Regulation (EU) 2017/2402 laying down a general framework for securitisation and simple, transparent and standardised securitisation (the "Securitisation Regulation") became effective on 1 January 2019.
Securitisation is an important element of well-functioning financial markets. It enables a lender or a creditor to refinance a set of loans, exposures or receivables (such as residential loans, car loans or leases, consumer loans, credit cards or trade receivables) by transforming them into tradable securities. Soundly structured securitisation is an important channel for diversifying funding sources.
The key objectives of the Securitisation Regulation are to lay down a general framework for securitisation and to create a specific legal framework for simple, transparent and standardised ("STS") securitisations.
Rules applicable to all securitisations
The new general framework applicable to all securitisations is based on the following features:
- Stringent rules are established for the sale of securitisation positions to retail clients, imposing the performance of a suitability test and specific investment restrictions (Article 3).
- Prior to holding a securitisation position, institutional investors must carry out adequate due diligence on the credit granting and the origination standards, the risk retention by the originator or sponsor and the assessment of the risk involved. They must also establish appropriate procedures in order to monitor, on an ongoing basis, the performance of the securitisation position and of the underlying exposure (Article 5).
- The originator, sponsor or original lender of a securitisation must retain on an ongoing basis a material net economic interest in the securitisation of at least 5% (Article 6).
- Transparency requirements apply for originators, sponsors, SSPEs (securitisation special purpose entities) and securitisation depositories towards holders of a securitisation position, potential investors and the competent authorities (Article 7).
- Underlying exposures used in a securitisation may not include securitisation positions (Article 8).
- All originators, sponsors and original lenders must apply appropriate credit-granting criteria and have certain processes and systems in place (corresponding to those for non-securitised exposures) (Article 9).
Rules applicable to STS Securitisation
The development of a simple, transparent and standardised securitisation market constitutes a building block of the Capital Markets Union and contributes to the European Commission's priority objective of a return to sustainable growth. The Securitisation Regulation therefore sets out the framework under which certain institutional investors can potentially benefit from more favourable regulatory capital treatment for STS securitisation exposures.
Originators, sponsors and SSPEs wishing to benefit from the STS Securitisation regime must be established in the EU and may use the designation "STS" or "simple, transparent and standardised" only where the securitisation meets all the STS requirements of Chapter 4 of the Securitisation Regulation, and ESMA (the European Securities and Markets Authority) has to be duly notified.
Simplicity requirements (Article 20) aim to ensure that acquisition of title to the underlying exposures by the SSPE is achieved by means of a true sale; that clear, predetermined and documented eligibility criteria are applied and do not allow for active portfolio management of exposures on a discretionary basis; and that securitisation is backed by a homogenous pool of underlying exposures.
Standardisation requirements (Article 21) include the appropriate mitigation of the interest rate and currency risks, the use of generally used market interest rates, an experienced, skilled and well-equipped servicer and adequate transaction documentation.
Transparency requirements (Article 22) entail the originator and the sponsor making available appropriate information about the transaction, including data on static and dynamic historical default and loss performance of the exposure, a cash flow model on an ongoing basis and all documentation that is essential for the understanding of the transaction.
Originators and sponsors who want the securitisation to qualify as STS must jointly notify ESMA (Article 27). When the STS requirements are indeed met, ESMA publishes a notification on its official website. However, the originator, the sponsor and the SSPE remain responsible for the STS information.
The Securitisation Regulation represents the most significant reform of securitisation regulation in the European Union for many years. It enables better differentiation of simple, transparent and standardised products from complex, opaque and risky instruments and the application of a more risk-sensitive prudential framework. It is nevertheless too early to determine to what extent it will succeed in its aim of revitalising the securitisation market.
At the same time, the Securitisation Regulation recognises the risks of increased interconnectedness and excessive leverage that securitisation raises. It therefore enhances the microprudential supervision by competent authorities of a financial institution's participation in the securitisation market, as well as the macroprudential oversight of that market by the European Systemic Risk Board (ESRB) and by the national competent and designated authorities for macroprudential instruments.