The European Banking Authority (EBA) has issued a Consultation Paper setting out draft Guidelines on the concept of "Significant Risk Transfer" (SRT) as set out in Articles 243 and 244 of the Capital Requirements Regulation (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's draft Guidelines cover: (i) requirements for originators when engaging in securitisation transactions for SRT; (ii) requirements for competent authorities to assess whether SRT has been achieved; and (iii) requirements for competent authorities when assessing whether commensurate risk has been transferred to third parties. The guidance for competent authorities is particularly important, since originators can technically satisfy the rules for recognition of SRT without actually having transferred commensurate credit risk. Focusing on (i), the EBA first clarifies the circumstances in which the securitisation framework will apply, for both traditional and synthetic transactions. It then outlines the circumstances in which competent authorities should conduct a review of SRT, which include: 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; where there are high costs of transferring credit risk; where there are unrated tranches within a securitisation; and in transactions of trading book portfolios. The Guidelines then require competent authorities to assess the significance of the risk transfer, structural features of the transaction, 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 SRT policies. Originators should provide detailed information to competent authorities, including in relation to their governance policies around SRT assessments, risk management and SRT self-assessment policies, and should use appropriate methods and procedures to assess and demonstrate SRT. Responses to the Consultation Paper are requested by 17 March 2014, and following a public hearing on 28 January (to be held in London), the EBA will prepare and issue a final set of Guidelines.

Useful links

EBA Consultation Paper: Draft Guidelines on Significant Risk Transfer relating to Article 243 and 244 of Regulation 575/2013