The new European regulatory framework for Asset-Backed Security transactions

After two years of negotiations, the new securitisation framework (Regulation (EU) No. 2017/2402) and associated amendments of the capital requirements for credit institutions and investment firms (Regulation (EU) No. 2017/2401) were finally published in the Official Journal of the EU on 28 December 2017.

The securitisation framework provides a general and cross-sectorally applicable framework for securitisations addressing different market participants such as institutional investors, originators, sponsors, original lenders and special purpose entities (SSPE). Accordingly, UCITS, Solvency II, AIFM, CRA 3 und EMIR are amended to ensure cross-sectoral consistency in regulatory treatment of securitisations, especially concerning definitions, retention requirements, due diligence and transparency requirements. An essential innovation is the introduction of criteria for high-quality securitisations, i.e. simple, transparent and standardised securitisations (STS securitisations). Primarily, the STS framework is solely applicable to true-sale securitisations (term and ABCP securitisations). An extension of the STS framework to balance-sheet synthetic securitisations will be considered by the regulators this year. Originators, sponsors and SPEE are responsible for the certification and notification of an STS securitisation to ESMA, but may be supported by a third party in the verification process. Investors should perform their own due diligence but they should be able to rely on the STS notification and on the information disclosed by the originator, sponsor and SSPE on whether a securitisation meets the STS requirements. A list of notified STS securitisations will be made available on ESMA’s website.

Basically, the CRR amendments focus on changing the regulatory capital standards for securitisations based on revised securitisation framework published by the Basel Committee on Banking Supervision (BCBS) in December 2014 with an updated version from July 2016. In comparison to BCBS’s hierarchy, SEC-SA was moved up to the second level of the hierarchy after SEC-IRBA and before SEC-ERBA within the trilogue negotiations. Based on EBA’s proposals in July 2015, the codified hierarchy of approaches includes a preferential capital treatment with lower risk weights for STS securitisations than those for non-STS securitisations.

After having agreed on core issues in the trilogue negotiations, final drafts of the securitisation regulation and the associated CRR amendments were published in June 2017. In October 2017 the European Parliament debated and approved both regulations at the first reading. After the European Council approved them in November 2017, both regulations were published in the Official Journal of the EU in December 2017. They became effective on 17 January 2018. Securitisations issued after the effective date of 1 January 2019 are subject to the new regulations; transitional provisions are defined for outstanding securitisations to date. In respect of securitisations issued before 1 January 2019, institutions shall continue to apply the recent capital requirements.

Both Regulations shall be binding in their entirety and directly applicable in all Member States. To specify several aspects, the European Financial Supervisory Authority (ESA) – ESMA, EBA und EIOPA – will develop numerous technical and implementation regulatory standards as well as guidelines and reports. We will keep you informed about further developments. Initial consultations regarding risk retention, homogeneity of underlying exposures in securitisations, STS notification, disclosure and operational standards as well as third party STS verification services were already published by EBA and ESMA in December 2017.

Please find more information on regulatory news regarding securitisations and other financial topics in our monthly FSNews.

Our Whitepaper No. 81 concerning the new European framework for securitisations is available for download next to this article.

If you have further questions – including in terms of using services from third parties to assess whether a securitisation complies the STS criteria – please do not hesitate to contact us.

We wish you an interesting read and a successful start to the New Year.