It follows on the discussion paper of September 2019 and shows the evolution of the EBA’s thinking.

Although we have yet fully to digest this paper, a number of things stand out (beyond the very kind and positive name-check of PCS on page 8).  First, the EBA – somewhat tentatively – has endorsed the idea of a lower capital requirement for synthetic STS securitisations.  This only would extend, in the EBA’s view, to the senior tranches retained by the originator.  It would also be limited to certain asset classes.  Although the intellectual justification for these limitations is not totally convincing, it should allow the synthetic securitisation market to assist in the safe and efficient use by European banks of their capital.  The absence of any proposal along those lines was the most glaring gap in the original discussion paper.

At a technical level, the EBA has also finally come round to the view that it is permissible in an STS synthetic securitisation to use some defined amount of excess spread, making the treatment of these transactions more commensurate with true sale securitisations.

A brief glance at the other STS criteria proposed for synthetics does not show any obvious change from the discussion paper which was – subject to the excess spread point – a reasonable approach to the challenges.

This paper may also be read with the paper on the calculation of weighted average maturities also published this week by the EBA, as the WAM calculations will also play a key role in determining the capital requirements of senior tranches of synthetic securitisations and therefore the viability of the synthetic securitisation market in Europe.  

This paper is another step in the direction of finalising the STS reforms as many market participants have suggested it is essential to do and as advocated in PCS’ recent paper.

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