As we have outlined in previous Editions of the SCM Briefing, the European Central Bank (ECB) has over the last few years made a substantial series of amendments to the collateral eligibility rules for asset-backed securities (ABS) as set out in its "General Documentation", such that the applicable rules were helpfully consolidated in Guideline ECB/2011/14, which was then supplemented and further amended by Guideline ECB/2014/31. The ECB has now published a new, consolidated version of the General Documentation, in Guideline ECB/2014/60 (now published in the Official Journal of the EU as Guideline 2015/510), which is intended to simplify and improve the clarity of the ECB's general framework for monetary policy implementation, consolidating all of the amendments made to the rules since 2011, and updating references to (e.g.) the revised Capital Requirements Directive IV and Regulation (CRD IV / CRR). The new Guideline will take effect from 1 May 2015. Aside from making some general changes to the ECB's monetary policy framework (including to revise the provisions on the ECB's "open market operations", further to the ECB's expansion of the various programmes, such as the Asset-Backed Securities Purchase Programme - for background on which, please see Edition 13 of the SCM Briefing), and a number of clarifications to other aspects of the monetary policy framework, Guideline ECB/2014/60 makes several changes to the collateral eligibility rules for ABS, as follows (see the new Part 4, Chapter 1, Subsection 1, entitled "specific eligibility criteria for asset-backed securities" - please also note the helpful re-numbering of the rules and re-ordering of some sections, such that the specific ABS eligibility criteria are set out in Articles 72-79, the credit quality requirements are set out in Articles 82-88 and other rules for the use of eligible assets are set out in Articles 138-147):
- If the cash-flow generating assets backing the ABS comprise leasing receivables with residual value leases, those ABS that were on the list of eligible assets on 1 May 2015 shall [only] maintain their eligibility until 31 August 2015 (see Article 73.7). It is not clear from this provision whether the ECB intends to catch deals that involve the securitisation of both lease receivables and their residual values, or whether the fact that a leasing deal's underlying assets include residual values (e.g. deals involving balloon payments) will mean it falls foul of this rule. Further information / guidance is being sought on the precise scope of the deals that will be ineligible after 31 August 2015.
- Existing provisions require that the cash-flow generating assets are originated by an originator incorporated in the EEA and sold to the SPV by the originator or by an intermediary incorporated in the EEA. Article 74.3 introduces a new rule that a mortgage trustee or receivables trustee shall be considered to be an "intermediary" for this purpose, and any ABS involving such a mortgage or receivables trustee that is not incorporated in the EEA will remain eligible for a 1-year grandfathering period from 1 May 2015 (until 1 May 2016) before they become ineligible.
- Regular surveillance reports (published by the accepted external rating agencies) are required to be published no later than four weeks after the coupon payment date of the ABS. The reference date shall be the most recent coupon payment date, except for ABS paying monthly coupons, in which case the surveillance report should be published at least quarterly. Surveillance reports must include, as a minimum, the key transaction data, including composition of the collateral pool, transaction participants, capital structure, as well as performance data (see Article 88.2).
- New rules governing the provision of liquidity support in respect of ABS will apply from 1 November 2015. A counterparty cannot use ABS as collateral if it (or any party with which it has "close links" - as defined in Article 138(2)) - provides liquidity support in the form of a cash reserve or liquidity facility (see Article 142).
For liquidity support in the form of cash reserves, a counterparty may not use ABS as collateral if the following three conditions are met simultaneously:
- the counterparty has close links with the issuer account bank in the ABS transaction;
- the current amount of the reserve fund of the ABS transaction is greater than 25% of the current outstanding amount of all senior and subordinated tranches of the ABS transaction; and
- the current amount of the reserve fund of the ABS transaction is greater than 25% of the current outstanding amount of the subordinated tranches of the ABS transaction.
For liquidity support in the form of a liquidity facility, a counterparty may not use ABS as collateral if the following two conditions are met simultaneously:
- the counterparty has close links with a liquidity facility provider; and
- the current amount of the liquidity facility of the ABS transaction is greater than 20% of the initial outstanding amount of all senior and subordinated tranches of the ABS transaction.
- The requirements that were introduced in April 2012 requiring counterparties to inform the Eurosystem of modifications to the ABS that took place in the preceding six months, and of any planned modification to the ABS, will be removed.
The ECB has also issued Decision ECB/2015/9 (published in the Official Journal as Guideline 2015/510), which repeals (also from 1 May 2015) various earlier ECB Guidelines and Decisions that have now been incorporated into the new Guideline ECB/2014/60, including Decision ECB/2013/6, which clarified that, from 1 March 2015, the following instruments will no longer be eligible as collateral:
- uncovered government-guaranteed bank bonds issued by either: (i) a counterparty applying to access the Eurosystem's operations; or (ii) an entity closely linked to that counterparty; and
- covered bonds issued by a counterparty applying to access the Eurosystem's operations, where the asset pool contains uncovered government-guaranteed bank bonds also issued by that counterparty or an entity closely linked to that counterparty.
The consolidation of the General Documentation (and the eligibility criteria for ABS) into a single, updated document was an extremely helpful development which the securitisation market had been anticipating for some time, notwithstanding the inclusion of the additional eligibility criteria for ABS. However, shortly after release of the consolidated version, the ECB issued a further update to the collateral eligibility rules, in Guideline 2015/[XX - i.e. unnumbered until the Official Journal version is published] of 16 April 2015, which amends the rules on coupon structures for "marketable assets" (which include ABS). This change, also taking effect from 1 May 2015, removes the provision (in Article 63(2)) that debt instruments with floating coupon rates will be ineligible if, at any time following the application of the coupon rate formula, the coupon rate results in a negative value. While this appears to be a helpful amendment in itself, the fact that the collateral eligibility criteria are now no longer set out in a single, consolidated form, is an unhelpful development.