German Banking Industry Committee / True Sale International

Especially the European SME sector, which is mostly financed through loans, should benefit from all types of credit programme financed through the securitisation markets instead of being excluded. Synthetic securitisations are a major part of securitisation markets and important instruments of credit risk transfer and therefore should be included in a framework for simple, transparent and standardised securitisations.

Considering the relatively positive acceptance of the STS label in traditional securitisations by market participants since March 2019, moreover, we recommend building on this development, avoiding any further fragmentation and complexity in regulations, and therefore apply the existing STS framework to synthetic securitisations as much as possible. This relates to the STS criteria themselves as well as the regulatory benefits connected to the STS label such as reduced capital risk weights. As a general rule, the same portfolio of receivables should be treated in a very similar and consistent way regardless of whether a traditional securitisation is carried out (funding purposes only, or for both funding and capital benefits in the case of a full stack transaction or SRT) or a synthetic securitisation (‘only’ seeking capital and risk transfer). However, in order to reflect the particularities of synthetic transactions, certain adjustments of STS criteria are obviously needed. In addition, the required level of transparency should be analysed carefully: the high STS standard of transparency towards affected parties (which are very few in synthetic transactions) should not lead to public disclosure requirements.
Yes, we agree.
Yes, we agree.
The essential benefit of synthetic securitisation for many originating banks is the transfer of credit risk to third parties when (i) true sale transactions (traditional securitisations) cannot be employed since bank customers do not want the bank to sell their loans (transfer clause limitations) or when (ii) the analysis of further parameters such as achievable level of risk transfer, liquidity requirements, transaction costs and timing prove a synthetic securitisation to be far more efficient compared to a traditional securitisation. Balance sheet synthetic securitisations performed consistently better than arbitrage synthetics and were typically structured to be far less complex than the latter. Therefore the ban of arbitrage synthetic transactions was an important step. Nevertheless, there is a need for balance sheet synthetic securitisations for risk management and for risk transfer outside of the banking sector. The consideration of this point is particularly important given the potentially rising capital requirements of banks in the EU (+EUR 135bn according to the EBA impact assessment study of July 2019) and rising uncertainties from a geopolitical and macroeconomic perspective. The availability of synthetic securitisations as an instrument for capital and risk management and with established markets is key for EU banks going forward.

Risk transfer products are suited for experienced investors who should have the knowledge and a comprehensive need for relevant data. So these skilled investors might invest without a STS label anyhow. Nevertheless to achieve “level playing field” with the regulatory treatment of true sale STS deals, the label creation could be positive. For banks the synthetic securitisation is a powerful instrument to manage risk/balance sheet. Regulatory uncertainty, uneven treatment and detailed reporting requirements in a bilateral market are possible hurdles.
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.
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.

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”)

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.
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.

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.

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.
To have a “level playing field” the handling of accrued interest / enforcement cost could be addressed.
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.
If the STS label is not supported by a different regulatory treatment this label will have no serious benefits. As a consequence the label will have no relevance. The existing investor side is comfortable with the product even without the label. New investors should develop the required skills anyhow and should not rely on a label.
The market outside a potential European STS label, e.g. US is special anyhow with a strong dominance of the two government sponsored mortgage agencies.
Yes
Felix Krohne