On 6 May 2020, the EBA published its final report (the Final Report) on an STS framework for synthetic securitisation under Article 45 Of Regulation (EU) 2017/2402 (the Securitisation Regulation).

As noted in our briefing on the draft report (the Draft Report), the Securitisation Regulation, which has applied since 1 January 2019, sets out a general framework for securitisation and creating a specific framework for simple, transparent and standardised securitisation (the STS framework). However, synthetic securitisations are currently not eligible under the STS framework.

The Final Report largely follows the recommendations of the Draft Report, including:

  1. the establishment of a cross-sectoral STS framework, limited to balance-sheet securitisation; and
  2. 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 the Final Report.

In addition, the EBA has added a further recommendation to those in the Draft Report. Namely, the consideration of the adoption of a differentiated regulatory capital treatment for STS framework-compliant synthetic securitisations. The differentiated treatment would only apply to the senior tranche of synthetic securitisations which are retained by the originating credit institutions. This is consistent with the EBA’s view in the Final Report that originators of balance sheet synthetic securitisations syndicate only the junior and mezzanine tranches as compared to pre-financial crisis transactions where the reverse was often true.

However, the EBA has included a significant note of caution in its recommendation to consider the differentiated capital treatment. The absence of data on the STS framework for traditional securitisation might not justify that treatment. In addition, the introduction of differentiated treatment could give rise to the risk of overuse of synthetic securitisation and might incentivise banks to substitute use of synthetic securitisation for raising regulatory capital, leading to an increase in bank leverage.

The EBA therefore recommends that it be mandated to monitor STS framework synthetic securitisations, the use of differentiated capital treatment and the risk of increasing bank leverage.

The European Commission will now consider the Final Report and assess whether or not to adopt a legislative proposal.