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    EBA Proposes to Create STS Framework for Synthetic Securitization

    September 25, 2019

    EBA published a discussion paper on the simple, transparent, and standardized (STS) framework for synthetic securitization. The discussion paper proposes a list of criteria to be considered when labeling the synthetic securitization as "STS." Stakeholders are invited to comment on the possibility of introduction of an STS framework for synthetics as well as on the regulatory treatment and potential market impact of the proposals laid out in the discussion paper. The consultation period ends on November 25, 2019.

    The discussion paper examines the rationale of the STS synthetic product and assesses positive and negative implications of its possible creation and labeling as "STS." The proposed STS criteria for balance-sheet synthetic securitizations include requirements on simplicity, standardization, and transparency similar to those applied to traditional securitization. The criteria must meet a number of synthetic-specific requirements, such as those on:

    • Mitigating counterparty credit risk, including eligible protection contracts, counterparties, and collateral
    • Addressing various structural features of the securitization transaction
    • Ensuring that the framework only targets balance-sheet synthetic securitization

    Finally, the discussion paper provides a balanced analysis of the possible introduction of a limited and clearly defined differentiated regulatory treatment of the STS synthetic securitization. The introduction of a limited and clearly defined differentiated regulatory treatment would match the historical performance of the synthetic securitization that outperforms the traditional securitization; it would also be in line with the characteristics and developments in the synthetic securtizations market since the financial crisis. However, one of the main deficiencies is that the preferential regulatory treatment would not be Basel-compliant and very limited experience exists with the STS traditional framework so far. Overall, the EBA work on synthetic securitizations unveils new data and insights into post-crisis market developments and trends, including data on historical default and loss performance.

    The discussion paper has been developed in response to the mandate assigned to EBA in the Securitization Regulation (2017/2402). The mandate requires EBA, in close cooperation with ESMA and EIOPA, to develop a report on the feasibility of a framework for STS synthetic securitization, limited to balance-sheet securitization. Following this consultation, EBA will aim to publish a final report. Based on the final report, EBA shall submit a report to the European Parliament and the Council, along with a legislative proposal, if appropriate. 


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    Comment Due Date: November 25, 2019

    Keywords: Europe, EU, Banking, Securities, Securitization Regulation, Synthetic Securitization, STS Securitization, EBA

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