Reform of the EU Securitisation Framework—Part 1: STS Label Extended to Unfunded Credit Protection

Background: STS and Synthetic Securitisations

The STS framework was established by the EU following the global financial crisis to incentivise the use of less complex, opaque securitisation structures. Securitisations that qualify for the STS label provide preferential capital treatment for the originator of the securitised exposures. 

The majority of STS transactions are traditional "true sale" securitisations, where the credit risk associated with a pool of underlying exposures (such as loans or receivables) is transferred from the originator (usually a bank) to investors through the issuance of asset-backed securities. However, certain on-balance-sheet synthetic securitisations, namely those used for SRT purposes, are also eligible for the STS label. In these transactions, the originator transfers its credit risk synthetically through the use of credit derivatives or guarantees, while retaining the underlying exposures on its balance sheet. 

Synthetic securitisations can be funded (typically cash collateralised) or unfunded (involving a contractual promise by the protection seller to compensate the originator's losses), but only the former qualifies for the STS label under the current framework. This has disincentivised banks from using unfunded structures (which currently provide less favourable capital relief) and limited the role in the SRT market of (re)insurers (who are naturally more positioned to provide unfunded risk protection).

The Proposals

The Commission's proposed amendments include a key development for the SRT market. Under the proposals, unfunded credit protection provided by (re)insurance undertakings would be recognised as eligible protection for STS purposes. This marks a significant shift from the current framework, which is intended to align the EU's regulatory framework with evolving market practices and to broaden the pool of eligible credit protection providers beyond the traditional banking sector.

Eligibility Requirements

Under the proposed amendments, eligibility for the STS label would be restricted to (re)insurers who:

1. Use an approved internal model for calculating capital requirements with respect to such guarantees; 
2. Comply with Solvency II capital requirements and have a credit assessment of at least credit quality step 3 on the Eurosystem's harmonised rating scale; 
3. Operate in at least two classes of non-life insurance; and 
4. Have total assets under management in excess of €20 billion.

Analysis of the Proposed Changes

The increasing involvement of (re)insurers in the SRT market reflects a broader trend toward risk sharing across the financial system. While (re)insurers have historically played a limited role in the European SRT market—largely due to regulatory constraints and the lack of STS recognition for unfunded protection—the market has seen growing interest from the insurance sector. The International Association of Credit Portfolio Managers estimates that (re)insurers protected an estimated €3 billion of SRT tranches last year, representing roughly a 138% increase compared to 2023. As (re)insurers are more naturally positioned to provide unfunded protection, these proposals seem likely to open the door to even greater participation by (re)insurers going forward. 

For bank clients, these changes are potentially transformative. The ability to obtain STS-qualifying capital relief through unfunded structures is expected to broaden the pool of eligible protection providers, increase capacity in the SRT market, and potentially reduce the cost of risk transfer. This is particularly relevant in the current environment, as banks seek to optimise capital and manage balance sheet risk more efficiently. The proposals are also likely to enhance the competitiveness of the European SRT market by aligning regulatory treatment more closely with economic substance and market practice, and by addressing a long-standing industry request to facilitate greater insurer participation. 

However, it is worth noting that the proposals restrict eligibility to EU-based insurers, which may limit full realisation of the above benefits. While this limitation is intended to safeguard the integrity and stability of the STS framework, it carries the risk of reducing market depth and increasing concentration risk by excluding non-EU (re)insurers from the market—regardless of their financial strength or regulatory standing. For banks seeking to execute large or frequent SRT transactions, this may constrain capacity, increase the cost of protection, and reduce counterparty diversification. Further, many of the (re)insurers with the most sophistication and appetite for credit risk are headquartered outside the EU; preventing these entities from participating in STS-eligible SRTs may reduce the EU's attractiveness for international players and lead to a bifurcation, where non-EU insurers are relegated to non-STS transactions with less favourable capital treatment. This, too, may limit flexibility and increase costs for banks—particularly those with international operations or large-scale risk transfer needs. As a result, there may be pressure to revisit certain of the eligibility requirements before the proposals become law, in order to strike a better balance between prudential oversight and the benefits of a more open, globally integrated SRT market.

It also should be noted that the proposed changes will result in further divergence between the respective securitisation regimes in the EU and the United Kingdom. The United Kingdom retained the EU's STS framework post-Brexit, with the Securitisation Regulation forming part of UK law. The current regime in the United Kingdom mirrors the pre-amendment regime in the EU (i.e., synthetic securitisations must use funded structures to qualify for the STS label). As of yet, UK authorities have not given any indication as to whether they intend to follow the EU in extending the STS label to unfunded credit protection provided by (re)insurers.

Looking Ahead

The Commission's proposed amendments have been submitted to the European Parliament and the Council of the EU for review and approval. Changes to the current draft amendments should be expected as part of the legislative negotiation process, though it is unclear at the present stage how extensive such changes may be. There is no defined timeline for the process, though it is expected to be at least 18-24 months before the proposals would become law.

In the second half of July 2025, the Commission also plans to open a consultation on draft amendments to Regulation (EU) 2015/35 (the "Solvency II Delegated Regulation"), the prudential framework for EU (re)insurance undertakings. It is expected that these amendments will adjust capital requirements applicable to (re)insurers who invest in securitisations (both STS and non-STS), as well as introducing a distinction between senior and non-senior tranches (similar to the existing rules for banks) to improve risk sensitivity. These changes reflect a two-pronged approach by the Commission to increase (re)insurers' role in the EU securitisation market:

1. The proposals around unfunded protection seek to improve the position for (re)insurers looking to add exposure to the liability side of their balance sheet (by underwriting credit risk). 
2. On the other hand, the changes the insurance prudential framework seek to improve the position for (re)insurers looking to add exposure to the asset side of their balance sheet (by investing in traditional or funded synthetic securitisations).

Sneak preview: In part two of this series, we will address the Commission's proposals with respect to redrawing the distinction between "public" and "private" securitisations.