On April 9th, 2021 the new on-balance-sheet STS regime came into force in the European Union. This regime provides that certain synthetic/on-balance-sheet securitisations may achieve STS status. Achieving STS status, in turn, will allow bank originators/protection buyers to benefit from improved capital requirements for a retained senior tranche – subject to additional requirements and applicable significant risk transfer rules.
To obtain STS status though, these securitisations will be required to meet almost all the true sale STS requirements and additional synthetic specific criteria. For a synthetic securitisation to be STS it needs to meet between 145 and 160 individual tests (as compared to 103 for “true sale” STS).
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. The law has done this on exactly the same basis as for “true sale” securitisations.
The 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.
This means that protection buyers can consider past transactions with a view to having them become STS either immediately or with some amendments.
PCS has already extensive experience of analysing synthetic transactions both through its own Risk Transfer Label and Art.270 Assessments.
The fees for such verification will be €20,000 upfront plus €6,000 annually for the weighted average life of the transaction (plus applicable VAT). For more detail on our fees, you may consult our Fees Schedule.
We also wish to point out that, as with “true sale” securitisations, additional criteria are necessary for a synthetic/on-balance-sheet STS transactions to get the benefit of the lower capital requirements for a retained senior tranche. These criteria can be found in the amended CRR legislation. PCS will therefore also provide, if requested, a CRR Assessment to provide originators/protection buyers with comfort that the lower capital requirements will be available.
PCS has discussed its intentions to provide such verifications with the Autorité des Marchés Financiers which has raised no objections. We anticipate final confirmation from the regulator imminently now that the law has come into force.
Applications should be sent to firstname.lastname@example.org.