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.
Comment Due Date: November 25, 2019
Keywords: Europe, EU, Banking, Securities, Securitization Regulation, Synthetic Securitization, STS Securitization, EBA
BoE updated the known issues document for the statistical reporting Forms AS and FV.
EBA updated the report on the implementation of selected COVID-19 policies.
OSFI published a letter that provides an update on the milestones for the implementation of the IFRS 17 standard on insurance contracts.
The Financial Stability Institute (FSI) of BIS published a brief note that examines the supervisory challenges associated with certain temporary regulatory relief measures introduced by BCBS and prudential authorities in response to the COVID-19 pandemic.
BCBS is consulting on the principles for operational resilience and the revisions to the principles for sound management of operational risk for banks.
BoE updated the reporting template for Form ER as well as the Form ER definitions, which contain guidance on the methodology to be used in calculating annualized interest rates.
MAS announced several initiatives to support adoption of the Singapore Overnight Rate Average (SORA), which is administered by MAS.
HKMA, together with the Banking Sector Small and Medium-Size Enterprise (SME) Lending Coordination Mechanism, announced a ninety-day repayment deferment for trade facilities under the Pre-approved Principal Payment Holiday Scheme.
The Advisory Scientific Committee of ESRB published a response, in the form of an Insights Paper, to the EBA proposals for reforms to the stress testing framework in EU.
FASB issued a new Accounting Standards Update (2020-06) to improve financial reporting associated with accounting for convertible instruments and contracts in an entity’s own equity.