As part of the Capital Markets Recovery Package, it was decided in March 2021 to include STS for on-balance-sheet securitisations in the Securitisation Regulation and to correspondingly adjust the CRR (see TSI Securitisation and Regulation News of 25 March 2021). The obligation to back synthetic excess spread ("SES") with own funds represents a significant factor for the economic efficiency of on-balance-sheet securitisations. Accordingly, Article 248 (1) CRR was supplemented by section (e). This regulates the calculation of the corresponding exposure value. The RTS published on 9 August 2022 now specifies this calculation methodology.
Overview of the RTS
The RTS essentially regulates the calculation of the synthetic excess spread available for loss absorption in future periods in accordance with Art. 248 (1) (e) (iv). The SES available from the current or past periods must be recognised in full in the exposure value (EV) in accordance with Art. 248 (1) (e) (i)-(iii).
For the calculation of the SES for future periods, the EBA introduces a Full Model Approach (FMA) and a Simplified Model Approach (SMA). The focus of the FMA is on modelling different loss scenarios: Losses are distributed in particular at the beginning of the term, are equally distributed or occur increasingly at the end of the term. The synthetic excess spread available in a certain period is then allocated to the arithmetic mean of the calculated losses of the same period. The sum of the synthetic excess spreads allocated to losses results in the exposure value.
In the SMA, the SES of the next period is multiplied by the weighted average maturity of the transaction and weighted by an additional multiplier. The multiplier represents the capacity of the SES to absorb losses and is correspondingly conservative, so that the use of the SMA should result in a higher exposure value than under the FMA.
The advantage of the FMA is the generation of lower exposure values.On the other hand, however, there is the obligation to have the model reviewed annually by an independent auditor as well as the higher effort in calculating the EV. Moreover, the model approach may only be changed for the respective next calendar year.
The obligation to deposit the synthetic excess spread with own funds represents an expense. The full model approach could also turn out to be an inappropriate cost driver. Overall, there is likely to be a lack of understanding as to why the very well performing European synthetic securitisations are subject to further requirements. Whether at least a pragmatic approach has been found for this is doubtful after the first impression.
The EBA invites comments, in particular on the 13 questions in the consultation. This also addresses the question of whether an alternative approach should be taken for "use-it-or-loose-it SES". Use-it-or-loose-it SES are those SES that are either used for loss absorption in a period or are no longer available. Market participants have until 14 October to provide feedback. TSI will actively accompany this consultation and submit a consolidated statement.