Introduction
The Joint Committee of the European Supervisory Authorities1 (the "Joint Committee" and the "ESAs", respectively) has published a report on the implementation and functioning of the EU Securitisation Regulation2 (the "EUSR") on 17 May 2021 (the "Report").3
The Report has been published pursuant to Article 44 of the Securitisation Regulation, which required the Joint Committee to publish a report by 1 January 2021 (and every three years thereafter) on (a) the implementation of the requirements for "STS" (simple, transparent and standardised) securitisations, (b) an assessment of the actions taken by the EU competent authorities on material risks and vulnerabilities and the actions of market participants to further standardise securitisation documentation, (c) the functioning of the due diligence requirements of Article 5 and the transparency requirements of Article 7 of the EUSR, and the level of transparency of the securitisation market, and (d) the risk retention requirements of Article 6 including compliance by market participants and the methods of risk retention.
The Report will be used by the European Commission (the "Commission") for the preparation of its report to the European Parliament and the Council of the European Union on the functioning of the EUSR, which is due by 1 January 2022, pursuant to Article 46 of the EUSR, and which may be accompanied by a legislative proposal. It is therefore an important step in relation to the regime for EU securitisations which was established by the EUSR when it became applicable on 1 January 2019.
It is worth noting that the Report will not be applicable to the UK Securitisation Regulation4 regime, which will be the subject of a separate review and report by the UK Treasury by 1 January 2022.
In this Legal Update, we summarise the main issues identified by the Report and some of its recommendations and key messages.
Due Diligence Requirements
Article 5 of the EUSR sets out detailed due diligence and monitoring requirements that institutional investors must comply with before and while holding an exposure to a securitisation.
Issues identified
The Report identifies several issues in relation to the operation of Article 5:
Recommendations and key messages
The Report sets out the following recommendations and key messages in relation to the operation of Article 5:
While the Report helpfully recognises the ambiguity identified with respect to the drafting of Article 5(1)(e), market participants have expressed significant concerns about the recommendations made in the ESAs' Opinion with respect to this provision. EU investors have been faced with a difficult decision of how to interpret the Article 5(1)(e) wording in order to continue to invest in third country securitisations, given the practical challenges in obtaining the specified reporting templates, or in some cases, asset-level data. Some market participants have expressed a preference for a proportionate and risk-based approach, as recommended in the report of the High Level Forum on Capital Markets Union.6 We would also note, however, that if Article 5(1)(e) is interpreted in such a way that means that asset-level data is required, this would likely result in certain transactions, e.g. US credit card securitisations and 144A deals which do not provide asset-level data, not being capable of being sold in the EU. Furthermore, depending on how the requirements are interpreted, there is a risk that EU banks will no longer be able to invest in warehouse transactions, where they would typically receive some asset-level data but only in the form of a pool spreadsheet or tape from the non-EU originator in the form generated by the originator’s system rather than under the EU templates.
It is also unclear whether the suggestion of a third country equivalence regime in the ESAs' Opinion would be achievable in practice. While the UK regime is currently very similar, and so might conceivably be deemed to be of an equivalent standard, it is not clear whether the regimes in other jurisdictions, for example the SEC requirements for asset-level data in Regulation AB, will be considered to be sufficient for compliance with the EU due diligence requirements.
Risk Retention Requirements
Article 6 of the EUSR requires that the originator, sponsor or original lender of a securitisation transaction retain on an ongoing basis a material net economic interest in the securitisation of at least 5%. Risk retention requirements were originally put in place as a result of the 2007 financial crisis, in order to ensure a proper alignment of interests between the parties and impose an obligation on the relevant entity to have some "skin in the game", and have been carried across in the various regulations since then. The EUSR introduced a direct obligation for the originator, sponsor or original lender to comply with the risk retention requirements, in addition to the indirect requirement on investors to verify compliance with risk retention as part of their due diligence obligations under Article 5. The concept of the sole purpose test was also incorporated in the EUSR (previously this was based on a recommendation in a report by the EBA), and a prohibition on adverse selection of assets was added.
