Austrian Federal Economic Chamber, Division Bank and Insurance

Synthetic securitization has become an important tool for Austrian banks to improve the efficiency of their balance sheets, effectively transfer credit risk to third parties and consequently facilitate additional lending to corporates in the whole CEE and SEE region.

We therefore highly welcome the initiative to extend the STS framework to synthetic transactions and would like to address four key aspects in the proposed framework. These aspects are of particular relevance for medium sized banks in smaller jurisdictions. Too strict rules might exclude these banks from the benefits of SRT transactions.
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Time Call & Early Termination (Question 10, Criterion 34)
We appreciate the rationale for Criterion 34 to avoid complex time call clauses and to allow for an early call after the weighted average life of the initial portfolio, thus allowing banks to limit ongoing costs especially in benign market conditions. This rationale (Early call after WAL without consideration of the replenishment period) should be applied in the requirements for Significant Risk Transfer (SRT) as well.
Background information:
 Banks typically only engage in synthetic securitization transactions if these transactions provide capital relief, hence they have to follow the criteria for SRT. The 2017 Discussion Paper on SRT (EBA-DP-2017-03) allows for time calls after weighted average life of the initial portfolio plus the replenishment period.
 Synthetic STS transactions have to comply with SRT and STS criteria. Therefore, STS transactions will ultimately end up with complex early termination clauses which contradicts the objective of simplicity.

Unfunded Credit Protection Arrangements (Question 10, Criterion 36)
In order to promote a functional STS market segment for SRT transactions it is vital to open up the market equally to private institutions with sufficient credit quality standing, such as globally active reinsurance companies. The counterparty downgrade risk is not different than if collateral is held in the form of cash with third party credit institutions. Excluding certain market players with similar counterparty risk characteristics opposes the ultimate goal of fostering the securitization market.

Excess Spread (Question 10, Criterion 35)
Excess spread is widely present in synthetic securitization transactions and especially supranational investors such as the EIF are commonly using this structural feature. EIF has a standard excess spread formula applied in its invested securitization transactions. EIF’s formula fulfills the standardization requirement. We therefore propose that in terms of excess spread at least transactions with this EIF standard excess spread formula which is satisfying all the excess spread criteria in the EBA SRT paper as well should meet the STS criteria.
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A prosperous market for STS synthetic securitization will only develop if market participants benefit from the additional framework. The key benefit for banks as originators is preferential risk weights on retained tranches.
 This would be in line with the preferred capital treatment on STS cash securitization and justified by the historic performance particularly on senior tranches.
 Given legal, tax and regulatory constraints particularly small and medium sized banks with sizeable corporate loan portfolios have to rely on synthetic structures.
Without a clear incentive a functioning market with sufficient supply and demand might not develop and fall short of the intention.
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Dr. Franz Rudorfer
+43 (0)5 90 900-3131
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