On 26 October 2017, the European Parliament approved the Securitisation Regulation, which contains significant changes to the current securitisation regulatory framework.
The Securitisation Regulation will enter into force on the 20th day after it is published in the Official Journal of the European Union, likely to be in early 2018.
However, it will only apply to securitisations the securities of which are issued on or after 1 January 2019. Existing securitisations which are being refinanced or having additional notes issued on or after 1 January 2019 will, therefore, become subject to it on the refinancing or additional note issuance.
Requirements imposed by the Securitisation Regulation
The risk retention quantum of 5 per cent and the five methods of risk retention remain the same.
Responsibility for risk retention
There is a "direct" obligation on the originator, sponsor or original lender itself to ensure it retains a 5 per cent material net economic interest, as opposed to the compliance burden resting solely on investors.There is also a requirement on institutional investors to carry out due diligence before buying a securitisation position, including verifying the 5 per cent risk retention.
Change to originator requirements
The originator may not be an entity which has been "established or operates for the sole purpose of securitising exposures". The intention behind this requirement is to prevent structures being set up to comply with the literal requirements of the retention rules but not with the "spirit".
The definition of sponsor is widened to include "credit institutions, whether located in the Union or not", and "investment firms". Investment firms are no longer restricted to being EU licensed MiFID entities but now include any legal person whose regular occupation or business is the provision of investment services to third parties and/or the performance of investment activities on a professional basis.
The implication of this is that, following Brexit, London asset managers may be able to act as sponsor risk retainers in EU securitisations. However, passporting issues post Brexit will still need to be considered.
A sponsor that has established a securitisation is also permitted to delegate the day-to-day active portfolio management to an authorised EU entity.
An SSPE (securitisation special purpose entity), namely the securitisation issuer, may not be established in a non-EU country if:
- that country is listed as high-risk and non-cooperative by the FATF; or
- that country has not signed an agreement with a Member State to ensure it fully complies with the OECD standards on exchange of information in tax matters.
The originator, sponsor and SSPE must make certain information available to holders of a securitisation position, to the competent authorities and, upon request, to potential investors, including:
- quarterly information on the underlying exposures; and
- the transaction documents.
- The final offering document and transaction documents (excluding legal opinions) shall be made available before pricing. This is a potential issue since most transactions do not have documents finalised before pricing. ESMA is to develop draft RTS to specify the exact information requirements, as well as providing standardised templates.
The originator, sponsor and SSPE shall designate responsibility for this reporting obligation between themselves, and make the information available through a securitisation repository. If at the time there is no securitisation repository registered under the Securitisation Regulation, the relevant entity should publish its information on a website meeting the prescribed conditions.
The obligation to send information to a securitisation repository does not apply to private transactions, but the prescribed information still needs to be made available to holders of a securitisation position, to the competent authorities listed and, upon request, to potential investors.
Originators, sponsors and original lenders shall apply the same sound and well-defined criteria for credit-granting for securitised exposures as the criteria used for non-securitised exposures.
Originators shall not cherry-pick assets to be transferred to the SSPE with the aim of rendering higher losses on those assets than assets remaining on their balance sheet. This is measured over either the life of the transaction or four years if the transaction is longer than four years.
In cases of negligence or intentional infringement of the risk retention, transparency or credit-granting criteria requirements, Member States shall impose effective, proportionate and dissuasive sanctions, including pecuniary sanctions.
- The EBA is to develop draft RTS specifying the new risk retention requirements in greater detail.
- A seller can only sell securitisation positions to retail clients if it conducts a suitability test which is satisfied.
- There is a ban on resecuritisation, so that underlying exposures in a securitisation cannot include securitisation positions. There are limited exceptions to this ban.
The Securitisation Regulation introduces the concept of STS (simple, transparent and standardised) securitisations. The criteria for a securitisation to qualify as STS include there being a homogenous asset pool, no active discretionary portfolio management and no transferable securities (other than corporate bonds that are not listed on a trading venue) in the underlying exposures. STS securitisations may be more appealing to investors because under the CRR Amendment Regulation the regulatory capital requirements for institutions' exposures to STS securitisations will generally be more favourable than for non-STS securitisations.