Issues identified
The Report identifies various issues in relation to the operation of Article 6:
Recommendations and key messages
The Report sets out the following recommendations and key messages in relation to the operation of Article 6:
Market participants will no doubt be pleased that there is no change to the required percentage or methods of risk retention. However, the proposed clarification of the jurisdictional scope of Article 6 has raised significant concerns. It is clear from Article 5 that non-EU entities may retain the required material net economic interest, and it is difficult to understand why different rules should be put in place for transactions involving EU and non-EU "sell-side" parties. The proposed changes also conflict with the wording in the Draft RTS (and which is also similar in the CRR RTS), which provide that in transactions with multiple originators, each originator should retain risk on a pro rata basis, with reference to the proportion of the securitised exposures it has originated, but which also allow for the retention to be held by a single originator if certain requirements are satisfied. This would be a significant departure from the established market position and would mean that the risks may not be appropriately aligned, contrary to the principles underlying the rules. It could also mean that in practice certain transactions would simply not be feasible and that some EU entities would not be able to obtain funding.
Transparency Requirements
General challenges in relation to transparency requirements
Article 7 of the EUSR requires that the originator, sponsor and SSPE of a securitisation make available certain information to investors, competent authorities and, upon request, potential investors. This information includes reports on the underlying assets and investor reports, in each case in the form of the required templates.9
Issues identified
The Report identifies various issues in relation to the operation of Article 7:
Recommendations and key messages
The Report sets out the following recommendations and key messages in relation to the general functioning of the transparency requirements under Article 7:
The extent to which changes to the reporting templates will be welcomed remains to be seen, and certainly any increase in the reporting burden will not be popular. However, the introduction of a specific template for trade receivables transactions could be helpful (assuming that it does not result in increased reporting requirements), given that these transactions currently need to be reported using the esoteric assets template and a number of aspects of that template are not relevant to trade receivables.
Private Securitisations
Private and/or bilateral securitisations represent an important segment of both STS and non-STS securitisation markets in the European Union, a trend which has significantly increased during and as a result of the COVID-19 pandemic.
Issues identified
The Report identifies certain issues in relation to the transparency requirements applicable to private securitisations:
Recommendations and key messages
On the subject of private securitisations, the Report sets out the following recommendations and key messages:
Many market participants will welcome the prospect of a reduced reporting burden for private transactions. However, the benefit of this will be limited if the types of transactions which are excluded are too narrowly defined. In addition, the prospect of those transactions no longer being capable of being STS will mean that in practice this will have the effect of limiting the ability for such transactions to benefit from the reduced reporting requirements, given the increased trend towards making transactions STS.
Moreover, we anticipate that the recommendation that private securitisations (unless they are exempted from the reporting requirements) would have to report via securitisation repositories will be perceived as unnecessary, given that competent authorities could already receive the relevant information, although in practice the mechanism for providing such information is not yet clear in a number of jurisdictions. It is also likely to be seen as disproportionately burdensome with respect to many private transactions.
STS Securitisations
The EUSR introduced the concept of STS securitisations, meaning that securitisations which meet the applicable STS criteria can achieve reductions in regulatory capital requirements and benefit from other favourable regulatory capital treatment. The STS label has been widely adopted.
The STS label
The Report considers the number of STS transactions with reference to public versus private securitisations, the underlying assets and the impact of Brexit resulting in UK transactions no longer being capable of being STS under the EUSR. Preferential capital treatment is perceived by market participants as the main advantage associated with STS securitisations, while the possibility of attracting a wider investor base, achieving better pricing, and transparency and standardisation are also seen as positive features of the STS label.
Issues identified
The Report highlights certain limitations with the STS label, such as:
Recommendations and key messages
The Report sets out the following recommendations and key messages in relation to the STS label:
The STS criteria
The report considers the STS criteria with respect to ABCP and non-ABCP securitisations.
Issues identified
The Report identifies the following issues in relation to the STS criteria:
Recommendations and key messages
The Report sets out the following recommendations and key messages in relation to the STS label:
We would note that one of the key barriers to obtaining STS treatment for an ABCP programme is the requirement for all transactions in the ABCP programme to be STS (except for a limited temporary exemption from certain requirements for up to 5% of the exposures), and some further flexibility would be helpful. In addition, the requirement for the remaining weighted average life of the underlying exposures to be no more than two years has been identified by market participants as problematic. It seems likely that the demand for STS ABCP programmes would increase if there were improved prudential benefits, and market participants will be keen that this aspect is considered further.
