REPORT FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND THE COUNCIL on the creation of a specific framework for simple, transparent and standardised synthetic securitisation, limited to balance-sheet synthetic securitisation (Text with EEA relevance)
Date: 2020-07-24
Institutions: Directorate-General for Financial Stability, Financial Services and Capital Markets Union, European Commission
Subjects: banking, capital market, credit, credit institution, financial legislation, financial market, investment, investment company

EN 

  EN 

   EUROPEAN COMMISSION  Brussels, 24.7.2020  COM(2020) 284 final  REPORT FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND THE COUNCIL on the creation of a specific framework for simple, transparent and standardised synthetic securitisation, limited to balance-sheet synthetic securitisation               (Text with EEA relevance) {SWD(2020) 120 final}  
 
 
1.  BACKGROUND AND RATIONALE 

Article  45(1)  of  Regulation  (EU)  2017/24021  (hereafter  “Securitisation  Regulation”)  requires  the 
European  Banking  Authority  (hereafter  “EBA”)  to  publish  a  report  on  the  feasibility  of  a  specific 
framework for simple, transparent and standardised (hereafter “STS”) synthetic securitisation, limited 
to  balance-sheet  synthetic  securitisation.  Balance-sheet  synthetic  securitisations  (hereafter  “BSSS”) 
are  securitisation  transactions  where  the  originating  institution,  typically  a  bank,  uses  financial 
guarantees or credit derivatives to transfer to third parties the credit risk of a specified pool of assets 
that it holds on its balance sheet and for which, in the vast majority of cases, it was also the original 
lender. The underlying assets are typically corporate loans, SME loans or trade finance  – assets that 
are for various reasons more difficult or less attractive for the  originator to securitise in a traditional 
way.  As  such,  BSSS  can  be  clearly  distinguished  from  arbitrage  synthetic  securitisations,  which 
involve underlying assets that are not owned by the originator of the securitisation. Instead of hedging 
credit risk, the main aim of an arbitrage synthetic transaction is to seek arbitrage between the spread 
on  the  credit  quality  of  a  pool  of  assets  or  product  indices  and  the  spread  on  the  resulting 
securitisation product.  

Recital 24 of the Securitisation Regulation also invites the EBA to determine relevant criteria for such 
specific framework “with a view to promoting the financing of the real economy and in particular of 
SMEs, which benefit the most from such securitisations”.  

Article  45(2)  of  the  Securitisation  Regulation  requires  the  Commission  to  submit  to  the  European 
Parliament  and  the  Council  a  report  on  the  creation  of  a  specific  STS  framework  for  balance-sheet 
synthetic  securitisation,  on  the  basis  of  the  aforementioned  EBA  report,  and  accompany  it  with  a 
legislative proposal, if appropriate. 

The EBA report was published on 6 May 20202. The report builds on the previous EBA Report on 
Synthetic Securitisation, published in December 20153, whose recommendations are already reflected 
in  the  Capital  Requirements  Regulation4  (hereafter  “CRR”),  and  on  the  Discussion  Paper  on 
Significant  Risk  Transfer5  in  Securitisation,  published  in  September  20176.  Significant  risk  transfer 
(hereafter  “SRT”)  is  particularly  important  for  synthetic  securitisation,  as  the  transfer  of  risk,  and 
associated capital relief, are one of the motivations for engaging in this type of securitisation. 

In  preparing  its  report,  the  EBA  published  a  discussion  paper  in  September  2019  for  a  two-month 
consultation. With most of the responses expressing strong support both for the analysis of the market 
and for the rationale for the development of an STS framework for synthetic securitisation, the EBA 
report builds on a broad consensus among stakeholders, for both the feasibility of such framework and 
the relevant criteria that would make synthetic securitisation part of it. 

https://eba.europa.eu/eba-proposes-framework-sts-synthetic-securitisation  
https://eba.europa.eu/eba-issues-advice-on-synthetic-securitisation-for-smes  
Regulation (EU) 2017/2401 of the European Parliament and of the Council of 12 December 2017 

