Response to consultation on draft RTS on the determination by originator institutions of the exposure value of SES in securitisations
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Clarifications are thus not needed on the currently proposed RTS provisions, which we believe should not be retained in the final version of the RTS. The so-called “alternative approach”, however, should be developed in the final version of the RTS.
As a general matter, FBF members believe that the determination of the exposure value of synthetic excess spread shall not undermine the economic viability of the operations using SES.
With regards to the two methods fully described, namely the “full model approach” and the “simplified model approach”, they would likely, unfortunately, and drastically, undermine this viability by including a lengthy time frame of up to 5 years and an assumption of the SES as future exposure (and not the contractual part of the exposure to the SES) . Adding that the “full model approach” appears to be the most heavily burdensome of the two approaches.
On the other hand, the “alternative approach”, that is briefly mentioned, which builds on the current supervisory practices implemented by a competent authority, is the most cost-effective and economically viable approach.
FBF members therefore believe that this “alternative approach” should be the one to favour and therefore fully developed in the RTS. This method, on a one year rolling horizon, potentially already takes into consideration several future periods (for the common case of a quarterly recalibration) as well as the contractual nature of the SES and the prudential risk to which the banks are exposed.
The only adequate prudential approach is the one that reflects the actual risk to which an originator is exposed. In the case of UIOLI SES, this risk spans over a one-year period, generally on a (quarterly) rolling basis. Therefore, only a deduction at 1 year (on a rolling-basis) makes sense from a prudential standpoint.
This is the so-called “alternative approach” referred to in the draft RTS, and which we believe should be developed as the only approach in the final RTS.
We also believe that it is compatible with CRR Article 248(1)(e). This article requires the EBA to specify the exposure value of elements (i) to (iv) that should be included in the exposure value of SES, taking into account the relevant losses expected to be covered by SES: this does not mean that SES amounts for “future periods” should be deducted at inception. Rather, the nature of SES and the prudential risk to which banks are exposed should be taken into consideration to determine the adequate exposure value of SES. Typically, in the case of a UIOLI SES recalibrated quarterly, the originator is at risk over a one-year horizon, on a quarterly rolling-basis, not over a horizon extending until the maturity of the securitisation transaction. Requiring lifetime deduction of SES contradicts both CRR Article 248(1)(e) and the overall calibration of the Basel framework.
To be noted, regulatory uncertainty surrounding the prudential treatment of SES since the adoption of the Capital Markets Recovery Package has already undermined the use of SES, which is however a very useful tool in a number of transactions. SES is used, for instance, in transactions with the European Investment Fund, to encourage SME lending in the EU. We thus ask for a fairer treatment of SES in the final version of the RTS, based on the so-called “alternative approach”, which, in our view, is compatible with the level-1 text.
Q1. Do respondents find the provisions clear enough or would any additional clarification be needed on any aspect?
We have no specific comments regarding the clarity of the proposed provisions. As discussed in our responses to the following questions, we believe that both the “full model” and the “simplified” approaches are inadequate. On the contrary, in our view, the so-called “alternative approach” is the only one that is adequate both from a prudential standpoint (it adequately reflects prudential risk) and from a cost-effectiveness standpoint (it makes sense, from an economic perspective, to use it in synthetic transactions, instead of thicker junior tranches).Clarifications are thus not needed on the currently proposed RTS provisions, which we believe should not be retained in the final version of the RTS. The so-called “alternative approach”, however, should be developed in the final version of the RTS.
As a general matter, FBF members believe that the determination of the exposure value of synthetic excess spread shall not undermine the economic viability of the operations using SES.
With regards to the two methods fully described, namely the “full model approach” and the “simplified model approach”, they would likely, unfortunately, and drastically, undermine this viability by including a lengthy time frame of up to 5 years and an assumption of the SES as future exposure (and not the contractual part of the exposure to the SES) . Adding that the “full model approach” appears to be the most heavily burdensome of the two approaches.
On the other hand, the “alternative approach”, that is briefly mentioned, which builds on the current supervisory practices implemented by a competent authority, is the most cost-effective and economically viable approach.
FBF members therefore believe that this “alternative approach” should be the one to favour and therefore fully developed in the RTS. This method, on a one year rolling horizon, potentially already takes into consideration several future periods (for the common case of a quarterly recalibration) as well as the contractual nature of the SES and the prudential risk to which the banks are exposed.
Q2. Do you agree with the possibility of choosing between the full and the simplified model approaches in a consistent manner?
We have no specific comments on this possibility since we believe none of the proposed approaches provides for an adequate prudential treatment of SES.Q3. Instead, would you favour that the RTS consider only one method (i.e. the full model approach or the simplified model approach) for the calculation of the exposure value of the synthetic excess spread of the future periods?
