Response to consultation on draft Guidelines on the STS criteria for on-balance-sheet securitisations
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A “at the best of the purchaser’s knowledge” qualifier would be worthwhile to introduce in the EBA guidelines as far as concern the assessment of the credit policy for the article 26(b)(1).
The nature of the two underlying exposures is normally different and the objective & the management process of the credit derivatives realised by the trading activities is completely different and separated from the credit & portfolio management department. In addition, there is a “Chinese Wall” between the two departments and therefore the trading activities is not aware of the exposures included in any “on balance sheet securitisations” by the credit & portfolio management department of the credit institution/originator.
We would like that the EBA guidelines clarifies that the potential short-term position of credit derivatives in market trading activities (outside the activity of credit & portfolio management) would not be considered as double hedging in the meaning of the article 26b(4).
Otherwise, the credit institution/originator may have a lot of difficulties to confirm the no “double hedging” of the article 26b(4) for the life of a transaction considering all the scenarios.
In addition, we would welcome confirmation that if it appears that as asset has already been hedged during the life of the transaction, the originator shall simply remove it from the securitised portfolio.
No double hedging - Hedge beyond the protection obtained through the credit protection agreement: We agree in principle. We would just suggest emphasizing that separate tranches, separate parts of the tranches or separate/different parts of underlying exposures under the credit protection agreement should not be considered as a hedge beyond the protection obtained through the credit protection agreement, and therefore, that vertical or horizontal tranching and hedging of unhedged portions of credit exposures would be possible and permitted.
However, this interpretation:
- tighten the level 1 text requirements that stipulate debtor with the inclusion of each exposure while banks follow-up by debtors.
- may also add a 3-month delay between the origination of the loan and the securitisation for already known clients, if regular payments do not exist at the beginning of the transaction
- is too restrictive on the definition of one payment since a payment could also include for instance, but not limited to, any fees.
Thus, maintaining the criterion on the debtor without narrowing the definition of payment would still achieve its purpose while avoiding the above mentioned unnecessary constrains.
Lastly, such a "double narrowing" could incur some operational difficulties since the reconciliation and/or identification of the flows might be done at the debtor level and not for each and every securitised exposure
However, taking into account the “two steps” mechanism of the determination of the credit protection (interim and then final mentioned in the article 26e(2), the coupon/premium to be paid to investors could include a “make up” mechanism. This “make up” mechanism (which exists in such transactions) allows to adjust/correct the interest amount/credit protection premium to be paid to the investors as such the amount of the final credit protection would have occurred/determined on the credit event date (instead of the amount of the interim credit protection).
We would like that the EBA clarifies in the guidelines that such “make up” mechanism is allowed and compatible with the criteria of the article 26(c)(3).
Further work is necessary on the RTS on SES in order to solve this interpretation and to solve another problems that the RTS on SES introduces on the RW formula ( 1250% RW of the SES above the EL): the fact that this amount should be multiplied by the residual WAL of the transaction is not consistent with the capital treatment (as indicated by EBA), and will lead to absurd capital treatment at the start of any transaction that uses this configuration. This puts more pressure in the definition of the 'derogation’ that should match the STS requirement (a fixed percentage of excess spread) and the cap by the EL
We would suggest harmonizing credit quality step required for collateral in the form of cash held by the originator or one of its affiliates to the credit quality step required for collateral held by third party institution, i.e. credit quality step 3 for both.
Firstly, it could be difficult to fully assess any side effect by anticipation and secondly the risk that any side effects (or discrepancies) actually occur cannot be underestimated . Thus, a grand-fathering clause should be strongly considered.
Q1. Do you agree that it is not necessary to further specify this criterion? If not, please provide reference to the aspects that require such further specification. For example, should additional interpretations of the term ‘no less stringent policies’ or ‘comparable exposures’ be provided and if yes, how are these terms understood in securitisation practice?
We would like we would like to take the opportunity to highlight that in the case of an “originator that purchases a 3rd party’s exposures”, it could be difficult for him to confirm in all material aspects that the credit policy of the “original” originator at the time of the origination of the exposures had “not less stringent” credit policies than the new originator as this comparative assessment would have to consider the credit policies at the origination of the exposures of the two originators with potentially more limited or partial information available for the new originator / purchaser. This assessment to be realised by the new originator / purchaser would be mainly qualitative and subjective.A “at the best of the purchaser’s knowledge” qualifier would be worthwhile to introduce in the EBA guidelines as far as concern the assessment of the credit policy for the article 26(b)(1).
