The draft proposed Regulation Amending CRR makes clear that it proposes amending the regulatory capital requirements for (all) securitisations in line with the Basel Committee's Final Revisions to the Securitisation Framework and then adding the "recalibration" of that framework suggested by the EBA in its recent Advice and Opinion to the Commission, for STS securitisations. The Commission's view is that differentiating the capital requirements for STS and non-STS deals will bring several benefits, including a more risk-sensitive framework, incentivising banks to issue STS securitisations and encouraging investors back to the EU market. How this will be done is as follows (please note that these may be among the most heavily negotiated aspects of this legislative package and may well be subject to amendment prior to publication of the final legislation):
- The hierarchy: as you may recall, the Final Revisions to the Securitisation Framework set out a three-tier hierarchy of capital treatment, the (most risk-sensitive) "Securitisation Internal Ratings-Based Approach" (SEC-IRBA), the "Securitisation External Ratings-Based Approach" (SEC-ERBA), and the (least risk-sensitive) "Securitisation Standardised Approach" (SEC-SA), and the proposal sets out the revised framework implementing this new hierarchy. However, the proposal would also provide a more risk-sensitive approach for STS securitisation under all three of the new approaches. This is done by adjusting the 'p' (supervisory) parameter in the calculations for SEC-IRBA and SEC-SA, and by adjusting (downwards) the risk-weights in the relevant look-up table under the SEC-ERBA (using the new look-up tables from the Final Revisions to the Securitisation Framework and then adjusting them for STS deals - such that, e.g. the risk-weight for a non-STS AAA-rated 5-year deal is 20%, but is 15% for an STS deal (compare with a BBB-rated deal which is 90% for non-STS and 65% under the STS framework)).
- The risk-weight floor: the Final Revisions to the Securitisation Framework set a minimum 15% risk-weight floor (compared to 7% under the existing rules). STS deals would benefit from a new10% floor under the proposals.
- The risk-weight cap: in line with the Final Revisions to the Securitisation Framework, it is proposed that the "look-through" approach (whereby the maximum risk-weight on the securitisation position is equal to the average risk-weight on the underlying exposures) only be allowed for senior securitisation positions and will apply regardless of whether the position is rated or not and regardless of whether the bank uses the Standardised or Internal Ratings-Based (IRB) Approach. This ensures that risk-weights on securitisation positions are no higher than those that would be applied to the underlying assets were they to be held directly.
- Maximum capital requirements (overall cap): helpfully, the approach that allows banks that use the most risk-sensitive approach (SEC-IRBA) to apply the maximum capital equal to the amount of capital that would have been held had the exposures not been securitised is being extended to banks using the "lower" of the approaches (SEC-ERBA and SEC-SA).
- Removal of some special treatments: the treatment for second-loss or better positions in ABCP programmes, the treatment of unrated liquidity facilities and the treatment of additional own funds securitisation of revolving exposures with early amortisation features will be removed, to ensure simplicity.
- Resecuritisations: it is proposed these would be subject to even higher capital requirements than under the Final Revisions to the Securitisation Framework, by way of a revised calculation under the SEC-SA (the only approach available to these structures), which results in a higher capital charge, and a higher (100%) risk-weight floor will apply.
- SME deals: a new, more risk-sensitive treatment for the senior tranches of certain synthetic SME securitisations (that are retained by originators) would be applied, despite their not being "traditional" securitisations to which the STS framework is limited. The Commission defines an SME deal as a securitisation "backed by an underlying pool of loans to small- and medium-sized enterprises".
- SRT and external credit assessments: the proposal makes clear that only essential changes are being made to CRR (principally to replace the entire Title 2, Part 3, Chapter 5 of CRR - "Securitisation", in Articles 242 - 270), but the existing provisions on Significant Risk Transfer (SRT) and on the use of external credit assessments within that section are not amended by this proposal. In addition, the existing risk-retention rules in Articles 405-410 are being repealed in their entirety and will be replaced by the new provisions noted above under the Securitisation Regulation.
