Response to discussion Paper on STS Framework for Synthetic Securitisation Under Art. 45 of Regulation (EU) 2017/2402
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As for Criterion 15 – Appropriate mitigation of interest rate and currency risks, Finance Denmark believes that the criterion to not allow for any currency risk within the transaction is penalising for originators that have operations and thereby assets in countries that do not use the most widely traded currencies such as EUR, GBP or USD, which notes to investors tend to be denominated in. The originator is already penalised by a currency mismatch, leading to additional capital requirements and therefore it seems as an additional penalty to not al-low for any currency risk in order to satisfy the STS criteria.
As for Criterion 19 – Early amortisation provisions/triggers for termination of the revolving period, Finance Denmark believes that the suggested criterion would provide a weakened protection for the originator, as the suggested triggers would limit the protection obtained from the synthetic securitisation in case of events such as deteriorating credit quality or incurred losses. These are events that underpin the motivation for many originators to actually enter into synthetic securitisation transactions and thus seem counter-intuitive.
As for Criterion 22 – Reference register. The criterion states that the underlying exposures should at all times be identified through a reference register, which should clarify among others the reference obligor. Finance Denmark believes that this criterion would dramatically reduce the attractiveness of using the sug-gested framework, as many synthetic securitisation transactions are done on a blind pool, i.e. not revealing the reference obligors’ names.
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?
Finance Denmark agrees with the assessment of reasons that supports a preferential capital treatment for STS synthetic securitisation.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.
Finance Denmark believes that in order to simplify, increase transparency and standardisation for synthetic securitisations through the introduction of the pro-posed framework, originator credit institutions should be incentivised by preferential capital treatment. If no preferential treatment is given to the originator, there is a risk that the framework is not used, as the costs of complying with the additional requirements are likely higher than the benefits of doing so. Further, this would align the proposed framework with the current limited scope for STS synthetic securitisation as ruled out in the CRR.Question 7: Do you agree with the criteria on simplicity? Please provide comments on their technical applicability and relevance for synthetic securitisation.
Overall, Finance Denmark agrees with the criteria on simplicity as proposed in the Discussion Paper.Question 8: Do you agree with the criteria on standardisation? Please provide comments on their technical applicability and relevance for synthetic securitisation.
Overall, Finance Denmark agrees with the criteria on standardisation as proposed in the Discussion Paper.As for Criterion 15 – Appropriate mitigation of interest rate and currency risks, Finance Denmark believes that the criterion to not allow for any currency risk within the transaction is penalising for originators that have operations and thereby assets in countries that do not use the most widely traded currencies such as EUR, GBP or USD, which notes to investors tend to be denominated in. The originator is already penalised by a currency mismatch, leading to additional capital requirements and therefore it seems as an additional penalty to not al-low for any currency risk in order to satisfy the STS criteria.
As for Criterion 19 – Early amortisation provisions/triggers for termination of the revolving period, Finance Denmark believes that the suggested criterion would provide a weakened protection for the originator, as the suggested triggers would limit the protection obtained from the synthetic securitisation in case of events such as deteriorating credit quality or incurred losses. These are events that underpin the motivation for many originators to actually enter into synthetic securitisation transactions and thus seem counter-intuitive.
As for Criterion 22 – Reference register. The criterion states that the underlying exposures should at all times be identified through a reference register, which should clarify among others the reference obligor. Finance Denmark believes that this criterion would dramatically reduce the attractiveness of using the sug-gested framework, as many synthetic securitisation transactions are done on a blind pool, i.e. not revealing the reference obligors’ names.