Public consultation on significant risk transfer through securitisation transactions

One of the EBA’s tasks is to monitor the range of supervisory practices in relation to the significant risk transfer (SRT). Based on art. 243 section 6 and art. 244 section 6 of the CRR, it has been appointed to advise the European Commission by 31 December 2017 on whether a “compulsory technical standard” for monitoring the SRT by the supervisory authorities is required. In light of this, the EBA published a discussion paper on 19 September 2017 that interested parties have been invited to comment on by 19 December 2017.

The amendments proposed in the discussion paper are based on the EBA’s experience from its ongoing monitoring of the SRT transactions reported to it and a survey of the competent authorities concerned on the practical implementation of the SRT framework (CRR, EBA guidelines) in all EU jurisdictions. Some of the approaches proved to be very different. Therefore, in view of the mandate extended to it through the draft of the CRR amendments to securitisations in art. 244, section 6 and art. 245, section 6 CRR II-E, the EBA proposed extensive changes in the discussion paper.

Three core areas of the EBA proposals

Drawing on its study on implementing the regulatory framework, the EBA identified three subsections in the SRT framework that are the most disparate.

To start with, the process of assessing the SRT is to be standardised further. The EBA would like to continue to standardise both the way SRTs are reported by the originators and the feedback from the competent authorities concerned. Standards are also to be introduced for any notifications during the term of the transaction.

It is also suggested that standard precautions are taken for a number of structural features such as excess spread or pro rata amortisation that could endanger the risk transfer during the term of the securitisation. Each of these types of structural features could be allocated a set of safeguards, which are to make auditing easier and increase the likelihood, all things being equal, of SRT being granted. Furthermore, the EBA wants to achieve submissions of self-assessments by the originators for all transactions with special structural features to support the granting of SRT.

The last pillar of amendments concerns identifying certain shortcomings in the previous regulations in art. 243 and 244 CRR and expanding the definition of commensurateness of the risk transfer. One option suggested would be to add a prescribed minimum size of the first loss tranche to the purely mechanistic tests and to tie the commensurateness to a comparison of capital relief achieved by the originator with the loss risk transferred. The second, more mid- to long-term solution could be the introduction of a new test in the CRR aiming at the compliance with both the significance and the commensurateness of the risk transfer.

Changes with the new securitisation regulation

The EBA’s proposals already take changes, which will probably be applied in early 2019, to the new European securitisation regulation into account.

The new definition of mezzanine tranches is the most important change in conjunction with SRT transactions. In the future, a mezzanine tranche will be defined as a tranche that (i) is subordinate to the senior tranche and superior to the first loss tranche and (ii) has a risk weight lower than 1250% and higher than 25%. By foregoing credit quality steps in the new definition, the mezzanine tranche now also depends on the approach used to determine the risk weights.

Under SEC-SA and SEC-ERBA, a tranche could exceed the required risk weight of 25%, but be under this figure based on the SEC-IRBA. Cases are also conceivable where, when the SEC-IRBA or SEC-ERBA are applied, individual tranches are classified differently in their capacity as mezzanine tranches depending on their remaining term.

Otherwise the tests will not change. Securitisations with a risk weight of 1250% will however be called first loss tranches in accordance with the new definition of mezzanine tranches.

Outlook

The standardisation of processes for assessing the significant risk transfer and the receipt of reliable information based on these will probably be welcomed by market players, also considering the fact that the many proposals, such as originators having to submit extensive self-assessments, will probably mean more work for the banks. The EBA is required to forward its final report to the EU Commission two years after the new securitisation regulation has come into force at the latest.

Your Contacts

Andrea Flunker
aflunker@deloitte.de
+49 211 8772 3823

Andrea Weber
andweber@deloitte.de
+49 211 8772 4769