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The new EU STS framework for on-balance sheet (synthetic) securitisations

On 16 December 2020, the Council of the European Union published final compromise proposals for a package of measures dubbed the “Capital Markets Recovery Package”, these were adopted by the European Parliament’s Committee on Economic and Monetary Affairs on 14 January 2021.

The measures include the creation of a regulatory regime for simple, transparent and standardised (STS) synthetic securitisations (excluding arbitrage synthetic securitisations) via amendments to the EU Securitisation Regulation (and Capital Requirements Regulation, including a differentiated prudential treatment for such transactions.

They also, however, introduce a capital charge for synthetic excess spread, which has adverse implications for the transaction economics of all synthetic securitisations (STS and non STS) involving excess spread.

This briefing provides an overview of the key points to note about the final on-balance sheet STS framework and new capital charge for synthetic excess spread.

The final on-balance sheet STS framework, new capital charge for synthetic excess spread, and this briefing will be of interest to originators and investors currently active in the synthetic securitisation markets and to entities that may be interested in participating in those markets. We continue our involvement in the relevant AFME working group and will be providing input to the industry response to related technical standards.