Q4. Do you agree with the interpretation provided? Should additional aspects be clarified? Please substantiate your reasoning.
We think that the market trading in credit derivatives is a complete separate activity than the credit & portfolio management activities which realises the “on-balance sheet securitisations” of the credit institution originator. The trading activities of a credit institution / originator could have temporary short positions on credit default swaps for example on senior unsecured bonds of an issuer which is also a borrower of an exposure (eg a term loan or RCF) would be potentially included in the securitised portfolio.The nature of the two underlying exposures is normally different and the objective & the management process of the credit derivatives realised by the trading activities is completely different and separated from the credit & portfolio management department. In addition, there is a “Chinese Wall” between the two departments and therefore the trading activities is not aware of the exposures included in any “on balance sheet securitisations” by the credit & portfolio management department of the credit institution/originator.
We would like that the EBA guidelines clarifies that the potential short-term position of credit derivatives in market trading activities (outside the activity of credit & portfolio management) would not be considered as double hedging in the meaning of the article 26b(4).
Otherwise, the credit institution/originator may have a lot of difficulties to confirm the no “double hedging” of the article 26b(4) for the life of a transaction considering all the scenarios.
In addition, we would welcome confirmation that if it appears that as asset has already been hedged during the life of the transaction, the originator shall simply remove it from the securitised portfolio.
No double hedging - Hedge beyond the protection obtained through the credit protection agreement: We agree in principle. We would just suggest emphasizing that separate tranches, separate parts of the tranches or separate/different parts of underlying exposures under the credit protection agreement should not be considered as a hedge beyond the protection obtained through the credit protection agreement, and therefore, that vertical or horizontal tranching and hedging of unhedged portions of credit exposures would be possible and permitted.
Q6. Do you agree with the interpretation provided? Should additional aspects be clarified? Please substantiate your reasoning.
“To the best of the originator’s knowledge”: We suggest the list of sources or circumstances, proposed by the EBA in order to clarify the article, should be considered as a non-exhaustive / non-mandatory list, but as a list of examples only. For instance, we tend to think that it should also cover the information which is obtained following a purchase of underlying exposures then securitised.Q7. Do you agree with the interpretation provided? Should additional aspects be clarified? Please substantiate your reasoning.
We suggest better articulation between what is not considered as active management under the text of Article 26b(7) (i.e. substitution in case of breach of R&W and replenishment) and the EBA proposal (i.e. a and b of the EBA proposal). Indeed, it should be clarified that the techniques that do not constitute active portfolio management within the meaning of paragraph 123 are in addition to the substitution of exposures that are in breach of R&W and replenishment as referred to in article 26(b)7 2d paragraph.Q11. Do you agree with the interpretation provided? Should additional aspects be clarified? Please substantiate your reasoning.
“To the best of the originator’s knowledge” : We suggest the list of sources or circumstances, proposed by the EBA in order to clarify the article, should be considered as a non-exhaustive / non-mandatory list, but as a list of examples only.Q12. Do you agree with the interpretation provided? Should additional aspects be clarified? Please substantiate your reasoning.
We understand that this criterion aims to test the operational processes and that assets are not fake/ fraud.However, this interpretation:
- tighten the level 1 text requirements that stipulate debtor with the inclusion of each exposure while banks follow-up by debtors.
- may also add a 3-month delay between the origination of the loan and the securitisation for already known clients, if regular payments do not exist at the beginning of the transaction
- is too restrictive on the definition of one payment since a payment could also include for instance, but not limited to, any fees.
Thus, maintaining the criterion on the debtor without narrowing the definition of payment would still achieve its purpose while avoiding the above mentioned unnecessary constrains.
Lastly, such a "double narrowing" could incur some operational difficulties since the reconciliation and/or identification of the flows might be done at the debtor level and not for each and every securitised exposure
Q15: Do you agree with the interpretation provided? Should additional aspects be clarified? Please substantiate your reasoning.