Supervision
Issues identified
The Report identifies various issues in relation to supervision by competent authorities of STS compliance, including the following:
Recommendations and key messages
The Report sets out the following recommendations and key messages in relation to supervision:
Third Party Verifiers
Article 28(1) of the EUSR provides that a third party verifier ("TPV") may be authorised by a competent authority to assess the compliance of securitisations with the STS criteria. TPVs are seen by market participants as an additional source of guidance and analysis in interpreting the STS requirements, which is highly valued by investors and less experienced originators. As of today, only two TPVs have been authorised to verify STS compliance: PCS and SVI.
Issues
The Report identifies certain issues with respect to TPVs, including the following:
Recommendations and key messages
The Report sets out various recommendations and key messages in relation to TPVs, including the following:
Other Considerations
The Report concludes that few material risks have been identified by competent authorities. However, the Report notes that the impact of the COVID-19 pandemic is not yet fully apparent.
Next steps
As mentioned, the Commission are required to prepare a report on the EUSR, which should consider in particular the findings of the Report, and which may be accompanied by a legislative proposal. We anticipate that this will involve a consultation process, and this may begin shortly. We would encourage market participants to make their views known on these important issues.
1 The European Banking Authority (the "EBA"), the European Securities and Markets Authority ("ESMA") and the European Insurance and Occupational Pensions Authority (EIOPA).
2 Regulation (EU) 2017/2402 of the European Parliament and of the Council of 12 December 2017 laying down a general framework for securitisation and creating a specific framework for simple, transparent and standardised securitisation, and amending Directives 2009/65/EC, 2009/138/EC and 2011/61/EU and Regulations (EC) No 1060/2009 and (EU) No 648/2012, as amended.
3 Joint Committee Report on the Implementation and Functioning of the Securitisation Regulation (Article 44), available at https://www.eba.europa.eu/esas-report-implementation-and-functioning-securitisation-regulation.
4 The EU Securitisation Regulation as it forms part of the domestic law of the UK as "retained EU law" by virtue of the European Union (Withdrawal) Act 2018, as amended, as such regulation was amended by the Securitisation (Amendment) (EU Exit) Regulations 2019 and as further amended. For more details of the UK regime, please see our Legal Update – "The Revised Securitisation Regulation Regime in the UK".
5 See our recent Legal Update for a more detailed discussion on this: "ESAs' Opinion to the European Commission on the Jurisdictional Scope of Application of the EU Securitisation Regulation".
6 Please see our previous Legal Update on this for more details: "Recommendations for developing the EU securitisation market – Report by the High Level Forum on Capital Markets Union".
7 Please see our previous Legal Update on this for more details: "Amendments to the EU Securitisation Regulation – the new synthetic STS framework and adjustments in relation to non-performing exposures".
8 Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 648/2012, as amended, known as the Capital Requirements Regulation.
9 See the following Legal Update for more information: "Disclosure Technical Standards and Templates published in relation to the EU Securitisation Regulation".
10 i.e. a securitisation where a prospectus is required to be prepared in accordance with the Prospectus Regulation.
11 i.e. a securitisation where a prospectus is not required to be prepared in accordance with the Prospectus Regulation.
12 Final Report on Guidelines on the STS criteria for ABCP securitisation and Final Report on Guidelines on the STS criteria for non-ABCP securitisation, available at https://www.eba.europa.eu/eba-publishes-final-guidelines-on-the-sts-criteria-in-securitisation.
13 Commission Delegated Regulation (EU) 2019/1851 of 28 May 2019 supplementing Regulation (EU) 2017/2402 of the European Parliament and of the Council with regard to regulatory technical standards on the homogeneity of the underlying exposures in securitisation.
14 The Report also suggests that supervision could be delegated by jurisdictions with no or limited issuances to jurisdictions which have a higher number of issuances, although it is acknowledged that this would present certain challenges.
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