Implicit support with securitisations

On 25 October 2018, BaFin published a circular on implicit support with securitisation transactions (BaFin circular 13/2018) with reference to the German version of the Guidelines on Implicit Support with Securitisation Transactions (EBA/GL/2016/08) published by the EBA on 24 November 2016.

The guidelines on implicit support with securitisation transactions allows the EBA to meet its commitment pursuant to article 248 paragraph 2 of the regulation (EU) no. 575/2013 (CRR) to define the term arm’s length conditions and identify when transactions are structured in such a way that they don’t constitute implicit support. The guidelines also elaborate further on the reporting and documentation requirements as stated in article 248, paragraph 1 of the CRR. BaFin’s circular concerns the integration of these guidelines pursuant to article 2, paragraph 4 of the regulation (EU) no. 1093/2010 into national regulatory processes. BaFin’s circular reflects the content of the EBA’s guidelines. The circular was agreed with the German Bundesbank and came into force with immediate effect on 25 October 2018, the day it was published.

In its guidelines based on article 248, paragraph 2 of the CRR, the EBA explains what constitutes arm’s length conditions and when a transaction is structured in such a way that it doesn’t constitute implicit support. Following the EBA’s guidelines, BaFin’s circular 13/2018 states that a transaction doesn’t constitute implicit support if the transaction is executed for the sponsor or originator of a securitisation transaction at arm’s length conditions or at a lower cost than arm’s length conditions. Transactions carried out at arm’s length conditions are those whose conditions are identical to a standard commercial transaction. In other words, the two parties are not affiliated with one another and each party acts independently of the other and in its own interest. In order not to constitute implicit support, in addition to the above-mentioned criteria, transactions by an originator that transfer a significant credit risk must meet the conditions pursuant to article 243 of the CRR or, if applicable, article 244 of the CRR for the transfer of a significant risk in accordance with this circular and the guidelines adopted by the EBA on the transfer of a significant credit risk, or, the transaction shouldn’t be entered into with the aim of reducing investors’ potential or actual losses. If the transaction no longer meets the conditions for the transfer of a significant credit risk, the originator must maintain the same level of his own funds for all securitised exposures as he would have had to have done without securitisation.