New EU Rules on Securitisation

This week, the Council of Europe adopted new rules aimed at facilitating the development of a securitisation market in Europe by defining and differentiating simple, transparent and standardised (“STS”) Securitisations. The simple, transparent and standardised concept refers to the process by which the securitisation is structured. These new EU rules are found in two regulations which the Council adopted, which upon their entry into force, one will set new rules and definitions on STS Securitisation, while the other will amend Regulation 575/2013 on bank capital requirements. These new rules are part of the Capital Markets Union (“CMU”), a plan aimed at developing a fully functioning capital markets union by the end of 2019.

Rules on STS Securitisation

The regulation which relates to new rules on STS Securitisation (the “STS Regulation”) reflects the Commission’s intention to restart high-quality securitisation markets, without repeating the mistakes made before the 2008 financial crisis. The development of a simple, transparent and standardised securitisation is a step in the right direction coherent to the Commission’s plan of the CMU. This STS Regulation aims at differentiating STS Securitisation from complex, opaque and risky instruments and to apply a more risk-sensitive prudential framework. This regulation recognises and addresses the risks of excessive leverage that securitisation raises and allows enhanced supervision by competent authorities of a financial institution’s participation in the securitisation market. The STS Regulation also clearly defines what an STS Securitisation is, along with providing definitions of all the key concepts of securitisation. Although a sponsor should be able to delegate tasks to a third-party service provider, this regulation would stipulate that the sponsor shall still remain responsible for risk management, and cannot transfer the risk-retention requirement to the service provider.

Amending Regulation 575/2013

Unlike in the United States where markets have recovered, the European securitisation markets have remained tempered, despite the fact that EU securitisation markets withstood the crisis relatively well. This is probably due to the stigma generally associated with transactions associated with securitisation. The second adopted regulation (the “BCP Regulation”) aims at eliminating this stigma by amending Regulation 575/2013 on bank capital requirements. On the BCP Regulation’s entry into force, it should subject all institutions to the same calculation methods when it comes to capital requirements for positions in securitisation.

The BCP Regulation would state that an institution should use its own calculation of regulatory capital requirements where the institution has permission to apply the Internal Ratings Based Approach (the “IRBA”). For institutions that are not able to use the IRBA in relation to their positions in a given securitisation, the Securitisation Standardised Approach (“SA”) should then be used. The SA should rely on a formula using as an input the capital requirements that would be calculated under the SA to credit risk in relation to the underlying exposures as if they had not been securitised. When the first two approaches are not available, institutions should be able to apply the Securitisation External Ratings Based Approach (“ERBA”). Under the ERBA, capital requirements should be assigned to securitisation tranches on the basis of their external rating.

The new BCP Regulation should adopt the approach that a senior securitisation position would be assigned a maximum risk weight equal to the exposure-weighted-average risk weight applicable to the underlying exposures, irrespective of whether the relevant position is rated or unrated and irrespective of the approach used for the underlying pool. It would also establish that the already existing cap in terms of maximum risk-weighted exposure amounts, should be available to all originator and sponsor institutions, regardless of the approach they use for the calculation of regulatory capital requirements for the positions in the securitisation. The BCP Regulation would also provide for an appropriately risk-sensitive calibration for STS Securitisations, with a lower risk-weight floor of 10 % for senior positions. Lower capital requirements applicable to STS Securitisations should be limited to securitisations where the ownership of the underlying exposures is transferred to ‘traditional securitisations’.