1  
Regulation  (EU)  2017/2402  of  the  European  Parliament  and  of  the  Council  of  12  December  2017 
laying  down  a  general  framework  for  securitisation  and  creating  a  specific  framework  for  simple,  transparent 
and  standardised  securitisation,  and  amending  Directives  2009/65/EC,  2009/138/EC  and  2011/61/EU  and 
Regulations (EC) No 1060/2009 and (EU) No 648/2012  
2  
3  
4  
amending Regulation (EU) No 575/2013 on prudential requirements for credit institutions and investment firms 
5  
Significant risk transfer is required in order for the originator bank to be able to exclude the securitised 
exposures from its risk-weighted assets, in the case of traditional securitisation, or to calculate its risk-weighted 
assets in accordance with Articles 251 and 252 of the CRR, in the case of synthetic securitisations. 
6  
significant-risk-transfer-in-securitisation  

https://eba.europa.eu/regulation-and-policy/securitisation-and-covered-bonds/discussion-paper-on-the-

1 

 
 
 
                                                           
2.  SPECIFICITIES OF BALANCE-SHEET SYNTHETIC SECURITISATION 

Synthetic securitisation and traditional/true-sale securitisation do not fundamentally differ in terms of 
the nature of the underlying exposures, risk tranching and capital (waterfall) structures. Where they 
differ considerably, however, is in the ways of transferring risk from the originator to the investor.  

Traditional  securitisation  involves  the  effective  legal  transfer  of  the  assets  by  the  issuer  of  the 
securities in a way that the ownership is actually transferred to a Securitisation Special Purpose Entity 
(SSPE) that hence becomes entitled to the cash flows generated by those assets. BSSS realises the risk 
transfer by means of a credit protection contract (credit derivatives or financial guarantees) between 
the  originator  and  the  investor,  in  a  way  that  the  underlying  exposures  in  the  ownership  of  the 
originator  are  left  on  its  balance  sheet.  Therefore,  while  traditional  securitisation  requires  both  an 
SSPE  and  actual  issuance  of  securities,  neither  of  those  would  be  strictly  necessary  for  synthetic 
securitisation. 

BSSS tends to be easier to execute than traditional securitisation, owing to the greater flexibility of the 
synthetic mechanism. In addition, it tends to be cheaper in terms of costs and quicker to arrange. It 
allows the originator to avoid the legal and operational difficulties that can arise in the process of the 
transferring the ownership of the underlying exposures in a traditional transaction.  

Recent  years  have  brought  about  significant  simplification  in  BSSS  market  practices  and  industry 
evidence suggests that the documentation accompanying the instrument have decreased from around 
500 pages before the global financial crisis to less than 50 pages nowadays, pointing to a significant 
reduction in complexity. 7 

The risk transfer in synthetic securitisation depends not only on the capital structure of the transaction 
(i.e. the tranching) and potential mechanisms of support from the originator (as it is the case for true-
sale securitisation), but also on the features of the credit protection contract entered into by the parties 
as well as on the creditworthiness of the investor. The recourse to credit protection, in particular if it is 
unfunded and provided by non-public protection sellers, exposes individual banks to counterparty risk 
and  may,  in  case  of  a  high  concentration  of  protection  sellers  create  an  interconnectedness  in  the 
financial  system  that  can  have  systemic  implications  (as  demonstrated  in  the  2008/9  financial 
crisis).This notwithstanding, when both parties enter into the transaction with full knowledge of the 
underlying risks, the risk of misalignment of interest between originators and investors is reduced as 
risk management is equally important for both the protection seller and the protection buyer. 

Synthetic  securitisation  also  differs  from  traditional  securitisation  in  terms  of  purpose.  The  use  of 
synthetic securitisation has indeed emerged as a useful tool for a large number of banks in their credit 
risk and capital management activities, as it enables them to transfer credit risk to the private capital 
markets  efficiently,  thus  freeing  up  both  capital  and  lending  limits  and  allowing  them  to  continue 
lending activities, while traditional securitisation is more commonly used to obtain funding from the 
sale of assets, rather than as a credit risk management tool.  

3.  MARKET PERFORMANCE 

Market dynamics 

Unavailability  of  comprehensive  data  about  market  developments  and  performance  of  synthetic 
securitisations  were  among  the  key  factors  that  resulted  in  limiting  the  STS  label  to  traditional 
securitisations  in  Regulation  (EU)  2017/2402.  The  EBA  filled  this  gap  by  collecting  i)  data  on  the 
volume of BSSS transactions for the period 2008 – early 2019; ii) data on the default performance of 
BSSS  for  the  same  period;  iii)  supervisory  data  on  transactions  that  have  achieved  SRT;  and  iv) 
information  gathered  from  industry  in  a  roundtable  event  in  March  2019  as  well  as  other  market 
analysis. Despite this significant effort, however, the picture is not fully complete, largely because of 
the  bilateral  and  private  nature  of  these  types  of transactions in  the  years  since  the  global  financial 

7  

Synthetic securitisation: Making a silent comeback, Deutsche Bank EU Monitor, 21 February 2017 

2 

 
 
                                                           
crisis. Moreover, a lot of the transactions reported were originated in recent years and therefore have 
not gone through a full business cycle yet. Finally, some of the data was collected through surveys of 
market participants and therefore may not be fully representative of the entire market.  