- Solvency II (insurance company) capital: the punitive capital charges for insurance company investors in ABS, currently set out in the Solvency II Delegated Act (Regulation 2015/35 - see the Feature Piece in Edition 12 of this SCM Briefing for a detailed overview) will be substantially amended under a new calibration that will significantly lower those charges for both senior and non-senior tranches. In addition, various definitions will be aligned with the Securitisation Regulation and the risk-retention provisions repealed to allow for the direct applicability of the new provisions. This will be achieved through a separate proposal to amend that Delegated Act that will be released at a later stage once the present legislative proposals have been finalised.
- LCR Delegated Regulation: this will also be amended (again, at a later stage) to align the requirements (in Article 13) of the LCR Delegated Regulation (Regulation 2015/61 Supplementing CRR) for "Level 2B" securitisations within the definition of "High Quality Liquid Assets" with the STS Criteria once they are finalised (see the Feature Piece in Edition 12 of this SCM Briefing for detailed background on this point).
Other key aspects of the framework (referencing both the Securitisation Regulation and the Regulation Amending CRR) include the following:
- Compliance: regarding compliance, supervisory oversight for the STS framework will be carried out by various designated national competent authorities (and according to the supervisory authorities for originators, sponsors and original lenders) that will cooperate with the ESAs, leaving investors free to seek optional third-party assessments of a deal's compliance with the Criteria. Individual Member States will set and impose administrative sanctions, remedial measures and even criminal sanctions for infringements of the legislation. Provisions dealing with incorrect or disputed assessments of compliance are also included. In terms of monitoring, the ESAs are required to prepare a Report for the Commission on the implementation of the STS requirements and their impact, and the Commission in turn is required to report within two years of the ESAs' Report on the functioning of the Securitisation Regulation four years after its entry into force (as to which, see below), in order to provide a complete evaluation of the efficacy of the legislation in achieving its objectives. The functioning of the legislation will be measured according to STS products, prices and levels of issuance. The Regulation Amending CRR also provides that its proposed approach to capital requirements for securitisations will be reviewed no later than three years after its entry into force.
- Date in force: the proposals (currently) remain blank as to their date in force (although the application of the existing / harmonised aspects of the legislation is back-dated to when the original provisions took effect (e.g. risk-retention is applied to deals closed since 1 January 2011 when those provisions took effect, or to which new exposures have been added or substituted after 31 December 2014)). However, the Prudential Regulation appears to provide for a transitional period allowing institutions to use the existing set of capital rules to calculate their capital requirements until 1 January 2019 (there is no reason they would, if capital is much lower for STS deals under the "new" framework). The brand new provisions in terms of the STS Criteria will effectively only apply to new transactions issued after the legislation's date in force and will not be retrospectively applied (although the Commission does anticipate that outstanding deals may be designated as STS, providing all of the relevant Criteria are met). Given that the proposed legislation will now be subject to negotiation prior to its finalisation, it is not expected that the final legislation will take effect before the end of 2017. However, since both pieces of legislation take the form of Regulations, there will be no transposition period and it is expected that, once finalised, there will only be a short period until they become directly applicable.
- Other points to note: the Securitisation Regulation also sets out the notification requirements (originators, sponsors and SSPEs are to notify ESMA of their verification of an STS deal by means of the template referenced in Article 14(5)), states what happens when the originator or original lender is not a credit institution (additional confirmations are required), provides for ESMA to maintain an official website for notifications and document storage, notes that additional Guidance and RTS/ITS will follow from the various ESAs, sets out the supervision and sanctioning arrangements, and explains how the ESAs and competent authorities will cooperate under the legislation. It also specifies the fairly minor amendments that it effects to other EU legislation, specifically the UCITS Directive, Solvency II, CRA III, AIFMD and EMIR to refer to (and harmonise) the new definitions, risk-retention and due diligence provisions.
- Level 2 and 3 measures: the EBA is to develop Guidelines on interpreting the Criteria, and, as mentioned above, a further set of RTS and ITS will need to be drafted (and others amended) to provide further detail on various aspects of the framework, including the requirements to be met by the website on which information should be made available to investors, the template for STS notifications, "further modalities" of the risk-retention framework, the information to be provided under Article 5 on transparency, and information exchange between competent authorities (and between competent authorities and the ESAs).