Synthetic Securitisation relies heavily on underlying credit derivatives and similarly structured guarantees, and has had the benefit of two new EU “Amendment Regulations“, both of which came into force on 9 April 2021.
The Amendment Regulations amend the EU Securitisation Regulation and the Capital Requirements Regulation (the “CRR“) and implement, the eagerly-anticipated, STS (simple, transparent and standardised) framework for balance sheet synthetic securitisations.
CLICK HERE for our detailed analysis of the Amendment Regulation and new STS framework for synthetic securitisations written by Alice Harrison , Robyn Llewellyn , Mariana Padinha Ribiero , Merryn Craske and me, Edmund Parker
In the Legal Update in our LINK we set out in an annex a comparison between the new STS criteria for balance sheet synthetic securitisations and the established STS criteria for non-ABCP “traditional” securitisations on which the new framework is based.
Key differences which we highlight between the new framework and the established STS criteria for non-ABCP “traditional” securitisations include the following points:
- Simplicity: criteria relating to true sale are not relevant for synthetic securitisations and so have not been included in the new framework. Instead, the underlying exposures need to have been originated as part of the core business activity of the originator and must be held on its balance sheet, the originator must not hedge its exposure beyond the protection obtained through the credit protection agreement, and additional representations and warranties are required from the originator in relation to the exposures and their origination.
- Standardisation: criteria relating to the disclosure of hedging and currency risks have been expanded, amortisation requirements have been adapted and the originator is required to maintain a reference register with respect to the underlying exposures.
- New requirements: specific criteria have been added on credit events, credit protection payments, the verification agent’s role and synthetic excess spread.
Helpfully, the new STS criterion for credit events, which is likely to be a particular area of focus for market participants, simply requires compliance with the requirements of Articles 215(1)(a) and 216(1)(a) of the CRR for a guarantee or credit derivative (as applicable) – rather than anything new or unfamiliar to the market.
The new STS criteria also include a list of items which a verification agent, who must be independent from the originator and the investors, needs to verify in relation to underlying exposures for which a credit event notice is given “as a minimum”.
As with the existing STS framework for traditional securitisations, originator institutions can benefit from preferential regulatory capital treatment as a result of structuring a synthetic securitisation so that it falls within the synthetic STS framework. However, this will only apply with respect to the senior position held by the originator institution and not to other positions which are held by investors.
On 9 April 2021, ESMA published the interim STS templates on which synthetic securitisations may be notified to ESMA as being STS-compliant
The Amendment Regulations are EU regulations and so will not be applicable in the UK, which is now subject to a separate, similar but not identical, securitisation regime .
We are not currently aware of any plans by the UK regulators to make corresponding changes to the EU Securitisation Regulation as it now applies in the UK, or the CRR as it forms part of “retained EU law” in the UK, and so the Amendment Regulations (for now) represent a divergence between the UK and EU regimes.