Ahead of the EBA's public hearing tomorrow on its significant risk transfer (SRT) discussion paper (SCI 28 September), SCI undertook a straw poll of industry opinion on the document. The exercise revealed an overall positive response, although some areas for improvement were highlighted, especially regarding transaction standardisation.

Giuliano Giovannetti, ceo of Arch Mortgage Insurance, says that the EBA's SRT guidelines are a practical step forward for the capital relief trade market. In particular, he welcomes the increased clarity around a handful of structural elements, including excess spread, pari passu agreements and upfront premiums.

"The fact that synthetic excess spread is being contemplated is a positive development, as it makes sense for capital relief trades to have a similar mechanism as cash excess spread," he observes. "The EBA proposal seems, however, quite harsh for synthetic trades, and the reasoning that favours trapping is all but clear."

Giovannetti continues: "What the trapped amount should be is up for discussion. A reasonable compromise would be to trap some - a thin layer of capital retention at the bottom of the structure, perhaps."

Robert Bradbury, md at StormHarbour, suggests that the immediate impact of synthetic excess spread becomes less obvious when taken in a wider context. "We're aware that an increasing number of transactions are being specifically structured to maintain efficiency within the new securitisation framework and taking into account other regulatory developments. Some originators may be unwilling to build up a potential first loss position via synthetic excess spread when they also have to take into account changes to provisioning under IFRS 9."

He warns that the level of SRT achieved by originators can change over time and recommends regular tests to continually compare the protected tranche and portfolio to realised and expected losses. "It will be interesting to see how tests on retained capital versus expected loss apply across different portfolios. We expect longer-dated portfolios of renewables or project finance to be impacted differently relative to portfolios of large corporates, for example, as well as tranches to generally become thicker as a range of new regulations become effective."

Bradbury suggests that this is something that needs to be taken into consideration at the structuring phase of the transaction. "We could also see transactions emerge that incorporate additional goals different than pure regulatory capital relief; for example, driven by hedging provisioning on a forward-looking basis," he comments.

Fiona Walden, senior underwriter at Liberty Specialty Markets, agrees that more requests for thicker tranches are likely to emerge. "To date, tranches have been 0%-7%/8% and we think that is growing to 0%-12%, although it would not make sense from an economic capital standpoint for tranches to get much thicker than that. It would be good to have more insurers in the market because that will help it to scale, and offering different tranche profiles could bring in new insurers," she says.

Risk transfer volumes totalled around €25bn-€26bn last year and while no small number in itself, it is dwarfed by the €15trn loans held by European banks. To create meaningful volumes and make synthetic securitisation a meaningful tool for the banking sector, Giovannetti calls for increased standardisation and reduced complexity for all parties.

He notes: "The focus so far has been on standardising the tests for SRT in the absence of many bespoke transactions, which is like nailing jelly. Standard transaction templates sanctioned by the regulators would help much more and would make the SRT tests easier for originators and regulators, at least in the most common cases which can satisfy most banks."

Finally, Giovannetti points out that mortgages are penalised under the new securitisation regulation - which he describes as "a pity", given the asset class is the one most investors are familiar with and can therefore provide capital relief at a cheaper cost. He concludes that risk transfer is facilitated more efficiently on the most common asset classes.

CS