The EU Synthetic Securitisation Market: Key Concepts and Regulatory Developments Ahead

Author: Rosa Narvio Read time: 5 min

Securitisation in the EU is primarily regulated by the Securitisation Regulation (SECR)[1] and the Capital Requirements Regulation (CRR)[2]. The Commission has put forward a proposal to amend the SECR[3] and the CRR[4] to restart the EU securitisation market, focusing on eliminating growth barriers whilst preserving financial stability, market integrity, and investor protection.
Although the proposal is still subject to further amendments, certain potential changes are worth monitoring. These changes include the development of the SRT framework and the possibility for the synthetic securitisation to qualify for the STS label when it is structured as unfunded credit protection with insurers.

Introduction to Securitisation

Securitisation means a technique whereby illiquid assets such as loans are transformed into liquid, tradable securities. When the securities can be sold to investors, risk can be transferred to those willing to bear it. Therefore, securitisation is an important channel for diversifying funding sources and an efficient way to allocate risk within the EU financial system.

In traditional securitisation, banks transfer the legal ownership of the assets to a special purpose vehicle. Synthetic securitisation is a transaction where the ownership of the assets remains on the balance sheet of the bank but the credit risk associated with the assets is transferred to investors. The transfer of risk is achieved by using credit derivatives or guarantees.

The objectives of the bank in synthetic securitisations often include credit risk management and regulatory capital relief, but there are also other purposes, such as funding. According to the European Systemic Risk Board, the EU synthetic securitisation market is the largest globally.[5] It should be noted that covered bonds, while also serving banks as a tool for funding, are regulated under a separate statutory framework from synthetic securitisation and are not addressed in this overview.

Unfunded or Funded Structure

To achieve the capital relief, synthetic securitisations should be structured either as unfunded or funded credit protection. However, it is important to note that the transaction can actually combine these two forms.

In unfunded credit protection, the investor who provides the guarantee or is the counterparty in the CDS must be compliant with certain eligibility requirements set out in the regulation to ensure that the investor actually can compensate the bank when a credit event occurs. Whereas in funded credit protection, a collateral must be provided to address the counterparty credit risk deriving from the relationship between the bank and the investor

Proposed Changes to the EU Securitisation Framework

There have been certain limitations in the SRT framework that have contributed to market uncertainty and delays for competent authorities in assessing some securitisation transactions. For this reason, the SRT framework would be amended by, among other things, replacing the current mechanical tests with a principle-based approach. Additionally, the applicable permission-based route would be removed from the CRR so that achieving SRT through permission granted by the competent authority would no longer be possible.

The synthetic STS securitisations have mainly used funded credit protection structures.[6] However, the proposal would introduce the STS label for unfunded credit protection where the investor is an insurer that meets certain proposed robustness, solvency, and diversification criteria. This development would enable broader participation by the insurance industry in the synthetic securitisation market. For banks, this would provide additional options for structuring synthetic securitisations and access to a wider pool of eligible investors. Whereas for insurance companies, this would open new investment opportunities in the synthetic securitisation market.

Hannes Snellman regularly advises clients on matters related to synthetic securitisations, and we closely monitor ongoing developments in securitisation-related legislation. Please feel free to contact us if you would like to discuss any questions related to this topic.

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[1] Securitisation regulation, Regulation (EU) 2017/2402 of the European Parliament and of the Council of 12 December 2017 laying down a general framework for securitisation and creating a specific framework for simple, transparent and standardised securitisation, and amending Directives 2009/65/EC, 2009/138/EC and 2011/61/EU and Regulations (EC) No 1060/2009 and (EU) No 648/2012 (OJ L 347, 28.12.2017, p. 35)

[2] Capital Requirements Regulation, Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 648/2012 (OJ L 176, 27.6.2013, p. 1)

[3] Proposal for a REGULATION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL amending Regulation (EU) 2017/2402 of the European Parliament and of the Council of 12 December 2017 laying down a general framework for securitisation and creating a specific framework for simple, transparent and standardised securitisation.

[4] Proposal for a REGULATION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL amending Regulation (EU) No 575/2013 on prudential requirements for credit institutions as regards requirements for securitisation exposures.

[5] European Systemic Risk Board: Unveiling the impact of STS on-balance-sheet securitisation on EU financial stability (May 2025) (available at https://www.esrb.europa.eu/pub/pdf/reports/esrb.report202505_syntheticSTSsecuritisation.en.pdf?6c3885349149fe9b6edb268d98d24490), p. 24.

[6] European Systemic Risk Board: Unveiling the impact of STS on-balance-sheet securitisation on EU financial stability (May 2025) (available at https://www.esrb.europa.eu/pub/pdf/reports/esrb.report202505_syntheticSTSsecuritisation.en.pdf?6c3885349149fe9b6edb268d98d24490), p. 32.