Implementation of the EU Securitisation Regulation 2017/2402MEDIA ROOM
As part of the European Commission’s Capital markets Union Action Plan, the Securitisation Regulation (“SR”) and the related Capital Requirements Regulation (“CRR”) became applicable as of the 1st of January 2019. The regulations now provide for a general framework for securitisation across the European Union and promote securitisation as a significant element of well-functioning financial markets, whilst diversifying funding sources and allocating risk more widely.
The amendment to the CRR ensures that capital treatment of securitisations for banks and investment firms is more risk-sensitive and able to properly reflect the specific features of Simple, Transparent and Standardised (“STS”) securitisations.
The SR defines securitisation and establishes requirements for due diligence, risk retention and transparency for all parties involved in a securitisation transaction. Additionally, it creates a definite framework for STS securitisations. In the context of the SR, the term securitisation is to be understood as a transaction or scheme, whereby a credit risk is tranched and has the following characteristics:
- payments in the transaction or scheme are dependent upon the performance of the exposure or of the pool of exposures;
- the subordination of tranches determines the distribution of losses during the ongoing life of the transaction or scheme; and
- the transaction or scheme does not create specialised lending exposures.
The SR sets out the criteria for credit granting; requirements for selling securitisation to retail clients; requirements for SSPEs as well as conditions and procedures for securitisation repositories. The Regulation also introduces a ban on re-securitisation.
Applicability of Securitisation Regulation
The SR applies to institutional investors; originators; sponsors; original lenders and securitisation special purpose entities (“SSPEs”).
In terms of the Regulation, an Institutional Investor includes an investor which is one of the following:
- an insurance undertaking or a reinsurance undertaking;
- an institution for occupational retirement provision;
- an alternative investment fund manager (AIFM);
- an undertaking for the collective investment in transferable securities (UCITS), if internally managed or otherwise its management company; or
- a credit institution or an investment firm.
General Framework – Key Requirements
The SR creates an obligation on the institutional investors to verify certain elements of a particular transaction. These mainly relate to the credit-granting process of the originator (except if EU credit institutions or investment firms), the compliance of originator/sponsor/original lender with risk retention requirements; the regular provision of required information by originator/sponsor/SSPE), and risks characteristics and structural features pursuant to written procedures (initially and on an ongoing basis).
The SR sets out risk retention requirements which are intended to align the interests of the investors with those of the originator, sponsor or original lender. The SR states that either of these parties shall retain a material net economic interest in the securitisation transaction of at least 5% on an ongoing basis (based on the notional value at origination), and not subject to any credit-risk mitigation or hedging.
Transparency requirements are now applicable to originators, sponsors and SSPEs. These all now have to provide:
- On a regular basis, provide the (potential) investors and to Competent Authorities with sufficient information on the underlying exposures and all underlying documentation that is essential for understanding the transaction in question;
- designate who among themselves will provide the required information;
- make available this information via the securitisation repository to provide the investors with a single and supervised source of the data necessary for performing their due diligence (except for private securitisations).
Specific framework – “STS” classification
In order to be considered as STS, a securitisation must fulfil numerous criteria divided in simplicity, transparency and standardisation and therefore aiming at establishing a more risk sensitive prudential framework for STS securitisation.
In addition to fulfilling the above indicated STS criteria the securitisation vehicle must be established in the European Union and all STS must be published in a list on the official website of the ESMA. The originators and sponsors shall jointly notify ESMA of the new STS securitisation and to verify the level of compliance of the STS criteria.
Third party verification
The originator, sponsor and SSPE may use the service of an authorised third party to check whether a securitisation complies with the STS criteria. However, the use of such a service shall not under any circumstances affect the liability of the parties in respect of their legal obligations under the SR nor the due-diligence obligations imposed on institutional investors.