In one of those highly technical yet genuinely impactful regulatory decisions, the EBA issued an opinion backing a decision of CONSOB on collateral for synthetic transactions. Briefly, you cannot have an STS synthetic transaction unless it is either in the form of a credit linked note (CLN) or it is cash collateralised. In Italy, for legal reasons, CLNs do not work. Further, the rules prohibit the cash collateral from being held by the originating bank unless that bank is at least CQS2. Again, in Italy, because of issues relating to rating agencies’ sovereign caps, banks are not CQS2. This meant that achieving STS for Italian synthetic transactions was very costly. Enter CONSOB and a derogation: under the Securitisation Regulation, an originating bank could hold the collateral even if it was CQS3 but only provided the national competent authority specifically allowed it. This derogation, in turn, could only be introduced in consultation with the EBA. Yesterday the EBA published an opinion backing CONSOB’s decision to allow CQS3 Italian banks to hold collateral. This is good news indeed for the Italian synthetic market and Italian banks’ capacity sensibly to manage their capital.
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