STS securitisation: Homogeneity of the portfolio
Delegated regulation published
Less than one year after the European Banking Authority (EBA) published its final draft regulatory technical standard (RTS) on the homogeneity of the underlying exposures in securitisation, the Delegated Regulation was published by the EU Commission on 28 May 2019.
As already reported in July 2018, the RTS 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 Deloitte White Paper no. 81: The new European framework for asset-backed security transactions). A homogeneous asset pool shall lead to similar risk profiles and thus, enable the investors to better assess risks as part of their due diligence.
The EU Commission has largely adopted the requirements proposed by the EBA, which are (1) similar underwriting standards, (2) similar servicing standards, (3) belonging to the same asset class and (4) homogeneity factors (see article on homogeneity for details).
Differences are only found in the specification of the homogeneity factors; according to the EBA, the factor which potentially has the most significant impact on the homogeneity of the asset pool should be applied. Therefore, originators must explain how the applied factor meets the criterion of homogeneity, why the factor is the most appropriate factor for risk assessment, and why the other factors were not used. The EU Commission however, waived this specification and only requires an originator or sponsor to apply one or more relevant factors on a case-by-case basis by taking into account the nature of the securitisation (i.e. non-ABCP securitisation or ABCP securitisation), the specific characteristics of the pool and the ability of investors to assess the risks.
The RTS continues to pursue a qualitative 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 hand, offers flexibility with regard to transaction-specific peculiarities (i.e. openly formulated asset classes and the choice of the homogeneity factor). However, this flexibility leaves scope for interpretation, particularly with regard to the choice of the homogeneity factor, which must be appraised by the institutions. Possible application uncertainties arising in this context and the handling by the supervisory authorities in connection with the determination of the homogeneity of the pool underlying the STS securitisation will soon become more apparent when market practice emerges.