The  gathered  information  demonstrated  that  the  2008  financial  crisis  has  profoundly  reshaped  the 
synthetic  securitisation  market.  Before  the  crisis,  European  synthetic  securitisation  peaked  in  2004-
2005 with volumes above EUR 180 billion due to a large supply of arbitrage synthetic transactions. 
The latter suffered significant losses during the crisis, reflecting their complexity, lack of transparency 
and  imperfect  alignment  of  interest,  and  seem  to  have  largely  disappeared,  and  the  market  now 
consists primarily of balance-sheet transactions. 

The  data  on  issuance  point  to  a  positive  trend.  Following  a  few  years  of  subdued  activity  after  the 
financial crisis, reflecting the stigma that was attached to the securitisation instrument, the synthetic 
market  has  been  recovering  in  the  recent  years,  with  both  the  number  and  volume  of  transactions 
steadily  increasing.  According  to  data collected  by  the  International  Association  of  Credit  Portfolio 
Managers  (IACPM),  2018  saw  the  initiation  of  some  49  transactions  with  a  total  volume  of  105 
billion EUR, the highest since the financial crisis (see Figure 1). 

Figure 1: European balance sheet securitisation issuance after the global financial crisis 

140.000

120.000

100.000

80.000

60.000

40.000

20.000

0

80

70

60

50

40

30

20

10

0

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
YTD

Number of trades, rhs

Expected number of trades for the year, rhs

Pool size in EUR mn, lhs

Source: EBA, IACPM 

The  change  in  the  nature  of  European  synthetic  securitisation  market  and  the  prevalence  of  the 
balance-sheet segment might be explained by the low default rates of the instrument even throughout 
the 2008 financial crisis. According to the data collected by the EBA, investors in on-balance sheet 
transactions have borne materially lower losses than investors in arbitrage synthetics (see Figure 2). In 
fact,  the  lifetime  default  rates  of  on-balance-sheet  transactions  tended  to  outperform  traditional 
securitisations as well, for all rating grades and asset classes (see Figure 3). 

Figure 2: Lifetime Default Rate for synthetic tranches, as of end 2018 

3 

 
 
 
)

%

(

25

20

15

10

5

0

Balance sheet

Arbitrage

AAA

AA

A

BBB

BB

Original rating category 

Source: EBA, S&P 

Figure 3: Lifetime Default Rates for balance-sheet synthetic and true-sale securitisaion, selected 
asset classes (as of end 2018) 

)

%

(

15

10

5

0

Balance sheet synthetic

True sale

SME CLOs

Other CLOs

RMBS

CMBS

Source: EBA  

Asset composition, buyers and sellers 

The  data  collected  by  the  EBA  shows  that  BSSS  appear  to  be  used  to  transfer  corporate  risk  from 
banks to capital markets to a much larger extent than traditional securitisations. The predominant asset 
classes in balance sheet transactions are loans large corporates and SMEs, followed by trade finance 
(see Figure 4).8  

To maximise the objective of capital relief, BSSS originators tend to select asset classes with high risk 
weights. Moreover, the EBA analysis indicates that originators of BSSS tend to select portfolios that 
represent  their  core  business,  which  might  reflect  demand  from  investors  to  ensure  alignment  of 
interest. Indeed, it is less common for stressed or over-leveraged assets to be included in BSSS than in 
traditional securitisations, which might partly explain the observed difference in terms of default rates. 
Retail  exposures,  such  as  residential  Mortgage-backed  securities  (RMBS)  or  consumer  loans,  also 
tend to appear less frequently in BSSS as they have lower risk weights, thereby bringing less benefit 
in terms of capital relief, and are more likely to be subject to internal concentration limits, such as in 
terms of geographical location, type of borrower or economic sector, which makes them more suitable 
for traditional securitisation. 

