Homogeneity of STS securitisation's portfolios
In July 2018, the European Banking Authority (EBA) published its final draft regulatory technical standards (RTS) on the homogeneity of the underlying exposures in securitisation in accordance with articles 20(14) and 24(21) of (EU) regulation no. 2017/2402 (the securitisation regulation), which was presented to the EU Commission to discuss.
The EBA specifies which requirements underlying exposures in securitisations have to meet to be considered homogenous. This is a key factor to qualify for treatment as simple, transparent and standardised securitisation (STS securitisation) according to the new European securitisation regulation (for more on this subject see White Paper no. 81: The new European framework for asset-backed security transactions). The purpose of a homogenous asset pool is also to allow the investor to make better risk assessments during due diligence.
In this respect, the following requirements must be complied with:
Similar underwriting standards
The purpose of similar underwriting standards with similar risk profiles and cashflow characteristics is to enable the investor to determine the risk of the underlying exposures pool based on general procedures and parameters. These standards do not have to be identical. It is important that they adopt a similar approach in establishing the credit risks of underlying exposures.
Similar servicing standards
The second condition concerns standardised monitoring, collection and administration of cash receivables from the underlying exposures. Similar procedures, systems and checks allow investors to make reliable assumptions about payment and default behaviour as part of the cashflow analysis.
Affiliation to the same asset category
Through the RTS, a non-exhaustive list of asset categories is defined based on which the underlying exposures are to be categorised. In this case, a decisive point is that the underlying exposures in a particular asset pool can be allocated to the same category of assets, even if some assets could be allocated to more than one asset category. Some of the distinctions made are between (i) residential loans, (ii) commercial loans, (iii) credit facilities provided to individuals, (iv) credit facilities to SMEs and corporates, (v) auto loans and receivables, (vi) trade receivables and (vii) credit card receivables.
As affiliation to a joint asset category does not necessarily ensure sufficient homogeneity of the asset pool, a fourth specification was added to the RTS. What are defined as homogeneity factors are to indicate the crucial potential determinants in fulfilling the homogeneity criterion of the underlying exposures based on their cashflow, credit risk and contractual characteristics. The factors distinguish between (i) type of obligor, (ii) ranking of security rights on collateral, (iii) type of immovable property and (iv) jurisdiction of the property/obligor. Depending on the asset category, a varying number of the four factors can be applied, whereby trade receivables and credit facilities to individuals for personal, family or household consumption are excluded from the analysis of the homogeneity factors. According to the EBA, the application of one factor is enough to meet the homogeneity requirements. However, the factor with the potentially biggest impact on the homogeneity of the asset pool in this category is to be used. The originators also have to explain how the homogeneity factor applied fulfils the homogeneity criterion and why the originator has chosen the factor concerned. The originator must explain why the factor selected is the most appropriate one for determining risk and why other factors can’t be applied.
In the RTS, the EBA is pursuing a quality-based and balanced approach, which, on the one hand, is to ensure a clear definition of homogeneity within the STS certification process and on the other, offers flexibility regarding the specific characteristics of transactions due to openly defined asset categories and the choice of homogeneity factors to be applied. This flexibility, above all with regard to the ability to choose homogeneity factors, however, leaves scope for interpretation which is to be appraised by the banks. Possible doubts about application in this respect and the approach by the supervisory authorities regarding the determination of the homogeneity of the pool underlying the STS securitisation will soon become more apparent when market practice emerges. In accordance with article 43 (transitional provisions) of the securitisation regulation that came into force this year, STS-capable term transactions could be reported in 2018 already.