The EBA published the Final Draft on the RTS on the exposure value of synthetic excess spreads (SES) on 25 April 2023. The first draft was published on 9 August 2022 and consulted until October 2022 (see TSI kompakt of 11 August 2022). The obligation to consider the SES as securitisation position which has to be included in the exposure value stems from the Capital Markets Recovery Package issued in March 2021.
Original draft received much criticism
During the consultation, many market participants clearly criticised the Draft RTS. Among them was AFME, which submitted a well-founded and detailed response to EBA, pointing out that the proposed rules would make securitisations with SES uneconomic. This concerns, among others, the synthetic balance sheet securitisations with the participation of EIF as investor. Due to the profound argumentation in the submission and the importance of SES for the synthetic securitisation market in Europe TSI has endorsed AFME’s submission. The main points of criticism were:
- the regulation, which is too small-scale,
- the time horizon in the calculation of the expected loss was not in line with the CRR (one year vs. maturity of the securitisation),
- the far too conservative calibration of the calculation methods for the SES exposure value, and
- the lack of grandfathering.
For details see TSI kompakt of 17 October 2022
EBA implements key points of criticism in the Final Draft
The Final Draft addresses the main points of criticism.The result is a new RTS that, although still very technical, appears much more practicable and risk adequate. The main adjustments can be summarised as follows:
- The full model approach for calculating the exposure value, which was introduced with the first draft and appears overregulated, was removed from the RTS. The calculation is now based on an adjusted simple model approach.
- The scalar for use-it-or-loose-it SES was reduced from 0.8 to 0.6 and is therefore less conservative.
- An exception was made for securitisations with use-it-or-loose-it SES where the SES is lower than the excess cash generated by the securitisation and lower than the expected loss on a one-year basis. If both conditions are met, the exposure value can be set to zero.
- A full grandfathering approach was introduced.
Assessment and conclusion
Fortunately, the EBA has taken the criticism from the market very comprehensively into account in the Final Draft of the RTS. The above-mentioned exemption for use-it-or-loose-it SES should be highlighted. This prevents originators from holding own funds against losses which are already covered by income. In addition, the usual 1-year horizon for the expected loss was taken up here. This now leads to consistency with CRR and the STS criteria. The latter stipulate that in relation to the one-year-horizon, SES may not be higher than the expected loss. This adjustment should mean that most transactions with SES will remain economic in the future, especially those involving the EIF as investor. The full grandfathering rule also means that the threat of inefficiency for existing transactions does not materialise.
The detailed feedback from the market remains to be seen. However, it is likely to be favourable and significantly more positive than during the consultation.