiums if the clause is banned would significantly increase which would make securitisation transaction uneconomical compared to alternative instruments.
Question 17: Do you agree with the proposed originator’s self-assessment of risk transfer? Should such assessment be formulated differently?
If ESBG understands §166 correctly, each of the mentioned stress parameters quoted in this paragraph should be used for the measurement of the lifetime risk transfer and the losses absorbed by investors. However if each of the parameters (base and stress scenario for each) have to be combined with all others (e.g. base PD with stressed LGD with back loaded losses with stressed prepayments and early trigger breach date), multiple scenario calculations are required and the paper does not explain what happens if for instance the risk transfer fails in one of various scenarios.Question 18: Are you aware of circumstances where institutions have entered into a structured risk transfer transaction which is not captured by Articles 243 or 244 CRR? For example, where the accounting treatment has meant a transaction is not considered for SRT assessment, or where transactions economically similar to SRT transactions do not fall into the definition of a ‘traditional securitisation’ or ‘synthetic securitisation’.
No.Question 23: Do you have any comments on the test of commensurate risk transfer proposed under Option 1?
The proposed criteria and tests to remedy identified limitations in CRR methods to measure whether a significant risk transfer has taken place appears to be relevant. It is difficult to evaluate whether option 1 or 2 should be the preferred option, but intuitively option 1 may appear to be the most logical. However, the following can be noted:- The calculations assume that specified shares of UL (2/3) and collateralised loans (50%) shall be included in the formal work without any further explanation as to why exactly those shares have been selected.
- It does not seem logical to multiply aggregate collateralised loan (which is a stock size) with average maturity to find expected loss over the duration of the commitments (which is a change size).
Question 26: Could you provide, on the basis of SRT transactions that are part of your securitisation business, an assessment of the impact in terms of SRT achievement of the proposed requirements under both Option 1 and Option 2, taking into account the new CRR securitisation framework (Securitisation Regulation package)?
Response to questions 19 to 26:In general, ESBG thinks that the suggested quantitative tests under 3.3 are too complex compared to the current test under CRR.
Moreover, the ongoing fulfillment of all the proposed tests over the lifetime of the transaction under different scenarios will be challenging. If for example a transaction redeems all tranches pro rata due to only minor front loaded losses and has a portfolio credit risk (EL + UL) deterioration due to weaker loans remaining in the pool, the proposed first and mezzanine tests will fail if calculated during the transactions life (even with decreasing lifetime EL due to lower remaining WAL of securitized exposures).
On the other hand in a low loss scenario with an improving remaining portfolio in terms of EL and UL the proposed new comprehensive test will fail during the transactions life due to the falling EL and 50% of UL being lower than the capital of retained positions. It will be very difficult to structure transactions that can fulfill all these tests under different scenarios and through the transactions lifetime.