Edition 8 of this SCM Briefing summarised a set of draft Guidelines prepared by the European Banking Authority (EBA) on the concept of "Significant Risk Transfer" (SRT) as set out in Articles 243 and 244 of the Capital Requirements Directive (CRR). The concept of SRT is important since originating banks demonstrating SRT may exclude securitised exposures from their calculations of risk-weighted assets (and expected loss amounts, where relevant). The EBA was tasked with providing draft Guidelines on this topic to the European Commission (not by any particular date), and to provide advice to the Commission by 31 December 2017 on whether a binding technical standard (either a Regulatory Technical Standard or an Implementing Technical Standard) is required in this area. The EBA has now released its Final Guidelines on Significant Risk Transfer, which should be applied generally by originators for all transactions claiming SRT under Articles 243 or 244 of the CRR, and by originators seeking to achieve SRT specifically under Article 243(4) or 244(4) of the CRR. They should also be applied by competent authorities when identifying securitisation transactions where credit risk is not considered to have been transferred, when assessing an originator's compliance with Articles 243(4) and 244(4) of CRR, and when collecting data to be provided (annually) to the EBA. The Final Guidelines provide:

  • Requirements for originators when engaging in securitisation transactions for SRT:originators should provide detailed information to competent authorities on all transactions for which they intend to demonstrate SRT, and notify the competent authority of any securitisation on which they intend to demonstrate SRT which is dissimilar in structure to previous transactions. Originators should have governance policies around SRT assessments and evaluations, ongoing SRT monitoring, risk management and SRT self-assessment policies, should use appropriate methods and procedures to assess and demonstrate SRT, expected loss and unexpected loss, and should consider the transaction structure, degree of credit risk mitigation or credit risk transfer (including a consideration of factors such as pricing, timing of payments, call dates, counterparty risk assessment, credit enhancement etc) in their assessments and demonstrations of SRT.

  • Requirements for competent authorities to assess whether SRT has been achieved:the guidance for competent authorities is particularly important, since originators can technically satisfy the rules for recognition of SRT in Articles 243(4) and 244(4) of CRR without actually having transferred commensurate credit risk. Competent authorities must conduct a comprehensive review of SRT where any of the following circumstances apply in a transaction: where the tranche thickness is insufficient to demonstrate risk transfer to third parties; where there are doubts over a credit rating; where losses have been incurred in previous periods that indicate expected loss is too low; where there are high costs of transferring credit risk; where there are unrated tranches within a securitisation; in transactions of trading book portfolios; and in transactions which feature call and put options other than those considered not to hinder credit risk transfer. What is clear is that the EBA expects national regulators to step up their scrutiny of individual deal structures, potentially adding time and costs for originators, who are required to provide "all requested information", including "documentation and evidence" on each relevant transaction to their competent authority.

  • Requirements for competent authorities when assessing whether commensurate risk has been transferred to third parties: the Guidelines require competent authorities to assess the significance of the risk transfer on a case-by-case basis (paying particular attention to risk-weighted exposure amounts and expected loss amounts, the appropriateness of models etc, the capture of idiosyncratic risk, and the sensitivity of retained positions to changes in own funds), structural features of the transaction that could undermine credit risk transfer (e.g. optional calls or "other contractual arrangements" which may increase the likelihood of assets being brought back onto the originator's balance sheet), maturity or currency mismatches between credit protection and underlying assets for synthetic securitisations, that SRT is transferred to genuine third parties, any credit ratings assigned to the deal, and the originators' own internal SRT policies. A form of Reporting Template for competent authorities is also set out at Annex 1. 

As mentioned above, the EBA will review Member States' implementation of these Guidelines and provide advice to the Commission on whether further binding standards are required in the area of SRT. Competent authorities are required to implement the Final Guidelines in their supervisory procedures within six months of their adoption (the date on which they will be formally "adopted" is not yet clear). Further, competent authorities must notify the EBA as to whether they already comply, or intend to comply with, the Final Guidelines (or notify the EBA of the reasons for their non-compliance with the Guidelines), by 7 September 2014.