Response to discussion Paper on STS Framework for Synthetic Securitisation Under Art. 45 of Regulation (EU) 2017/2402
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The successful establishment of STS for synthetic securitisation will lead to a much stronger overall market for securitisations in the future, and the choice between traditional (funding and potentially risk transfer) or synthetic (‘only’ risk transfer) securitisation will be part of banks capital management strategy. We do not expect any negative consequences for traditional STS securitisations.
Open lines should be clarified as an eligible component within synthetic STS structures. (“…made at least one payment”)
To install an external verification prior to closing is - for in most cases replenishing structures - an expensive and not ultimately helpful third party appointment.
The publication of a precise cash flow model for synthetic transactions is not intuitive, availability should be limited to the protection buyer, the protection seller and banking supervisors/regulators. The risk premiums will be paid by the protection buyer despite potential cash flow issues.
All transparency requirements should be simplified for bilateral deals where no further investor is involved.
Excess spread is a helpful mechanism for investors and originators. It can be defined as a straight forward mechanism and should not be generally treated as STS ineligible, especially if it is structured in the same way as in traditional securitisations, i.e. excess spread inherent to the underlying portfolio, not guaranteed in terms of timing and size. We therefore propose to clarify that excess spread is generally allowed and that committed forms of excess spread may contribute to a less complex structure on the one hand but might prevent the recognition of SRT and capital relief on the other hand.
As stated above, the introduction of a preferential regulatory treatment will be key to success to establish STS for synthetic securitisations and is well justified by historical performance data.
Question 1: Do you have any comments on this introductory section of the Discussion Paper?
NoQuestion 2: Do you agree with the analysis on the market developments? Please provide any additional relevant information to complement the analysis.
NoQuestion 3: Do you agree with the analysis of the historical performance? Please provide any additional relevant information to complement the analysis.
NoQuestion 4: Do you agree with the analysis of the rationale for the creation of the STS synthetic instrument? How useful and necessary is synthetic securitisation for the originator and the investor? What are the possible hurdles for further development of the market?
NoQuestion 5: Do you agree with the assessment of the reasons that could eventually support a preferential capital treatment?
Yes, a preferential capital treatment (of senior tranches) should be the logical consequence of the STS label. It should be noted in this context that lower risk weights for bank investors (and capital charges for insurance investors under Solvency II respectively) and the consideration in the LCR ratio have been the prevailing reason for the wide acceptance and implementation of STS in traditional securitisations.Question 6: Please provide any additional relevant information on potential impact of the creation of the STS synthetic securitisation on (STS) traditional securitisation, and any other information to complement the analysis.
The missing legal transfer of the assets – which in many cases is owed to bank secrecy, data protection and privacy laws on European or national level – is mitigated by other structural features (cash deposit by investors, early termination in case of protection buyer insolvency). All other STS criteria are already fulfilled. In addition synthetic securitisations are less costly than true sale transactions (no SPV, less documentary burden, fewer external counterparties involved) and have a positive impact on the ability of a bank to lend to SME.The successful establishment of STS for synthetic securitisation will lead to a much stronger overall market for securitisations in the future, and the choice between traditional (funding and potentially risk transfer) or synthetic (‘only’ risk transfer) securitisation will be part of banks capital management strategy. We do not expect any negative consequences for traditional STS securitisations.
Question 7: Do you agree with the criteria on simplicity? Please provide comments on their technical applicability and relevance for synthetic securitisation.
The double hedging situation should be clarified as an intended double hedging to evade documentation or regulatory requirements. A risk neutral substitution mechanism to mitigate modelling effects to ensure an effective risk transfer structure should be considered eligible.Open lines should be clarified as an eligible component within synthetic STS structures. (“…made at least one payment”)
Question 8: Do you agree with the criteria on standardisation? Please provide comments on their technical applicability and relevance for synthetic securitisation.
Criterion 22: We do agree with the proposal of a reference register to support standardisation and avoiding conflicts between transaction parties. The above mentioned aspect of confidentiality should be considered, assuring that data protection law in general and contractual arrangements in the underlying loan documentation is complied with, e.g. limiting access to such reference register to the protection buyer, the protection seller and banking supervisors/regulators.Question 9: Do you agree with the criteria on transparency? Please provide comments on their technical applicability and relevance for synthetic securitisation.
Risk transfer trades are predominantly bilateral contracts. Investors should feel adequately informed by the data history provided. There are situations where a five-year consistent history is not easily achievable.To install an external verification prior to closing is - for in most cases replenishing structures - an expensive and not ultimately helpful third party appointment.
The publication of a precise cash flow model for synthetic transactions is not intuitive, availability should be limited to the protection buyer, the protection seller and banking supervisors/regulators. The risk premiums will be paid by the protection buyer despite potential cash flow issues.
All transparency requirements should be simplified for bilateral deals where no further investor is involved.
Question 10: Do you agree with the specific criteria for synthetic securitisation?
The verification agent should be activated when losses are allocated to investors or certain threshold levels (pool/assets) are reached, to avoid complexity and costs.Excess spread is a helpful mechanism for investors and originators. It can be defined as a straight forward mechanism and should not be generally treated as STS ineligible, especially if it is structured in the same way as in traditional securitisations, i.e. excess spread inherent to the underlying portfolio, not guaranteed in terms of timing and size. We therefore propose to clarify that excess spread is generally allowed and that committed forms of excess spread may contribute to a less complex structure on the one hand but might prevent the recognition of SRT and capital relief on the other hand.
Question 11: Do you agree with the criterion 36 on eligible credit protection agreement, counterparties and collateral? Please provide any relevant information on the type of credit protection and different collateral arrangements used in market practice and their pros and cons for the protection of the originator and investor.
It is unclear who should specify the “sufficient credit quality” of the cash collateral counterparty. In most cases rating agencies are no part of a synthetic risk transfer transaction anymore.Question 12: Please provide suggestions for any other specific criteria that should be introduced as part of the STS framework for simple, transparent and standardised securitisation.
To have a “level playing field” the handling of accrued interest / enforcement cost could be addressed.Question 13: Do you see a justification for possible introduction of a differentiated regulatory treatment of STS synthetic securitisation? If yes, what should be the scope of such treatment and how should it be structured - for example only for senior tranche retained by the originator bank, or more limited/wider?
We see no economic argument to treat traditional and synthetic STS differently in the regulation.As stated above, the introduction of a preferential regulatory treatment will be key to success to establish STS for synthetic securitisations and is well justified by historical performance data.