SRT Weekly Wrap: Working Document Jeopardizes EU Mortgage SRT Market

Negotiations over the European Parliament’s stance on the Securitisation Regulation have moved into a technical and heavily political drafting phase ahead of a decisive May 5 vote in the Economic and Monetary Affairs, or ECON, committee.

While Rapporteur Ralf Seekatz maintains market-friendly pivots on capital requirements – mostly for the consumer and small and medium-sized enterprises segments – the latest versions of a working document intended to form the basis of a compromise, dated April 15 and seen by Octus, suggest that the market for mortgage-backed significant risk transfer, or SRT, transactions faces a near-total shutdown.

The controversy centers on a late-stage requirement stating that “the special types of credit protection provided by insurers should not be eligible as resilient under non-STS (simple, transparent and standardized).”

The intervention, attributed to a senior European Parliament official, has drawn a sharp response from market participants who argue that the provision effectively disqualifies insurance-backed protection from the high-quality resilient category.

Earlier drafts suggested more aggressive recalibrations, but the working text confirms a fundamental split in the three-component risk-weight floor for senior positions. Furthermore, the risk-weight floor of a senior position has three components: a minimum value, a proportional factor that is applied to pool risk weight and a maximum value.

For non-STS nonresilient, those three values are 12%, 15% and 15%, respectively; for non-STS resilient, 10%, 15% and 15%. For STS nonresilient, those values are reduced to 7%, 7% and 10%, respectively, and for STS Resilient, 4%, 7% and 10%. The floor for non-STS senior positions is maintained at 15% for all categories, or higher if the senior position itself has a higher value.

While the reduction to a 7% minimum value for standard STS is a decrease from the current 10% floor, market specialists describe it as commercially unworkable for low-risk portfolios. A Paris Europlace and IACPM report highlights that for high-quality assets such as European residential mortgages – which have an average 17% risk weight – imposing floors at these levels creates capital charges on senior tranches that are significantly higher than the actual economic risk of the underlying tranches.

The report identifies a “Capital Relief Threshold” effect, noting that issuing banks currently view a 40% risk-weight density as a de facto lower bound for viability. Because the vast majority of mortgage books fall well below this 40% threshold, they remain effectively excluded from the market unless floors are adjusted toward a 2% target.

This exclusion is viewed by some market participants as particularly damaging because it sidelines the “natural risk-takers” for the mortgage market. The IACPM note highlights that while funded investors prefer shorter-duration corporate or consumer credits, the long-term nature of mortgage risk is best suited for insurers and reinsurers who can operate without maturity mismatches.

By disqualifying these EU-authorized insurance undertakings from the resilient tier, the working document risks forcing European banks to rely on external capital – specifically North American pension funds – thereby outsourcing the management of European mortgage risk and limiting the growth of a sovereign European investor base.

Beyond the mortgage-specific floors, the most significant development in the working text involves a sophisticated recalibration of the p-factor under the new SEC-IRBA formulas. Under the new SEC-IRBA formulas, the minimum p-factor, the p-floor, for a senior securitisation position is maintained at 0.3 for non-STS and reduced to 0.2 for STS. The p-scaling factor is reduced to 0.7 from 1 for non-STS and to 0.3 from 0.5 for STS. There is now a maximum p-factor, the p-cap, at 0.8 for non-STS and 0.4 for STS.

For nonsenior positions, for non-STS, the p-floor at 0.3 and the p-scaling factor at 1 are unchanged compared with current rules, but there is p-cap introduced at 1 compared with an uncapped situation today; for STS, the p-floor, p-scaling factor and p-cap are 0.2, 0.5 and 0.4, respectively. A critical shift since February is the extension of this relief to the buy-side; text now explicitly applies the 0.25 p-factor to senior STS positions held by originators, sponsors or investors alike.

As the reforms move toward a final decision, the atmosphere has pivoted from a technical to a purely political phase.

Stakes are further complicated by a standoff over third-country equivalence rules. Negotiators suggest that the French Treasury is opposing the recognition of jurisdictions such as Bermuda. Such opposition to equivalence – specifically under mechanisms such as article 260 of the Solvency II directive – creates a potential structural bottleneck. If Bermuda-based reinsurers are excluded due to a lack of supervisory equivalence, originators will be restricted by counterparty concentration limits, reaching maximum exposure with the few eligible EU-based entities almost immediately.

In this tense context, observations from sources suggest that the May 5 vote is no longer a guaranteed procedural step. Without a political resolution to these technical conflicts, the committee risks a postponement to avoid a failure of the compromise.