Figure 4: Asset classes breakdown, EUR million 

8 Data from recent years indicates increased diversification of asset classes to include specialised lending 
(including infrastructure loans), commercial real estate, residential real estate, trade receivables, auto loans, as 
well as more esoteric classes such as micro loans and farming loans. 

4 

 
 
 
 
                                                           
 
 
140.000

120.000

100.000

80.000

60.000

40.000

20.000

0

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
YTD

SME loans
Other (RMBS, CMBS, etc.)

Large corporate loans
Trade finance
Total

Source: EBA, IACPM 

Market characteristics 

The  originators  are  now  mostly  banks,  in  particular  large  and  systemically  important  banks  using 
Internal Rating-Based models for calculating capital requirements. The main reasons for an originator 
to seek entering into a BSSS are credit risk management and releasing capital. The latter is becoming 
increasingly  important  in  light  of  regulatory  developments,  such  as  the  adoption  of  the  Basel  III 
framework and the application of IFRS 9. 

The majority of investors in synthetic securitisation are non-bank entities, usually highly specialised 
in credit investing and experienced in portfolio due diligence. The investor pool consists primarily of 
hedge  funds,  pension  funds  and  asset  managers,  while  insurance  companies  represent  a  negligible 
minority  (see  Figure  5).  Recent  years  have  seen  the  entry  of  multilateral  development  banks9  and 
international organisations (including the EIB/EIF which continue to be an important investor in the 
SME market).  
Figure 5: Investors, in terms of % volume of distributed tranches over 2008-2019 

2,20% 

0,20% 

[VALUE] 

0,90% 

[VALUE] 

[VALUE] 

Central Governments or
Central Banks

0% risk-weighted MDB and
Int'l Organisation

Insurance Company

Pension Fund

Asset manager

Hedge Fund

Other

[VALUE] 

Source: IACPM, EBA; Note: MDB – Multilateral Development Bank 

9 The multilateral development banks, exposures to which are eligible for a 0% risk weight, are listed in Article 
117(2) of the CRR. 

5 

 
 
 
 
                                                           
The credit protection mechanisms used in BSSS evolved substantially in the aftermath of the global 
financial  crisis.  Unfunded  credit  protection  mechanisms  (bilateral,  privately  negotiated  credit 
derivative  contracts,  such  as  Credit  Default  Swaps)  have  been  almost  entirely  replaced  by  funded 
protection  (involving  an  upfront  payment  to  the  protection  buyer,  thus  removing  counterparty  risk 
exposure, such as Credit Linked Notes). Indeed, the EBA highlights in its report that 90% of the credit 
protection provided by the private investors is now funded credit protection.  

Beyond this additional security provided by the change in the use of credit protection mechanisms, the 
financial  crisis  brought  about  major  changes  in  the  way  risk  is  shared  and  transferred  within  the 
market. According to the EBA’s analysis, originators tend now to transfer the junior and/or mezzanine 
element of the portfolio’s credit risk and retain the senior tranche of the same portfolio. The senior 
tranche would typically be the largest of the tranches and would represent on average around 87% of 
the  total  volume  of  transaction.  This  is  an  important  change  in  practice  compared  to  the  pre-crisis 
period, when a “super” senior tranche10 would typically be placed with investors. The EBA observed 
that  in  response  to  the  entry  into  application  of  the  new  securitisation  framework,  junior  tranches 
appear to have become thicker, which might attract new investors into the market.  

In terms of geographical distribution, many of the larger transactions have been concentrated in a few 
Member States (UK, Germany, Spain, France, and Italy), although transactions have also been seen in 
other EU Member States. The EBA’s analysis also shows that the majority of the transactions contain 
multi-jurisdictional exposures, with most of them involving exposures outside Europe. 

4.  WOULD  BALANCE-SHEET  SYNTHETIC  SECURITISATIONS  REQUIRE  A  SPECIFIC  STS 

FRAMEWORK? 

Desirability analysis 

The  pro’s  and  con’s  analysis  conducted  by  the  EBA  suggests  that  introducing  a  specific  STS 
framework  for  BSSS  is  likely  to  bring  many  long-terms  benefits  to  financial  markets  and  the  real 
economy and is, to that extent, expected to improve overall financial stability. 

