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    EBA Recommends Harmonization of SRT Assessment in Securitization

    November 23, 2020

    EBA published a report presenting a set of detailed recommendations for EC on the harmonization of practices and processes applicable to the significant risk transfer, or SRT, assessment in securitization transactions. The report makes recommendations for the assessment of structural features of securitization transactions, the application of significant risk transfer quantitative tests, and the supervisory process for assessing significant risk transfer in individual transactions. In the report, EBA also identifies shortcomings in certain in force Capital Requirements Regulation (CRR) provisions that are significantly detrimental to the effectiveness of the supervisory assessment of significant risk transfer. Thus, the report sets out several recommendations on desirable amendments to the CRR that could correct those shortcomings and improve the significant risk transfer framework.

    The EBA recommendations aim to enhance the efficiency, consistency, and predictability of the supervisory significant risk transfer assessment within the securitization framework in the following ways:

    • Securitization transactions that exhibit ineligible structural features should not qualify for significant risk transfer recognition. Ineligible structural features could include call options other than those specified in this report and early termination clauses other than those specified in this report.
    • Securitization transactions that exhibit one or several of the other structural features outlined in this report should comply with a set of safeguards to qualify for significant risk transfer recognition and to be eligible for the fast‐track significant risk transfer assessment process.
    • The originator should submit within its risk transfer self‐assessment to the competent authority a quantitative analysis of how the structural features interact in the context of the transaction and affect the risk transferred to the third parties.

    CRR uses two sets of tests to measure significant risk transfer. The mezzanine and the first‐loss tests use quantitative formulae to assess the "significance" of risk transfer. To address certain limitations in the significant risk transfer tests, the report recommends supplementing the first‐loss test with a requirement that the first‐loss tranche has a minimum thickness. The report also recommends providing two new commensurate risk transfer tests: a principle‐based approach test and a quantitative test. The report explains that significant risk transfer assessments should be subject to a common supervisory dual‐track process, whereby "qualifying securitizations" would follow a distinctive fast track, while competent authorities would be able to apply a longer and more in‐depth process to the assessment of "non‐qualifying securitizations." The report also recommends harmonizing the preliminary significant risk transfer notice that originators should submit to the competent authority to start the assessment process as well as the transaction documents that should be made available to the competent authority to substantiate the assessment. 

     

     

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    Keywords: Europe, EU, Banking, Securities, Significant Risk Transfer, CRR, Basel, Securitization Framework, SRT, EC, EBA

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