Response to discussion Paper on STS Framework for Synthetic Securitisation Under Art. 45 of Regulation (EU) 2017/2402
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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.
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.
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?
NoQuestion 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.
NoQuestion 7: Do you agree with the criteria on simplicity? Please provide comments on their technical applicability and relevance for synthetic securitisation.
NoQuestion 8: Do you agree with the criteria on standardisation? Please provide comments on their technical applicability and relevance for synthetic securitisation.
NoQuestion 9: Do you agree with the criteria on transparency? Please provide comments on their technical applicability and relevance for synthetic securitisation.
NoQuestion 10: Do you agree with the specific criteria for synthetic securitisation?
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.
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.
NoQuestion 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.
NoQuestion 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?
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.