The  main  benefits  of  the  extending  the  label  are,  as  the  name  implies,  enhancing  simplicity, 
transparency and standardisation of the synthetic securitisation product. This would address some of 
the  main  concerns  that  have  been  attached  to  synthetic  securitisation,  such  as  its  perceived 
complexity,  riskiness,  likelihood  of  arbitrage  and  fraud,  and  the  information  asymmetries  involved. 
The assessment of risks, by the parties involved as well as by supervisors, would be enhanced and the 
overall  monitoring  of  the  market  would  be  greatly  facilitated.  Even  if  the  market  remains  largely 
bespoke and bilateral, competent authorities would be notified of each transaction that claims the STS 
label  and  would  have  the  opportunity  to  follow  up  with  the  parties  involved.  Finally,  market 
standardisation would make it easier for new originators to enter the market, which could also attract 
more investors. 

Furthermore, the roll-out of the final elements of the Basel III reform would increase the importance 
of  credit  risk  and  capital  management  tools,  such  as  BSSS.  In  this  context,  making  sure  that  the 
market develops within the parameters of the robust STS framework avoids the risk of re-emergence 
of the harmful practices of the past and would benefit financial stability.  

However,  the  EBA  warns  that  the  introduction  of  a  specific  STS  framework  for  BSSS  needs  to  be 
diligently accompanied by supervision to avoid negative consequences. In particular, just like with the 

10 Designating a “super” senior tranche was a technique used by originators of synthetic securitisations before 
the  global  financial  crisis,  in  order  to  stress  the  deemed  risk-free  nature  of  the  most  senior  tranche  in  the 
securitisation structure. Typically, the tranche below the ‘super’ senior one would be rated AAA, thus giving the 
“super” senior tranche the nickname “AAAA-rated”. 

6 

 
 
 
                                                           
cash  securitisation  STS  label,  the  risk  of  moral  hazard,  such  as  negligence  by  less  sophisticated 
investors, might increase due to a possible perception that the STS label inherently means a low-risk 
product independent of differences between individual transactions or positions within transactions.  

Additionally, there is a question whether the introduction of an STS framework for BSSS might lead 
to less issuance of traditional STS securitisation. The likelihood of this risk materialising is however 
not  significant.  Also  the  EBA  points  out  that  no  materially  significant  impact  on  traditional 
securitisation should  be  expected  given  the  different functions  and  objectives  – both for  originators 
and investors – of the two instruments.  

Finally,  it  should  be  noted  that  currently,  the  international  framework  for  simple,  transparent  and 
comparable securitisation, developed by  the  Basel  Committee  on  Banking  Supervision  (BCBS)  and 
the International Organization of Securities Commissions (IOSCO), excludes synthetic securitisation 
from  its  scope.  Based  on  the  data  collected  and  the  technical  analysis  performed  by  EBA,  there  is 
prudential evidence to consider a specific STS framework for BSSS. 

Feasibility analysis 

According  to  the  EBA,  a  specific  STS  framework  for  BSSS  would  need  to  take  account  of  the 
structural  specificities  of  the  product  that  differ  from  traditional  securitisation.  In  particular,  these 
include counterparty credit risk, modalities of the credit transfer, as well as the different motivations 
and perspectives for the protection buyers and sellers.  

Taking the existing STS criteria for true-sale securitisations as a basis, the EBA has identified a set of 
STS criteria that can apply to BSSS, while at the same time addressing the specificities of the latter. 
The  identified criteria  also  seek  to ensure that  risky  assets that  are  out  of  scope  for  traditional  STS 
securitisations, such as non-performing loans, corporate mortgage backed securities or collateralised 
loan obligations, woud remain out of scope of the STS label. 

When it comes to simplicity and transparency, many of the true-sale STS criteria can be applied also 
to  synthetic  transactions.  Some  would  need  to  be  modified  or  replaced  as  they  are  not  relevant  in 
synthetic  transactions.  For  example,  the  true-sale  criterion  and  its  enforcement  should  be  replaced 
with a definition of balance sheet synthetics, carefully drafted to excluding arbitrage transactions, and 
requirements to ensure robustness of credit protection contract. Some new criteria, such as specifying 
credit protection premiums and early termination events, have also been deemed necessary. 

The EBA proposes a more substantial review of the standardisation criteria as only a few general ones 
would be relevant in synthetic transactions, such as the risk retention requirement. Others, such as the 
mitigation of interest rate and currency risks or the allocation of losses and tranche amortisation, have 
been modified to better reflect the nature of BSSS practices. Finally, a number of new criteria specify 
key  aspects  such  as  credit  protection  mechanisms,  synthetic  excess  spread,  credit  events  and  credit 
protection  payments.  Standardising  this  largely  bespoke  market  has  been  seen  as  one  of  the  key 
challenges  to  building  an  efficient  STS  framework.  The  proposed  set  of  criteria  takes  into  account 
existing best market practices in order to set a prudent and workable standard. 

