By virtue of EU Regulation 2017/2402 (the “Regulation”) focusing mainly on simple, transparent, and standardised securitisations (“STS”), which came into full effect on January 2019, a harmonised set of rules now exist for securitisations in the EU, independently of the class of the investors.
Through the Regulation, the EU is aiming to establish a more risk-sensitive prudential framework which aims to better differentiate securitisations which are simple, transparent and standardised from other securitisations which are more complex, opaque and risky.
The Regulation allows securitisation special purpose vehicles (“SSPEs”) to use the designation of STS where the securitisation meets all the requirements relating to simplicity, transparency and standardisation, with the most notable requirements being outlined hereunder:
True Sale – The main requirement for ensuring simplicity is the requirement of having the underlying exposures being acquired by the SSPE through a ‘true sale’, assignment or transfer with the same legal effect in a manner that is enforceable against the seller or any other third party. The transfer of the title to the SSPE shall not be subject to severe clawback provisions in the event of the seller’s insolvency. For this reason, ‘synthetic securitisations’, where the transfer of risk is achieved by the use of credit derivatives or guarantees while the exposures being securitised remain exposures of the originator, are not allowed.
Homogenous exposures– Another key requirement is that that securitisation transactions shall be backed by pools of exposures that are homogenous in asset type, such as pools of residential loans, pools of corporate loans, etc. Also, the underlying exposures should not include transferable securities. For such purposes, ‘homogenous’ means being in the same asset type where the contractual, credit risk, prepayment and cash-flow related characteristics are sufficiently similar.
Ban on re-securitisation – Since re-securitisations could hinder the level of transparency that the Regulation seeks to establish, a ban on re-securitisation is introduced, subject to derogations for certain cases of re-securitisations that are used for legitimate purposes. Re-securitisations are only permitted in specific instances as established by the Regulation.
Availability of data – The Regulation requires the originator and the sponsor to make available data to potential investors before pricing. Such data shall include static and dynamic historical default and loss performance for substantially similar exposures to those being securitised, the sources of those data, and the basis for claiming similarity. Such data shall cover a period of at least five years.
Due-diligence requirements – Emphasis is drawn to the requirement that institutional investors be subject to proportionate due-diligence requirements to ensure proper assessment of the risks arising from all types of securitisations, to the benefit of end investors.
Material information – Certain material information must be communicated to investors. In this regard, where originators, sponsors and SSPEs would like their securitisations to use the STS designation, investors, competent authorities and ESMA should be notified that the securitisation meets the STS requirements. Such notification should include an explanation on how each of the STS criteria has been complied with. A list of STS securitisations will then be published on ESMA’s website for information purposes.
Attestation by third-parties – The Regulation also allows an authorised third-party to attest to the satisfaction of a SSPE with the STS requirements. Such third parties should be subject to authorisation by competent authorities. For a third-party to receive authorisation to carry out such attestation, it must be independent and must have professional qualifications, knowledge, experience and a good reputation, amongst other requirements. Credit institutions, investment firms, insurance undertakings and credit rating agencies are ineligible to carry out such attestations.
Securitisation repositories – A lot of importance is shifted to establishing a comprehensive system under which investors and potential investors will have access to all the relevant information over the entire life of the transactions, to reduce originators’, sponsors’ and SSPEs’ reporting tasks and to facilitate investors’ continuous, easy and free access to reliable information on securitisations. In this regard, a framework for securitisation repositories to collect relevant reports, primarily on underlying exposures in securitisations, is established. Such securitisation repositories shall be authorised and supervised by ESMA.
Risk retention – It is essential that the interests of originators, sponsors, and original lenders that are involved in a securitisation and the investors are aligned. To achieve this aim, the Regulation requires the originator, sponsor or original lender of a securitisation to retain on an ongoing basis a material net economic interest in the securitisation of not less than 5%. Such interest shall be measured at the origination and shall be determined by the notional value for off-balance-sheet items. More generally, securitisation transactions should not be structured in such a way so as to avoid the application of the retention requirement.
The above-mentioned key elements of the Regulation should be adhered to in order for SSPEs to utilise the designation of a simple, transparent and standardised securitisation. Such requirement and the rest of the provisions in the Regulation will be further supplemented by draft technical standards on how the Regulation will be implemented which are currently at consultation stage and which will be issued by the European Supervisory Authorities in due course.
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