The publication of the long-awaited EU framework for "Simple, Transparent and Standardised" (STS) securitisation at the end of 2017 has been welcomed by market participants. However, there is still a lot of detail and guidance which remains to be finalised.
In response to many client queries, we set out a high level summary of the current status and some recommendations for market participants during this current transitionary period.
Where we are?
1. Two Regulations were published in December 2017:
a. The Securitisation Regulation (Regulation (EU) 2017/2402) which sets out a general framework for securitisation and creates a specific framework for STS securitisation. The Regulation sets outs some requirements which apply to all securitisations and others that apply if the transaction is to qualify as an STS securitisation, in each case with specified criteria for "traditional" and "short-term" (i.e. ABCP) transactions; and
b. The Regulation amending the Capital Requirements Regulation (Regulation (EU) 2017/2401) which amends and updates required capital treatments and, amongst other things, allows more favourable capital treatment for some STS securitisations.
2. These Regulations take effect on 1 January 2019.
3. The Regulations anticipate secondary level guidance and standards from the EBA and ESMA on topics such as Risk Retention, Homogeneity and the STS Criteria. For some of these, drafts have been released for consultation and we anticipate texts to be sent to the European Commission by 18 July 2018, 18 October 2018 and 18 January 2019 (depending on the particular guidance / standards).
What can you do?
We recommend that sponsors and originators contemplating securitisation transactions:
1. Consider carefully the timing of deals and whether to target closing in 2018 or 2019.
2. Consider whether to structure transactions ready for STS compliance - although the detailed secondary level guidance is not yet available and/or final, some market participants are certainly attempting to structure deals that would potentially be eligible for STS treatment in due course (under "grandfathering" provisions). We are happy to discuss how best to reflect STS criteria in deal documents.
3. Consider preparatory steps - even for non-STS transactions from 2019 onwards, there will be changes to disclosure and reporting requirements (amongst other things) which may take time for participants to implement.
4. Consider their preferred risk retention approach - despite much speculation, the required risk retention level for securitisations remains at 5% and the accepted methods and application of risk retention have not changed substantially. However, risk retention will become a direct requirement on originators, sponsors and original lenders.
5. Engage with the criteria and guidance - even if not structuring transactions now with a view to STS guidance, familiarity with the criteria, guidance and market interpretation is likely to be helpful under the new regime.
For those wanting a more detailed analysis of the STS Regulation, we refer you to our ongoing series of Alerts STS Client Alert Part 1 and STS Client Alert Part 2. We will continue to update you on the latest developments, including the impending publication of final standards and guidance.