Annex II provides a full list of the STS criteria identified by the EBA. 

As  with  true-sale  STS  securitisations,  the  synthetic STS  label  should  not  be taken  to  mean  that  the 
securitisation concerned is free of risks, but rather that the product respects a number of criteria and 
that a diligent protection seller and buyer, as well as a national competent authority, will be able to 
analyse the risk involved. The identified criteria take into account the different objectives of synthetic 
securitisations,  i.e.  done  for  capital/risk  management  purposes  as  opposed  to  funding,  no  true  sale 
transfer  of  the  underlying  assets,  exposure  to  counterparty  credit  risk,  etc.,  and  therefore  seek  to 
ensure  protection  for  both  originators  and  investors  (as  the  originator  is  also  an  investor  in  the 

7 

 
 
transaction, retaining the senior tranche). By contrast, the true-sale STS framework aims to maximise 
protection  for  the  investor  only,  as  the  sale  of  the  assets  to  an  SSPE  makes  protection  for  the 
originator less relevant. 

5.  PREFERENTIAL CAPITAL TREATMENT 

From a prudential point of view, synthetic securitisations are currently treated as traditional (true-sale) 
non-STS securitisations. The only exception to this  approach is provided in Article 270 of the CRR 
for the synthetic securitisations of SME loans. Article 270 targets the senior tranche retained by the 
originator of synthetic securitisations fulfilling a set of limitative criteria: 

- 

- 

- 

at least 70% of the securitised exposures need to be exposures to SMEs, as defined in Article 501 
of the CRR; 

the securitisation meets the true-sale STS criteria as applicable to a synthetic securitisation; 

the  credit  risk  not  retained  by  the  originator  is  transferred  through  a  guarantee,  or  counter 
guarantee,  which  complies  with  CRR  requirements  on  credit  risk  mitigation,  and  the 
guarantor/counter-guarantor is either a) a central government or central bank of a Member State, a 
multilateral development bank or an international organisation, and qualifies for a 0% risk-weight 
treatment under the standardised approach for credit risk; or b) an institutional investor provided 
that  the  guarantee  or  counter-guarantee  is  fully  collateralised  by  cash  on  deposit  with  the 
originator. 

Despite some constrains in terms of collected data and practical experience with the traditional STS 
securitisation framework, the technical analysis carried out by the EBA could allow to conclude that 
the inherent risks linked to BSSS complying with adjusted STS criteria could call for  reviewing the 
CRR  toward  a  more  risk-sensitive  capital  treatement  of  the  senior  tranche  of  those  instruments, 
aligning it with the preferential treatment of traditional STS securitisations. As observed by the EBA, 
this  would  be  justified  by  the  good  performance  of  BSSS  compared  to  arbitrage  synthetic 
securitisation and traditional securitisation, with in particular low default and loss rates. In addition, 
the extention of the STS label would allow to better appreciate simpler, more standardised and more 
transparent synthetic securitisations, where reduced agency and modelling risks can be expected.   

As mentioned by the EBA Report, BSSS are currently not part of the STS framework developed by 
the  Basel  Committee,  which  is  centred  on  traditional  securitisations.  This  deviation  from  Basel 
standards  would  be  nonetheless  prudentially  motivated  by  data  and  technical  analysis justifying  the 
prudential soundness of an extension of the STS framework to BSSS.  

The extension of the STS framework to BSSS would allow the latter to benefit from the established 
preferential  capital  treatment  for  the  STS  product.  This  could  be  nonetheless  framed  by  a  targeted 
review of Article 270 of the CRR ensuring a) an extension of the preferential capital treatment offered 
by this Article to all STS-compliant BSSS, independently from the type of underlying exposure (by 
deleting provisions currently restraining this article to BSSS composed of at least 70% of securitised 
exposures  on  SMEs),  while  b)  maintaining  the  already  existing  limited  scope  of  the  preferential 
capital treatment to the senior tranche retained by the originator, deemed less risky. As a consequence 
of these adjustments, the senior tranche retained by the originator would be subject to a risk weight 
floor of 10%. 

