STS Criterion 1. Balance sheet synthetic securitisation credit risk mitigation

Description

Balance sheet synthetic securitisation, credit risk mitigation

Content

General requirements for balance sheet securitisation

In order to be considered STS synthetic balance sheet securitisation the following requirements should be met:

1. The securitisation should be a synthetic securitisation as defined in Article 2(10) of the Securitisation Regulation.
2. The protection buyer under the credit protection arrangements establishing the synthetic securitisation is an EU-regulated undertaking as defined under points (a) to (g) of Article 2(12) of the Securitisation Regulation, and is an originator with respect to the underlying exposures as defined in Article 2(3) of the Securitisation Regulation.
3. When the protection buyer is an originator with respect to the underlying exposures as defined in point (b) of Article 2(3) of the Securitisation Regulation i.e. the exposures underlying the synthetic securitisation have been purchased from a third party before they are securitised, the originator should apply to the purchased exposures credit and collection policies, workout policies and servicing policies that are no less stringent than those the originator applies to similar exposures that have not been purchased.
4. The underlying exposures are part of the core lending or any other core business activity of the protection buyer.
5. The underlying exposures should be held on the balance sheet of the protection buyer, at or before the closing date.
6. The protection buyer should undertake in the securitisation documentation to not further hedge its exposure to the credit risk of the underlying exposures beyond the credit protection obtained through the synthetic securitisation in a manner that results in the double hedging of the same credit risk.

Credit risk mitigation rules

The credit protection agreement establishing the synthetic securitisation should comply with the credit risk mitigation rules laid down in Article 249 of the amended CRR (including the requirements on SSPE), or with equivalently robust requirements in case the protection buyer is not an institution regulated under the CRR.

Rationale

The objective of the criterion is to set out requirements for balance sheet synthetic transactions, i.e. those transactions where the regulated institution’s primary objective is the transfer of credit risk of exposures that the regulated institution itself holds on balance sheet. The ultimate object of credit risk transfer should be exposures originated or purchased by the institution within a core lending/business activity of such regulated institutions and held on its balance sheet at the closing date.

This criterion should exclude arbitrage securitisations, i.e. transactions where the protection buyer purchases exposures outside their core lending/business activity, for the sole purpose of writing credit protection on them (i.e. securitising them) and arbitraging on the yields resulting from the transaction. Ensuring that the management of exposures purchased for the purposes of securitising them is consistent with that of similar exposures not securitised is important to avoid the occurrence of moral hazard behaviours by the protection buyer that could result in an overall lesser credit quality of the securitisation transaction, ultimately affecting both retained securitisation positions and securitisation positions placed with investors.

This criterion should also exclude arbitrage transactions where the risk is subject to a double hedge (for example, where more than one credit default swap (CDS) is used to hedge the same credit risk).

In order to ensure legal certainty in terms of the payment obligations, the protection buyer should undertake that it does not hedge the same credit risk more than once by obtaining credit protection in addition to the credit protection provided by the synthetic securitisation for such credit risk.

In order to ensure the robustness of the credit protection agreement such agreement should fulfil the credit risk mitigation requirements in accordance with Article 249 of the amended CRR that have to be met by institutions seeking significant risk transfer through a synthetic securitisation.