Since they are based on lifetime deduction, both approaches are excessively penalizing, making SES economically unviable. The “scalar” proposed in the draft RTS does not solve the issue: the question is not whether the impact of lifetime deduction should be partially mitigated, but what a sensible prudential treatment of SES (either “trapped” or “UIOLI”) could be.The only adequate prudential approach is the one that reflects the actual risk to which an originator is exposed. In the case of UIOLI SES, this risk spans over a one-year period, generally on a (quarterly) rolling basis. Therefore, only a deduction at 1 year (on a rolling-basis) makes sense from a prudential standpoint.
This is the so-called “alternative approach” referred to in the draft RTS, and which we believe should be developed as the only approach in the final RTS.
Q4. Do you agree with the specifications of the asset model made in Article 3?
As explained above , we do not believe that either the “full model” or the “simplified” approach provides for an adequate prudential treatment of SES. We thus do not have specific comments on this question.Q5. Do you agree with the specifications for the determination of the relevant losses made in Article 5?
As explained above , we do not believe that either the “full model” or the “simplified” approach provides for an adequate prudential treatment of SES. We thus do not have specific comments on this question.Q6. Do you agree with the calculation of the exposure value of synthetic excess spread for future periods made in Article 6?
As explained above , we do not believe that either the “full model” or the “simplified” approach provides for an adequate prudential treatment of SES. We thus do not have specific comments on this question.Q7. Shall the average of the scenarios be made in a different way for UIOLI and trapped mechanisms (e.g. back-loaded and evenly-loaded only for UIOLI mechanisms, and front-loaded and evenly-loaded for trapped mechanisms)?
As explained above , we do not believe that either the “full model” or the “simplified” approach provides for an adequate prudential treatment of SES. We thus do not have specific comments on this question.Q8. Do you agree with the specification of the simplified model approach made in Article 7?
As explained above , we do not believe that either the “full model” or the “simplified” approach provides for an adequate prudential treatment of SES. We thus do not have specific comments on this question.Q9. Do you consider that the formula can be further simplified (e.g. by using the maturity of the credit protection multiplied by a conservative scalar instead of WAL)?
As explained above , we do not believe that either the “full model” or the “simplified” approach provides for an adequate prudential treatment of SES. We thus do not have specific comments on this question.Q10. Do you agree with the scalar assigned for UIOLI mechanisms? If not, please provide empirical evidence that justifies a different scalar based on the different loss absorbing capacity of UIOLI vs trapped mechanisms.
As explained above , we do not believe that either the “full model” or the “simplified” approach provides for an adequate prudential treatment of SES. We thus do not have specific comments on this question.Would you favour that approach? If so, how do you think that this rolling-window approach for calculating UIOLI SES will affect the efficiency and viability of synthetic transactions in comparison with the current supervisory practices? Please justify your response with specific illustrative examples or data.
In our opinion, the so-called “alternative approach” is the one that makes sense both from a prudential standpoint and from a cost-effectiveness standpoint.We also believe that it is compatible with CRR Article 248(1)(e). This article requires the EBA to specify the exposure value of elements (i) to (iv) that should be included in the exposure value of SES, taking into account the relevant losses expected to be covered by SES: this does not mean that SES amounts for “future periods” should be deducted at inception. Rather, the nature of SES and the prudential risk to which banks are exposed should be taken into consideration to determine the adequate exposure value of SES. Typically, in the case of a UIOLI SES recalibrated quarterly, the originator is at risk over a one-year horizon, on a quarterly rolling-basis, not over a horizon extending until the maturity of the securitisation transaction. Requiring lifetime deduction of SES contradicts both CRR Article 248(1)(e) and the overall calibration of the Basel framework.
Q12. Do you agree with the treatment of the ex-post SES of future periods in the RTS? If not, please provide rationale and data supporting your views
No comment.Q13.Do you have any other comments on these draft RTS?
As highlighted in our previous responses, both “full model” and “simplified” approaches developed in the draft RTS under consultation would make SES uneconomic. In other terms, originators would not have any economic rationale to use SES and would instead place larger junior tranches.To be noted, regulatory uncertainty surrounding the prudential treatment of SES since the adoption of the Capital Markets Recovery Package has already undermined the use of SES, which is however a very useful tool in a number of transactions. SES is used, for instance, in transactions with the European Investment Fund, to encourage SME lending in the EU. We thus ask for a fairer treatment of SES in the final version of the RTS, based on the so-called “alternative approach”, which, in our view, is compatible with the level-1 text.