knowledge 1 June 2018 |

New Rules for EU Securitisations

Background

Securitisations have the potential to play an important role in financial markets both in diversifying lending more on to the capital markets and away from banks, and in giving investors, including investment funds, insurers and pension funds a wider range of investment options. Since the financial crisis, however, the level of EU securitisations has been very subdued, partly due to a loss of investor confidence, but also due to the existence of a number of regulatory burdens, including the treatment under the CRR of securitisations from a regulatory capital requirements perspective.

The STS Regulation seeks to increase the level of EU securitisations on a measured basis as part of the EU’s Capital Markets Union initiative. It has two main parts.  The first part harmonises and reforms existing rules for all securitisations while the second creates a new framework for STS long-term securitisations and asset-backed commercial paper (“ABCP”) programmes. Certain STS securitisations will benefit from favourable rules on regulatory capital under the CRR Amending Regulation.  

Once it comes into force, the STS Regulation will replace the existing sectoral framework applicable to securitisations, currently set out in the CRR, the Solvency II Directive 2009/138, the Alternative Investment Fund Managers Directive 2011/61, the Credit Ratings Regulation 1060/2009 and the Prospectus Regulation 809/2004.

Rules for all Securitisations

The STS Regulation sets down requirements relating to due diligence, risk retention, transparency, and credit granting, which apply to all securitisations.  It also restricts sales to retail investors and bans re-securitisations, subject to certain exceptions.

As compared to existing sectoral legislation, one of the main changes introduced by the STS Regulation regards the issue of “skin in the game”.  Under the CRR, the onus is on the investor to check whether the originator, sponsor or original lender has retained a material net economic risk of not less than 5% in the securitisation. Failure to do so may result in punitive capital charges for regulated investors such as credit institutions.  

While the STS Regulation maintains this requirement with respect to regulated investors, it also imposes a new, direct obligation on the securitisation’s originator, sponsor or original lender to retain on an on-going basis a material net economic interest in the securitisation of not less than 5%.  This means, in particular, that the original lender, originator or sponsor will not be able to ignore risk-retention rules if the investor comes from a third country or is not otherwise subject to “skin in the game” regulatory capital requirements at EU level. Moreover, they may be subject to administrative or criminal sanctions should they fail to comply with those rules.

The STS Regulation also restricts the definition of “originator” to exclude an entity from being used for risk retention purposes where it has been “established or operates for the sole purpose of securitising exposures”.  This will prevent the establishment of an originator Special Purpose Entity solely for the purpose of securitising exposures.

STS Securitisations

The STS framework for securitisations seeks to differentiate between, on the one hand, STS securitisations and on the other hand, all other securitisations, including those using more complex and opaque structures.  STS securitisations may benefit from more favourable regulatory capital treatment, which the EU hopes will incentivise these types of securitisations thus enabling the EU securitisation markets to develop on a more sustainable basis in the STS space.

The STS Regulation sets out eligibility criteria which must be met in order for the STS designation to apply. In the case of non-ABCP securitisations these are separated into three categories of requirements relating to simplicity, transparency and standardisation. The critieria applicable to ABCP securitisations are separated into transaction-level requirements and programme level requirements.

Generally, there is considerable overlap between the criteria applicable to each type of STS securitisations. Some points to note include the following:

• the originator, sponsor and securitisation Special Purpose Entity (“SSPE”) involved in an STS securitisation must be established in the EU and the STS Regulation does not currently provide for a third-country equivalence framework;
• only “true-sale” securitisations can be designated as STS, synthetic securitisations are excluded;
• certain other types of securitisations cannot qualify as STS securitisations, including actively managed portfolios of assets, commercial mortgage backed securities, non-performing loans and residential mortgage backed securitisations of self-certified mortgages granted after 20 March 2014;
• STS securitisation transactions must be backed by pools of exposures that are homogenous in asset type and must not include transferable securities; and
• in order to be securitised on an STS basis, exposures must be originated in the ordinary course of the orginator’s or original lender’s business pursuant to underwriting standards that should not be less stringent than those the originator or original lender applies at the time of origination to similar exposures which are not securitised.

Originators and sponsors must jointly notify ESMA that a securitisation meets the STS criteria by means of a standardised template to be developed by ESMA.  The STS notification must include an explanation of how each criterion has been met and will be published on ESMA’s website.

Next Steps

The STS Regulation will generally apply to securitisations the securities of which are issued, or which create new securitisation positions, on or after 1 January 2019. However, securitisations issued prior to 1 January 2019 may benefit from the STS designation provided that they comply with certain criteria at the time of issuance of the relevant securities and certain other criteria at the time the securitisation is notified to ESMA.

ESMA and the EBA have consulted on a range of regulatory technical standards which will specify in more detail certain requirements set out in the STS Regulation. The consultation on the guidelines for interpreting the STS criteria will remain open until 20 July 2019 (here). We expect further consultations to be issued over the coming months.