The coupon/premium to be paid to investors is usually based on a reference index and/or a margin and the outstanding balance of the tranche of the credit protection provided by such investor.However, taking into account the “two steps” mechanism of the determination of the credit protection (interim and then final mentioned in the article 26e(2), the coupon/premium to be paid to investors could include a “make up” mechanism. This “make up” mechanism (which exists in such transactions) allows to adjust/correct the interest amount/credit protection premium to be paid to the investors as such the amount of the final credit protection would have occurred/determined on the credit event date (instead of the amount of the interim credit protection).
We would like that the EBA clarifies in the guidelines that such “make up” mechanism is allowed and compatible with the criteria of the article 26(c)(3).
Q16: On reference rates: Is the interpretation on this term deemed helpful for the interpretation of this requirement? Please provide more information on the referenced interest payments used in relation to the transaction in your entity’s practice.
cf Q15Q17: On complex formulae or derivatives: Is the guidance provided sufficient to clarify the requirement or should the guidance be extended? In case of the latter, please provide suggestions on how to define complex formulae and derivatives.
cf Q15Q19: Do you agree with the interpretation provided? Should additional aspects be clarified? Please substantiate your reasoning.
We believe that the additional interpretations on ‘significant losses’ and ‘back loaded loss distribution scenario’ are too restrictive and can be viewed as ‘gold-plating’ to the already published final draft RTS on performance. Thus, they should be removed. Besides it's our understanding they go beyond the purpose of this consultation aiming at clarifying the Regulation 2017/2402 and not adjusting the RTS Regulatory technical standards.Q26: Do you agree with the interpretation provided? Should additional aspects be clarified? Please substantiate your reasoning.
We would welcome having confirmation that the verification can be carried out via IT systems, and that no check is systematically required on the loan agreement itself .Q28: Do you agree with the interpretation provided? Should additional aspects be clarified? Please substantiate your reasoning.
We agree with the interpretation, however the comment on ‘third parties’ does not seem relevant in relation with the mention of third parties in the level 1 text Article 26d(3) where third parties seems to refer to third parties of the operation itself while "third parties" in the interpretation seems to refer to third parties for each institution.Q39: Do you agree with the interpretation provided? Should additional aspects be clarified? Please substantiate your reasoning.
We don't see any reason to limit the amount of excess spread used to define an STS securitization in a manner that is different from the requirements of the RTS on synthetic excess spread. We would recommend to refer directly to the RTS on synthetic excess spread, where a few questions still need to be clarified: since the amount of excess spread should be a fixed percentage in the contract (expressed as a fixed percentage of the total outstanding portfolio balance), it cannot be defined by the Expected Loss at each payment date: it should be defined by the planed 1 Year Expected Loss as seen at the origination.Further work is necessary on the RTS on SES in order to solve this interpretation and to solve another problems that the RTS on SES introduces on the RW formula ( 1250% RW of the SES above the EL): the fact that this amount should be multiplied by the residual WAL of the transaction is not consistent with the capital treatment (as indicated by EBA), and will lead to absurd capital treatment at the start of any transaction that uses this configuration. This puts more pressure in the definition of the 'derogation’ that should match the STS requirement (a fixed percentage of excess spread) and the cap by the EL
Q42: Do you agree with the interpretation provided? Should additional aspects be clarified? Please substantiate your reasoning.
We have no comments on the EBA guidelines proposal; however, we would like to take the opportunity to highlight a ‘technical’ contradiction / inconsistency in the level 1 text, as the collateral in the form of cash should be held with a third-party credit institution with credit quality step 3 and the originator may have recourse to high quality collateral in the form of cash on deposit with the originator if the originator qualifies as a minimum for credit quality step 2.We would suggest harmonizing credit quality step required for collateral in the form of cash held by the originator or one of its affiliates to the credit quality step required for collateral held by third party institution, i.e. credit quality step 3 for both.
Q43: Do you agree that no other requirements are necessary to be specified further? If not, please provide reference to the relevant provisions of the STS requirements and their aspects that require such further specification. Please substantiate your reasoning.
What would happen to the existing operations that already received the STS Label should they were compliant at the time of the constitution but could become non-compliant due to some of the clarification provided by those guidelines?Firstly, it could be difficult to fully assess any side effect by anticipation and secondly the risk that any side effects (or discrepancies) actually occur cannot be underestimated . Thus, a grand-fathering clause should be strongly considered.