Securitisation and Regulation News

Performance-based triggers for synthetic STS securitisations

The EBA published the Final Draft of the RTS on performance-related triggers for synthetic STS securitisations on 20 September 2022. The objective of this RTS is to establish rules regarding the point in time at which synthetic securitisations must switch from pro-rata to sequential amortisation in order to protect investors in the senior tranche from losses.
The EBA had published the original draft on 20 December 2021. Market participants had until 28 February 2022 to submit their comments, TSI reported. The EBA has now taken into account some of the comments received in the Final Draft. The main changes are set out below.

Main adjustments to the RTS

  • The backward-looking performance trigger according to article 26c (5), paragraph 3 (a) Securitisation Regulation (SECR) has been clarified with regard to the wording. Furthermore, additional rules for transactions with replenishment or ramp-up period were defined.
  • The additional backward-looking performance trigger according to article 26c (5), paragraph 3 (b) SECR has been made more flexible. Originally, the definition of a fixed threshold value for the percentage of the detachment point of the senior tranche in relation to the original detachment point was intended as a trigger. This threshold can now be individually adjusted to the respective transaction. The alternative proposal for this trigger contained in the first draft is no longer taken into account in the final draft.
  • With regard to the forward-looking performance trigger according to article 26c (5), paragraph 3 (c) SECR, the intended regulation based on the exposure-weighted PD of the portfolio was removed from the RTS. The focus is now on the risk concentration, in the sense of the share of higher risk buckets in relation to the total exposure. In addition, a special rule was defined for transactions with less than 100 exposures.
  • Since the RTS does not define exact thresholds or fixed trigger events, an additional article was formulated that defines requirements for transaction-specific triggers. Among other things, the backward-looking triggers must be tested for effectiveness using a loss simulation.
  • In addition, the rules regarding a return to non-sequential amortisation were removed from the RTS.

The RTS for performance-related triggers for synthetic STS securitisations continues to provide for only limited grandfathering. Accordingly, also existing portfolio transactions have to take the new RTS into account from 1 January 2025. This could lead to some synthetic securitisations losing STS status during their term. This regulation could artificially raise the hurdles for efficient synthetic STS securitisations.

Next Steps

The Final Draft will now be submitted to the Commission. After consideration by the European Parliament and the Council, it will then be published in the official journal of the European Union. The RTS will enter into force twenty days after publication in the Journal.

Final draft RTS on performance-related triggers in STS OBS securitisations