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ID 1018. Synthetic securitisation: partial protection Back

Relevant provisions

Article 4 (38) of Directive 2006/48/EC
( (66) Annex IX of Directive 2006/48/EC
Article 96 (2) of Directive 2006/48/EC


According Art.4 point 38, synthetic securitization means a securitisation where the tranching is achieved by the use of credit derivatives or guarantees, and the pool of exposures is not removed from the balance sheet of the originator credit institution.
Meanwhile, Art.96 P2 states that where there is an exposure to different tranches in a securitisation, the exposure to each tranche shall be considered a separate securitisation position.
Let’s assume the following transaction: A bank performs a synthetic securitization at the level of a pool of exposures; it has obtained an unfunded credit protection for 80% of the first loss, up to a 25% cap rate of the effective losses recorded for this tranche, 20% of the remaining first loss tranche being in charge of the originator.
This securitization transaction leads to two portfolio parts: one covered by the guarantee and the other one uncovered. In this case, the guaranteed part of the portfolio is subject to a securitization operation, which generates two tranches: a first loss tranche in the charge of the protection provider and a senior tranche in the charge of the originator, both representing securitization positions. The uncovered part represents exposure classes of the originator credit institution.
We raise two questions regarding this securitization:
1) We wonder if the directive recognizes this transaction as securitization only at the level of the guaranteed part of the exposure pool. Meanwhile, the uncovered part of the portfolio could be treated as exposure classes different from securitization positions?
2) We wonder if this securitization scheme, where the protection provider covers only a part of the first loss, should be treated within the scope of Annex IX, Part Pt. 66.


In the transaction you propose for analysis, you refer to approaches A and B:
• Approach A: the whole portfolio is subject to the securitization transaction.
• Approach B: only the guaranteed sub-portfolio is subject to the securitization transaction.

The consultation process initiated at the EBA level brought three different views on the transaction in question. However, such divergent opinions refer to the transaction itself and its corresponding capital charges, and not to the interpretation of the Capital Requirements Directive.

In our understanding, approaches A and B represent two different structures. National supervisors are entitled to decide whether the guarantee corresponds to one or to the other structure.

It seems to us that your main question is whether only 80% of loans are guaranteed and if the total loss for the remaining 20% tranche needs to be completely covered by the bank itself, which can only be decided by the local supervisor based on the documentation of the transaction. If loan-by loan means that only a number of earmarked loans are actually covered by the guarantee, there seems to be no reason to believe that the loans not covered could form part of the securitised exposures. In such case, we are of the opinion that the remaining loans cannot be treated as securitized loans.

In any case, also the requirements for significant risk transfer must be assessed regarding the 80% of the loans; if the requirements are not met, the loans cannot be treated as securitized.


Submitted on 02/03/2011

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