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.
We have no specific comments on this possibility since we believe none of the proposed approaches provides for an adequate prudential treatment of SES.
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.
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.
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.
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.
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.
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.
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.
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.
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.
No comment.
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.
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.