The EBA has announced a two month public consultation on its proposals for a simple, transparent and standardised (STS) framework for balance sheet synthetic securitisations. If this framework is implemented, it would be a terrific development for the growing synthetic market.
An STS synthetic product could create lots of benefits for the market and broader economy including:
- increasing the transparency of the complexity, risks and information asymmetries of the securitisation structure; preventing risks of arbitrage, fraud and lack of transparency that were linked with some pre-crisis synthetic deals;
- increasing the relevance of the product as a credit risk and balance sheet management tool for European banks willing to seek risk sharing partners in the market;
- increasing the relevance of the flexible synthetic solution compared to traditional securitisation;
- enhancing the standardisation and harmonisation of the product resulting in greater investor confidence;
- giving an important regulatory endorsement to the product for originators to help with destigmatisation, economic viability and revival of the market;
- notwithstanding global regulatory reform and geo-political headwinds, increasing demand from public and private investors seeking higher yields and enhanced diversification. A bigger synthetic market would provide a positive kick-back for the real economy by giving banks greater lending capacity to lend to SMEs and retail customers or to invest in their infrastructure and people.
The EBA discussion paper - prepared in close cooperation with ESMA and EOIPA - gives some excellent insights to the market and emerging trends across the EU and is essential reading for anyone active in this space.
The consultation runs until 25 November 2019 and there will be a public hearing at the EBA offices in Paris on 9 October.
Following the consultation on the Discussion Paper, the EBA will aim to publish a final report. Based on the EBA final report, the Commission shall submit a report to the European Parliament and the Council, together with a legislative proposal, if deemed appropriate.
There is still a long road ahead but the EBA Discussion Paper and public consultation is a very welcome leap forward and industry is looking forward to participating in the consultation process over the coming weeks.
This ground-breaking work on synthetic securitisation unveils new data and insights into post-crisis market developments and trends, including data on historical default and loss performance.