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14 October 2019
Regulation (EU) 2017/2402 (the Securitisation Regulation) sets out a general framework for securitisation and creating a specific framework for simple, transparent and standardised securitisation (the STS framework). The Securitisation Regulation has applied since 1 January 2019.

Currently, true-sale securitisations (i.e. securitisations in which the underlying receivables are transferred) which comply with the STS framework receive beneficial regulatory capital treatment. Conversely, there is no such STS framework in place in respect of synthetic securitisations (i.e. securitisations in which (a portion of) the risk exposure to the underlying receivables is transferred, but the underlying receivables are not) and so they do not receive such beneficial treatment.

However, Article 45 of the Securitisation Regulation requires the European Banking Authority (EBA) to publish a report on the feasibility of a STS framework, limited to balance-sheet synthetic securitisation. Pursuant to this, on 24 September 2019, the EBA published its discussion paper, “Draft Report on STS Framework for Synthetic Securitisation” (the EBA paper) and on 9 October 2019, the EBA held a public hearing on the same topic (the EBA hearing).

EBA paper – EBA recommendations 

While the EBA paper does not provide any recommendations on any potential differentiated regulatory treatment, it does seek stakeholders’ input about the possibility, its potential impact and other considerations.

Under section 5.6 of the EBA paper, the EBA recommends:

  • the establishment of a cross-sectoral STS framework, limited to balance-sheet securitisation; and
  • that for any synthetic securitisation to be eligible as “STS”, it should comply with the criteria on simplicity, standardisation and transparency, and additional criteria specific to synthetic securitisation, as specified in section 5.4 of the EBA paper.

EBA hearing – pros and cons of the development of a STS framework for synthetic securitisations

Helpfully, the EBA Hearing presentation set out some of the pros and cons of the development of a STS framework for synthetic securitisations, as follows:

Pros Cons
  • Increased transparency of the product.
  • Increasing relevance of the product in the context of ongoing regulatory developments.
  • Increased relevance of the product due to some advantages compared to traditional securitisation.
  • Further standardisation of the product and opening of the market for smaller originators and investors.
  • Importance of regulatory endorsement for the revival of the market.
  • Potential positive impact on the financial and capital markets, financial stability and on the real economy.
  • STS balance sheet synthetic framework has not been developed at global level (IOSCO/BCBS).
  • Could be perceived as a high quality label by less sophisticated market players.
  • Could lead to less issuance of traditional STS securitisations.

EBA hearing – pros and cons of the introduction of more risk-sensitive regulatory treatment of the STS framework-compliant product

In addition, the EBA Hearing presentation also set out some of the pros and cons of the introduction of a more risk-sensitive regulatory treatment of the STS framework-compliant product, as follows:

Pros Cons
  • Stimulation of development of STS product; more in line with actual performance of balance sheet synthetics, more risk sensitive regulatory framework.
  • Overcoming constraints of current limited STS risk weight treatment of SME synthetic securitisations.
  • Ensuring regulatory playing field with the traditional securitisation.
  • Fuelling the potential positive impact of the synthetic securitisation on the financial markets and stability.
  • Non-compliant with Basel STS: no balance sheet synthetic framework and no preferential treatment has been developed at global level (IOSCO/BCBS).
  • Potential risks for the banking sector.

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