New Synthetic/On-Balance Sheet STS Securitisation Regime

In December 2020, the European Commission, European Parliament and European Council of Ministers reached an agreement on proposed amendments to the STS Regulation designed to enable synthetic risk transfer securitisation to obtain STS status.  Under the new scheme, this would allow protection buyers in certain synthetic securitisations to allocate the lower STS capital requirements to the retained senior risk  in the securitisation.  The legislation uses the expression “on-balance sheet securitisations” rather than the more common “synthetic securitisations”, so PCS uses the former in its formal documentation.

To obtain STS status though, these securitisations will be required to meet almost all the true sale STS requirements and additional synthetic eligibility criteria.  The current numbering of criteria that will need to be met for a synthetic STS securitisation is over 160 (as compared to 103 for true sale STS).

It is anticipated that the law will be voted by the European Parliament around March and come into force around April although no guarantees can be given on the exact timing.

The United Kingdom having left the European Union, this reform will not apply to the UK.  Currently, PCS is not aware of any intention by the UK Treasury to introduce a similar regime.

Third Party Verification Agent

Fortunately, considering the increased number of eligibility criteria, the proposed legislation extends the role of third party verification agent to the new synthetic STS regime.

Synthetic/On-Balance Sheet STS securitisations and grandfathering

The proposed law contains a straightforward grandfathering provision.  This is in contrast to the complex grandfathering provisions that had been inserted in the law on true sale STS securitisations.  Those provisions made it very challenging for existing true sale securitisations to become STS after the entry into force of the law.  The synthetic STS rules envisage that any securitisation that meets the admittedly complex synthetic STS criteria can be notified as STS and take the benefits of this status immediately upon the law coming into force.

This means that protection buyers can already structure transactions with a view to them become STS later in the year.  This will allow for the lower capital requirements to be achieved as soon as the new law comes into force even for synthetic transactions closed beforehand.

There is a small risk, of course, that the law may not be voted or that last minute amendments are introduced.  But those who are familiar with the workings of Brussels believe this to be extremely unlikely.

How PCS can provide comfort immediately?

For any protection buyer who would like to obtain comfort that their transaction will get STS status once the law comes into force, PCS is able to start work immediately.

For regulatory reasons, PCS cannot provide advisory services.  But PCS is able immediately to receive mandates for a two part STS verification with the preliminary STS checklist available at closing (and therefore, before the law comes into force) and the final checklist being provided at the STS notification of the transaction to ESMA.

The process would be identical to the current true sale STS verification.  PCS has already compiled its synthetic STS checklist and, with its extensive experience in the field of synthetic securitisation, is ready to assist market participants.

To mandate PCS for such a verification, you can complete an Application Form that can be found  here and consult our Terms and Conditions (here)

Applications should be sent to