Last Friday, 14 October 2022, the EBA’s consultation period on the draft RTS on the capital adequacy of synthetic excess spreads (“SES”), the so-called Exposure Value of SES, expired. The Association for Financial Markets in Europe (AFME) has submitted a detailed response to the EBA. The underlying regulations STS for synthetic securitisations had already entered into force on 9 April 2021.
In its response, AFME criticises – partly very clearly – the present draft RTS regarding the tendency towards small-scale regulation, analogous to other regulations in connection with securitisations. Unfortunately, the high quality, strong performance and particularly the high relevance of (synthetic) securitisations for the financing of the real economy in the EU are not addressed.
The most important points of the AFME response on the exposure value of SES at a glance
- AFME points out that the draft RTS in its current version will make the use of SES in virtually all synthetic securitisations uneconomic, as it will massively reduce the capital relief available in synthetic securitisations. This includes securitisations sponsored by the European Investment Fund (EIF). The EIF has been fundamental in supporting bank lending to the real economy in the EU for many years.
- It is criticised that the RTS represents another assessment that banks must carry out when launching synthetic securitisations. The result is that the regulatory provisions are becoming more and more fragmented and comprehensive, but no longer form a uniform framework – and the economic viability of synthetic securitisations is thus further restricted.
- AFME attests to the draft RTS that the calculation of capital requirements for SES is not “fit for purpose” – neither with the Full Model Approach (FMA), nor with the Simple Model Approach (SMA). It backs up its finding with detailed model calculations for both approaches and shows that, on the one hand, they do not exhibit adequate sensitivity and, on the other hand, calculate inappropriately high capital requirements overall.
- AFME clearly favours the existing calculation method of the ECB mentioned in the draft RTS. In addition, the right to choose the approaches is rejected as unnecessary and impracticable in its design.
- The response also criticises the lack of a grandfathering rule, which poses major problems for ongoing transactions with regard to STS status.
The AFME response addresses several other important points and is overall very well written and backed up with valid arguments. TSI therefore strongly supports the AFME response. It now remains to be seen how many of the points raised the EBA will consider in its Final Draft.