On 6 May, the EBA published a report on synthetic securitisations. It recommends allowing synthetic securitisations to be STS-eligible and formulates a corresponding proposal for the STS criteria. The recommendations are based on an extensive and insightful market analysis of on-balance sheet transactions conducted by EBA in cooperation with the IACPM.
Insights of the market analysis
In addition to outlining various market characteristics over time, the report compares the synthetic securitisation market before and after the Global Financial Crisis (GFC). We have summarised the key results below:
- Synthetic securitisations have been almost exclusively privately structured and placed since GFC, whereas publicly rated transactions were common before.
- Arbitrage transactions have disappeared from the market.
- The asset pool has become more diversified, but synthetic transactions still consist mainly of corporate loans (SMEs & large corporates).
- The asset pool of synthetic transactions often originates from different jurisdictions. The majority of the underlying assets originates from Europe.
- Before GFC, usually all tranches of a synthetic securitisation were placed (in whole or in part); nowadays, only mezzanine or junior tranches are sold to investors. This is due to the changed regulatory framework under Basel I & II.
- Government funding programmes are now set up at European level (e.g. EIB/EIF) instead of national level.
- Funded credit protection structures, which used to be rare before GFC, are now the conventional type of protection in synthetic securitisations.
Default rates and STS
EBA's further analysis shows that on-balance sheet transactions are not expected to have a higher default risk than traditional securitisations. On this basis, the EBA recommends to the European Commission to also develop an STS framework for synthetic securitisations. Further arguments for the STS eligibility of synthetic securitisations are the increased relevance in the European securitisation market and the higher standardisation and transparency of securitisations which can be reached through STS.
Proposal for STS criteria for synthetic securitisations
In the second half of the report, EBA presents in detail its proposal for STS criteria for synthetic securitisations. Where possible and appropriate, it is based on the existing criteria for non-ABCP transactions. Furthermore, EBA introduces adjustments and additional criteria to take into account the specific characteristics of synthetic transactions. The additional criteria deal, in particular, with the topics of credit events, credit protection, verification agent, early termination, synthetic excess spread and STS-eligible collateral. However, EBA recommends regulatory relief for synthetic securitisations only under certain conditions related to the CRR and to a limited extent.
The results of the market analysis are very informative and help in understanding the European securitisation market. Against the background of the increased importance of synthetic securitisations in Europe, EBA's recommendation to develop a STS framework for synthetic securitisations is highly appreciated. We are hoping for a timely implementation by the European Commission.