Securitisation: Key Changes Proposed by EU Commission
Introduction
The European Commission has published a significant package of legislative proposals (available here) to revise the EU’s securitisation framework. The proposals aim to revitalise the EU securitisation market, reduce operational and prudential barriers, and support the broader objectives of the EU’s Savings and Investments Union, while maintaining robust safeguards for financial stability and investor protection. The Commission’s package proposes amendments to the Securitisation Regulation,1 the Capital Requirements Regulation,2 the Liquidity Coverage Ratio (LCR) Delegated Regulation,3 and the Solvency II Delegated Regulation.4
In this briefing we consider the most significant changes suggested by the proposals, with a focus on the Securitisation Regulation.
Securitisation Regulation
Due Diligence: The proposals seek to introduce a more principles-based and proportionate approach to due diligence for EU securitisations. EU institutional investors will no longer be required to verify certain information when the sell-side party is established and supervised in the EU (as competent authorities already oversee compliance).
The detailed list of structural features of a securitisation, that must currently be checked as part of an institutional investor’s due diligence assessment, is removed, with the intention that the assessment should instead be proportionate to the risk profile of the securitisation.
For secondary market transactions, investors will be allowed a “reasonable period of time” (not exceeding fifteen days) to document the due diligence assessment and verifications they have undertaken.
Where securitisations are fully guaranteed by multilateral development banks due diligence requirements for institutional investors are waived. In addition, where the first loss tranche (at least 15% of the nominal value) in a securitisation position is held or guaranteed by certain public entities, due diligence requirements are lightened.
Where an institutional investor delegates certain authority and functions to another investor, the draft regulations clarify that the delegating investor will remain liable for any failure to comply with due diligence requirements. Failure to meet due diligence requirements is to be added as a basis on which administrative sanctions can be applied against an investor.
Risk Retention: Where the first loss tranche (at least 15% of the nominal value) of a securitisation is held or guaranteed by certain public entities, the usual 5% risk retention requirement will not apply to the retention parties.
Transparency and Reporting: The reporting burden on issuers will be reduced through a review of reporting templates. The number of mandatory data fields is to be cut by at least 35% and a distinction will be made between mandatory and voluntary fields. Loan-level data will not be required for highly granular, short-term exposures (such as credit card receivables).
For private securitisations, a new lighter reporting template will be introduced, focused on supervisory needs. Private transactions will be reported to securitisation repositories but data will not be disclosed to investors or potential investors.
“Public” and “Private”: new definitions of “public” and “private” securitisations are suggested. A “private” securitisation is simply one that is not “public”, with a public securitisation being one that satisfies any of the following criteria:
- a prospectus is drawn up for that securitisation under the EU Prospectus Regulation5;
- the securitisation is marketed with notes constituting securitisation positions admitted to trading on an EU regulated market, multilateral trading facility (MTF) or organised trading facility (RTF); or
- the securitisation is marketed to investors and the terms and conditions are not negotiable.
Simple-Transparent and Standardised (STS): To facilitate the securitisation of SME loans, the homogeneity requirement will be reduced to a 70% threshold (down from 100%) where the underlying pool of exposures consists of qualifying SME loans. To enable insurance and reinsurance undertakings to participate meaningfully in the STS on-balance-sheet market, eligible credit protections will be extended to include an unfunded guarantee by such an undertaking provided it satisfies certain criteria.
Supervision: Changes are also proposed to improve the existing supervisory structures and to enhance collaboration and co-ordination of supervisory practices. These changes will include a revised securitisation committee, the European Banking Authority taking a more prominent leadership role, the development of common supervisory practises and ensuring that personnel participating in the relevant committees have the requisite experience and expertise.
Capital Requirements Regulation
The Commission’s proposal acknowledges that the existing prudential securitisation requirements for credit institutions are insufficiently risk-sensitive and, as a result, credit institutions’ capital requirements for securitisation exposures are unduly high. With a view to freeing up capital that could be put to better use, a number of targeted amendments are proposed to the Capital Requirements Regulation.
These include amendments aimed at: (i) better calibration of risk-weight floors by introducing a new concept of a risk-sensitive floor for senior securitisation positions, and (ii) more accurate risk-weight calculations by reducing the so-called “(p) factor”, especially when calculating senior positions, originator/sponsor positions and for STS securitisations.
Alongside those amendments, the significant risk transfer (SRT) framework (which allows a credit institution to reduce capital requirements by transferring associated risks) is to be overhauled, replacing mechanical tests with a principles-based approach and requiring originators to submit a self-assessment, including stress testing, to demonstrate effective risk transfer.
In connection with the above, the Commission is also running a consultation on proposed amendments to the Liquidity Coverage Ratio (LCR) Delegated Regulation (which relates to the maintenance of buffers to meet short-term liquidity requirements). The eligibility of securitisations for inclusion in a credit institution’s liquidity buffer is to be broadened, with a view to attracting further investment into the securitisation market.
Finally, the Commission notes that it plans to publish draft amendments to the insurance prudential rulebook (in the Solvency II Delegated Regulation) in the near future. The proposed amendments will include changes to the prudential treatment of securitisations (both STS and non-STS).
Comment
The overall aim of the Commission’s proposals – to revitalise the EU securitisation market by reducing costs and other barriers to entry – will no doubt be welcomed by the markets. However, some of the proposals, as currently drafted, may be more of a hindrance than a help.
For example, the new expanded definition of “public securitisation” may capture certain types of transactions that are currently considered to be “private”, having the effect that a more limited number of transactions will benefit from the new proposed simplified reporting template for private securitisations. This could have the practical effect of increasing (rather than decreasing) the costs and compliance burden for a significant part of the securitisation market.
It is important to note that the Commission’s proposals are the beginning of the legislative process and amendments are likely to be made. Market participants are encouraged to review the proposals in detail, assess their business models and compliance frameworks, and seek advice as needed to ensure readiness for the forthcoming changes.
For further information or tailored advice on how these reforms may affect your organisation, please contact one of the below key contacts or your usual contact at McCann FitzGerald LLP.
- (EU) 2017/2402.
- (EU) 575/2013.
- Commission Delegated Regulation (EU) 2015/61.
- Commission Delegated Regulation (EU) 2015/35.
- Regulation (EU) 2017/1129.
This document has been prepared by McCann FitzGerald LLP for general guidance only and should not be regarded as a substitute for professional advice. Such advice should always be taken before acting on any of the matters discussed.
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