Regulations & Current Topics

Regulation has a profound impact on CRS. As a relatively young asset class, CRS is still in development and regulation continues to shape the market both directly and indirectly.

There is a great variety of regulations that affect the economic efficiency and structuring of CRS, with significant differences across jurisdictions. This is due to the nature of CRS: a type of securitisation, which allows banks to achieve capital relief on a portfolio of credit exposures. As such,it has multiple touchpoints with regulation.

Firstly, regulation governs CRS directly, as a type of securitisation also known as ‘balance sheet synthetic securitisation’ ( “BSSS”). For example, the European Securitisation Regulation includes minimum standards and requirements for the main parties involved in a securitisation transaction, such as the originating bank and the investor. It also created a framework for “Simple, Transparent and Standardised” (“STS”) securitisation which enables transactions that meet these additional STS criteria to benefit from lower capital requirements. Under the current framework a CRS transaction is not yet eligible to become “STS”, however recently the European Banking Authority and the European Commission have issued reports supporting the creation of a specific STS framework for CRS, or BSSS as they call it. We strongly support this initiative, as we have been advocating this since 2015, and elaborate on this below.

Secondly, CRS is also a way of credit risk mitigation, thereby allowing banks to achieve capital relief. Capital relief is a key rationale for banks to enter into CRS. Banking regulation, such as the Capital Requirements Regulation (“CRR”), determines the extent to which a bank can gain capital relief and under which conditions. Within the European Union, capital relief is only granted if a bank achieves “Significant Risk Transfer” (“SRT”), in other words when a bank can show that the transaction indeed achieves credit risk mitigation to a significant extent.

In addition, banking regulations stipulate the capital requirements for the underlying credit exposures. The Basel III and its finalisation, also known as ‘Basel IV’, is the most recent comprehensive regulation affecting capital requirements for banks’ credit exposures, as well as overall capital requirements for the bank. Banking regulation and supervision also govern whether banks are allowed to use internal models for determining capital requirements for its credit exposures, and whether these are appropriately calibrated. Sophisticated and well-calibrated internal models are hugely important for investors in CRS, as these typically allow for a more accurate estimation of potential losses that a given portfolio could experience during the life of the CRS transaction.

Finally, the structuring of a CRS transaction and the activities of banks are impacted by many other regulations, such as accounting and tax regulation. These generally have a far broader scope, however, they may have a noticeable impact on CRS transactions nonetheless.


As a pension fund asset manager, by our nature we have an investment horizon that stretches decades rather than years or months. Therefore, the long-term viability and sustainability of the CRS market is of the utmost importance to us. We strongly believe that this objective is only achievable if a balance is found between the long-term interests of banks, investors and the regulator.

Because of this conviction, we have since many years become a vocal advocate for harmonisation of practices, appropriate standards for healthy transactions and transparency. We do this through active dialogue with regulators, banks and investors, as any rule or standard will need to meet the objectives of all three. We further contribute to roundtables and consultations and publish our opinions where we believe this adds value.

We hope that by helping to shape standards in this young and promising market, we can continue to create sustainable partnerships in which risk is genuinely shared between the bank and investors.

Current topics – STS for synthetic CRS

In July 2020, the European Commission (“EC”) published its report supporting the establishment of a framework for ‘Simple, Transparent and Standardised’ (“STS”) securitisations, applicable to balance sheet synthetic securitisation (“BSSS”), which is the technical legal term for CRS. This followed on a report by the European Banking Authority, published in May 2020, which is also supportive. In the next few months, this proposal will be discussed in the European Council and the European Parliament.

As an adamant supporter of healthy transaction structures, we strongly encourage this development and are keen to contribute to the establishment and implementation of the STS criteria for CRS transactions. We believe key features of any healthy and sustainable investment class are that it is relatively easy to understand and manage, which is closely aligned with the objectives of STS. In our view, the CRS transactions that we have invested in to date already broadly follow the spirit of STS.

We are of the opinion that adopting STS standards should be stimulated by introducing differentiated capital weights for STS compliant synthetic securitisations, in combination with strong risk alignment by the bank. Please see below for more background. In addition, we strongly believe that the cash proceeds of a STS compliant synthetic securitisation should be collateralised in order to mitigate bank counterparty credit risk. More details on collateralisation of investment notional can be found here.

Differentiated capital treatment

We believe a differentiated capital treatment is crucial for the success of the STS framework for synthetics. STS for synthetics can encourage a ‘race to the top’ in terms of transaction standards at a time when more investors are entering the market and the market is maturing, thereby solidifying these high standards for the long term. A capital treatment that is aligned with that of STS for true sale securitisation will appropriately incentivise banks to issue high-quality synthetic STS transactions and compensate originators for the increased costs of STS compliance. At the same time, we understand the concern that banks might become opportunistic and too reliant on synthetic securitisation as a capital management tool. While there are already levers in place to mitigate this concern, in our view, the cleanest and most direct mitigant is to require a minimum of twenty percent risk retention, different from the five percent minimum requirement for true sale securitisation. PGGM has made twenty percent risk retention a hard requirement since inception of its mandate in 2006, and has thereby proven that this requirement can be implemented in practice for synthetic securitisation. We believe this stricter risk retention criterion compared to true sale securitisation is warranted, as in a synthetic securitisation investors typically invest in the most risky first and second loss tranches, while in true sale securitisation the investors are protected by the bank typically retaining these risky tranches. Please find more information on risk alignment here.

Investor perspectives on STS without differentiated capital treatment for banks

Investors in first loss or second loss STS compliant synthetic securitisations will not be subject to a different capital treatment of the senior tranche. Therefore, investors are likely to continue to judge each transaction on its own merit. Whilst investors are likely to look favorably to a transaction that meets the high-quality standards that go with STS compliance, the label alone is unlikely to be an incentive for investors to accept a lower coupon and provide an offset to originators for any lack of differentiated capital treatment. That said, we believe that the market for CRS has an enormous potential to grow over the next few years. Not only on the supply side, but also on the demand side, with more investors being drawn to the market, in particular large real money investors such as ourselves. Such investors share the importance that we place on high-quality transaction standards and the impact on market stability and formulate their investment mandates around STS compliance as a minimum quality hurdle for transactions.

Potential implications of divergence between EU and non-EU regulation

One concern around providing differentiated capital treatment which has been mentioned is the potential risk of divergence between EU and non-EU regulation. We believe that this concern is unfounded. Firstly, there is already deviation between EU and non-EU regulation (such as EU securitisation regulation versus Basel III), leading to third countries not always being in lockstep with their EU counterparts. Secondly, we believe that it is unlikely that a differentiated regulatory treatment for synthetics in the EU would cannibalise the market for non-EU issuance. Quite the opposite: we believe that a sound STS framework, encouraging high-quality transaction standards, may motivate non-EU originators to follow the same example when structuring transactions, leading to a higher standard of CRS worldwide. This may ultimately convince non-EU regulators to follow the EU’s example, similar to what Basel has done with its STC framework for true sale securitisation.