EBA Proposes to Create STS Framework for Synthetic Securitization
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.
Related Links
Comment Due Date: November 25, 2019
Keywords: Europe, EU, Banking, Securities, Securitization Regulation, Synthetic Securitization, STS Securitization, EBA
Related Articles
BIS and Central Banks Experiment with GenAI to Assess Climate Risks
A recent report from the Bank for International Settlements (BIS) Innovation Hub details Project Gaia, a collaboration between the BIS Innovation Hub Eurosystem Center and certain central banks in Europe
Nearly 25% G-SIBs Commit to Adopting TNFD Nature-Related Disclosures
Nature-related risks are increasing in severity and frequency, affecting businesses, capital providers, financial systems, and economies.
Singapore to Mandate Climate Disclosures from FY2025
Singapore recently took a significant step toward turning climate ambition into action, with the introduction of mandatory climate-related disclosures for listed and large non-listed companies
SEC Finalizes Climate-Related Disclosures Rule
The U.S. Securities and Exchange Commission (SEC) has finalized the long-awaited rule that mandates climate-related disclosures for domestic and foreign publicly listed companies in the U.S.
EBA Proposes Standards Related to Standardized Credit Risk Approach
The European Banking Authority (EBA) has been taking significant steps toward implementing the Basel III framework and strengthening the regulatory framework for credit institutions in the EU
US Regulators Release Stress Test Scenarios for Banks
The U.S. regulators recently released baseline and severely adverse scenarios, along with other details, for stress testing the banks in 2024. The relevant U.S. banking regulators are the Federal Reserve Bank (FED), the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC).
Asian Governments Aim for Interoperability in AI Governance Frameworks
The regulatory landscape for artificial intelligence (AI), including the generative kind, is evolving rapidly, with governments and regulators aiming to address the challenges and opportunities presented by this transformative technology.
EBA Proposes Operational Risk Standards Under Final Basel III Package
The European Union (EU) has been working on the final elements of Basel III standards, with endorsement of the Banking Package and the publication of the European Banking Authority (EBA) roadmap on Basel III implementation in December 2023.
EFRAG Proposes XBRL Taxonomy and Standard for Listed SMEs Under ESRS
The European Financial Reporting Advisory Group (EFRAG), which plays a crucial role in shaping corporate reporting standards in European Union (EU), is seeking comments, until May 21, 2024, on the Exposure Draft ESRS for listed SMEs.
ECB to Expand Climate Change Work in 2024-2025
Banking regulators worldwide are increasingly focusing on addressing, monitoring, and supervising the institutions' exposure to climate and environmental risks.