Overall, the combined review of the STS framework and the CRR in the case of BSSS, by allowing 
for  a  differenciated  prudential  treatment  of  STS  compliant  BSSS  compared  to  non-STS  compliant 
BSSS and arbitrage securitisation, would increase the risk sensitivity of the prudential framework and 
reinforce the attractiveness of the STS framework.  

8 

 
 
 
 
6.  CONCLUSIONS 

The  analysis  conducted  by  the  EBA  shows  that  it  is  possible  to  set  standards  for  synthetic 
securitisation  that  allow  mitigating  the  main  drivers  of  structuring  risk,  such  as  agency  and  model 
risks,  in  the  same  way  as  for  traditional  securitisation,  thereby  creating  a  subset  of  synthetic 
securitisation  that  is  comparable  to  STS  traditional  securitisation.  In  fact,  evidence  shows  that 
historical  performance  of  balance-sheet  synthetic  securitisation  tends  to  exceed  that  of  traditional 
securitisations for the same asset class. Indeed, from a technical perspective, there is no evidence that 
would suggest that synthetic securitisation structure inherently results in higher losses than traditional 
securitisation structure. A sound synthetic structure does not negatively affect the performance of the 
securitisation.  

The analysis does not point to any material negative consequences that could be foreseeably generated 
by the creation of a specific STS framework for balance-sheet synthetic securitisations. On the other 
hand, reviving the synthetic securitisation market and ensuring that it develops within the robust STS 
framework entails a number of positive benefits for banks, financial market and financial stability in 
general. The risk transfer from banks to the non-banking sector is one of the main objectives of the 
Capital  Markets  Union  and  by  facilitating  the  availability  of  credit  to  those  who  need  it,  could 
promote economic growth. 

9 

 
 
 
 
Based  on  the  EBA  analysis,  it  is  possible  to  create  a  specific  framework  for  STS  balance-sheet 
synthetic securitisations and to establish a differentiated regulatory treatment, limited to adjusting the 
prudential floor for the senior tranche, that should be retained by the originating credit institution, to a 
level equivalent to the traditional STS framework. 

10 

 
 
 
 
 
Annex I: Summary comparison of synthetic market pre- and post-crisis  

ANNEXES 

Synthetic market pre-crisis 

Synthetic market post-crisis 

Market 

Public 

Private or bilateral 

Type of securitisation 

Arbitrage and balance sheet 

Almost exclusively balance 
sheet 

Private/Public 

Mostly public and rated 

Mostly private and bilateral 

Assets 

Mostly corporates 

Mostly corporates, 
diversification and addition of 
new asset classes 

Large banks, mostly SIFIs 

Larger to mid-tier banks, 
standardised banks moving to 
IRB 

Broad, ABS mainly 

Narrow, alternative mainly 

Full synthetic structure (senior 
+ junior) 

Mezz/junior only 

Originators 

Investors 

Structure 

Credit protection mechanism  Unfunded 

Funded, and unfunded for 
public 

Source: EBA, Integer Advisors 

11 

 
 
 
 
 
Annex II: Overview of STS criteria and comparison with STS criteria for traditional 
securitisation 

Criterion 

Comparison with criteria for traditional (non-ABCP) 
securitisation (references to Articles in Securitisation 
Regulation)  

Simplicity 

Criterion 1: Balance sheet 
synthetic securitisation, credit 
risk mitigation  

Criterion 2: Representations and 
warranties  

Criterion 3: Eligibility criteria, 
no active portfolio management  

Replacement of the criterion on true 
sale/assignment/assignment at later stage, clawback 
provisions, representations and warranties on enforcement 
of true sale (Art. 20(1) – (5) of the Securitisation 
Regulation) – with definition of balance sheet synthetics 
and requirement to ensure robustness of credit protection 
contract (credit risk mitigation criteria)  
Adaptation of the the criterion on representations and 
warranties (Art. 20(6): extension of the required 
representations and warranties and adaptation of their 
objective and content  
Adaptation of the criterion on eligibility criteria, no active 
portfolio management (Art. 20(7)): adaptation of allowed 
portfolio management techniques, inclusion of additional 
conditions for removal of the underlying exposures in 
securitisation  
Similar  (Art. 20(8))  

Criterion 4: Homogeneity, 
enforceable obligations, full 
recourse to obligors, period 
payment streams  
Criterion 5: No transferable 
securities  
Criterion 6: No resecuritisation   Similar (Art. 20(9))  
Criterion 7: Underwriting 
standards and material changes 
thereto  

Similar (Art. 20(8))  

