STS Criterion 29. Credit events

Description

Credit events

Content

The credit protection agreement establishing the synthetic securitisation should cover, at least, the following credit events:

• Failure to pay of the underlying obligor, defined to encompass at a minimum the circumstances defined in Article 178 (1)(b) of the CRR;
• Bankruptcy of the underlying obligor, defined to encompass at a minimum the circumstances defined in Article 178 (3)(e) and (f) of the CRR;
• Restructuring of the underlying exposure, defined to encompass at a minimum the circumstances defined in Article 178(3) (d) of the CRR.

The requirement to include at least these three events should not prevent the parties from agreeing on additional and/or stricter credit events. All credit events that are to apply, and their precise definitions, should be clearly documented.

Forbearance measures, as defined in Annex V Section 30 paragraphs 163 to 183 of Commission Implementing Regulation (EU) 2015/227 amending Implementing Regulation (EU) No 680/2014 laying down implementing technical standards with regard to supervisory reporting of institutions according to Regulation (EU) No 575/2013, applied to underlying exposures shall not preclude the trigger of eligible credit events.

Rationale

The definitions of credit events provided in the CRR shape the way prudential regulation quantifies the credit risk to be covered by regulatory capital and such well-established definitions should also be applied as a basis for standardising the minimum credit events to be considered in synthetic STS securitisations. A reference to the CRR definitions also strikes a right balance between the interest of the protection buyer and the interest of investors.

The parties under the credit protection agreement may agree on additional events or stricter definitions of the events mentioned in the criterion (e.g. failure to pay with a grace period of less than 90 days), in line with the general framework provided for in the standard industry master agreements, as long as that the credit protection agreement complies with the requirements provided for Article 249 of the amended CRR and, at a minimum, the events taken into account for prudential purposes for institutions regulated under the CRR are included in the credit protection agreements.

Forbearance measures, which consist of concessions towards a debtor that is experiencing or about to experience difficulties in meeting its financial commitments, should not preclude the triggering of the credit protection event. In this regard, concessions refers to either a modification of the previous terms and conditions of a contract that the debtor is considered unable to comply with due to its financial difficulties (‘troubled debt’) resulting in insufficient debt service ability and that would not have been granted had the debtor not been experiencing financial difficulties; or a total or partial refinancing of a troubled debt contract, that would not have been granted had the debtor not been experiencing financial difficulties. A concession may entail a loss for the lender, which should be considered within the credit protection agreement.