Adaptation of the criterion on underwriting standards and 
material changes thereto (Art. 20(10): additional 
clarification with respect to the types of eligible obligors 
and with respect to the underwriting of the underlying 
exposures  

Criterion 8: Self-certified loans   Similar (Art. 20(10))  
Similar (Art. 20(10))  
Criterion 9: Borrower’s 
creditworthiness  
Criterion 10: Originator’s 
expertise  
Criterion 11: No defaulted 
exposures or exposures subject 
to outstanding disputes  
Criterion 12: At least one 
payment made  

Similar (Art. 20(12))  

Similar (Art. 20(11))  

Similar (Art. 20(10))  

NEW criterion: Credit 
protection premiums 

NEW criterion: Early 

Specifying that the credit protection premiums should be 
contingent i.e. the actual amount of premium paid should be 
a function of the size and the credit risk of the protected 
tranche. No guaranteed premiums, upfront premium 
payments, rebate mechanisms or other mechanisms of 
similar nature are to be allowed 
Specifying an exhaustive, limited number of early 

12 

 
 
 
 
 
 
 
 
termination events 

Criterion 13: Risk retention 
requirements  

Criterion 14: Appropriate 
mitigation of interest rate and 
currency risks  

Criterion 15: Referenced 
interest payments  
Criterion 16: Requirements 
after enforcement/acceleration 
notice  
Criterion 17: Allocation of 
losses and amortisation of 
tranches  

Criterion 18: Early amortisation 
provisions/triggers for 
termination of the revolving 
period  
Criterion 19: Transaction 
documentation  

Criterion 20: Servicer’s 
expertise  
Criterion 21: Reference register  

Criterion 22: Timely resolution 
of conflicts between investors  
NEW criterion: Credit events 

NEW criterion: Credit 
protection payments 
NEW criterion: Credit 
protection payments following 
the close out/final settlement at 
the final legal maturity of the 
credit protection agreement 
NEW criterion: Synthetic 
excess spread 

NEW criterion: Eligible credit 
protection, counterparties and 
collateral 

Criterion 23: Data on historical 
default and loss performance  

termination events 

Standardisation 
Similar (Art. 21(1))  

Adaptation of the criterion on appropriate mitigation of 
interest rate and currency risks (Art. 21(2)): to further 
specify measures for appropriate mitigation of interest rate 
and currency risks, adapted to synthetic securitisation  
Similar (Art. 21(3))  

Adaptation of the criterion on requirements after 
enforcement/acceleration notice (Art. 21(4)): adapted to 
reflect that not all synthetic securitisations use SSPE  
Adaptation of the criterion on requirements for non-
sequential priority of payments (Art. 21(5)): adapted with 
additional requirements for pro rata amortisation and 
allocation of losses  
Adaptation of the criterion on early amortisation 
provisions/triggers for termination of the revolving period 
(Art. 21(6)): adapted with requirements for early 
amortisation only in the case of the use of an SSPE  
Adaptation of the criterion on transaction documentation 
(Art. 21(7)): with additional requirements for servicing 
standards and procedures  
Similar (Art. 21(8))  

Replacement of the criterion on definitions, remedies in the 
transaction documentation (Art. 21(9)): requirements for the 
transaction documentation to specify payment conditions is 
covered in separate criteria  
Similar (Art. 21(10))  

Definitions of credit events, including reference to existing 
CRR text, and forbearance measures 
Criteria for credit protection payments, including that they 
should be based on the actual realised loss 
Specifying criteria for ensuring a minimum degree of 
timeliness in credit protection payments 

Specifying the conditions, under which the originator would 
be allowed to commit to synthetic excess spread in the 
transaction. The interplay between synthetic excess spread 
and a potential assessment by the supervisor of the 
achievement of significant and commensurate risk transfer 
should be specified. 
Specifying a clear set of rules for the credit protection 
arrangement and the collateral in the transaction. 

Transparency 
Similar (Art. 22(1))  

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Criterion 24: External 
verification of the sample  
Criterion 25: Liability cash flow 
model  
Criterion 26: Environmental 
performance of assets  
Criterion 27: Compliance with 
transparency requirements  
NEW criterion: Verification 
agent 

Source: EBA 

Similar (Art. 22(2))  

Similar (Art. 22(3))  

Similar (Art. 22(4))  

Similar (Art. 22(5))  

Establishing the need to appoint an independent third-party 
verification agent to verify specified elements of the credit 
notice for each underlying exposure. 

14