As outlined in detail in Edition 17 of this SCM Briefing, the European Commission's Capital Markets Union (CMU) Action Plan set out (amongst other things) two detailed legislative proposals establishing a set of European Criteria for "Simple, Transparent and Standardised" (STS) securitisation (in the form of a proposed Securitisation Regulation) and setting revised capital requirements for STS securitisations (in the form of a Regulation Amending the Capital Requirements Regulation (CRR)) (see the Feature Piece in Edition 17 for a detailed summary of the proposals). With the European Council having agreed on third Presidency Compromise texts of both Regulations late in 2015 (as outlined in Edition 18 of this SCM Briefing), the European Parliament's Committee on Economic and Monetary Affairs (ECON), led by rapporteurs Paul Tang MEP and Pablo Zalba MEP, has spent the last few months preparing its Reports on the proposals. These Reports set out the European Parliament's proposed amendments to both Regulations and effectively reconcile the views of MEPs from all political parties in advance of 'trialogue' negotiations between the European Commission, Council and Parliament which are scheduled to take place over the next few months.
ECON has now finalised its Reports containing its proposed amendments to the legislative package. Many MEPs appear to remain critical of the securitisation market and question the value of its revival without the imposition of further regulatory tightening to promote safety, prevent 'misguided' originate-to-distribute models and address 'unsound practices'. Among the key issues on which ECON's package proposes amendments include:
- Risk-retention: on risk-retention, some MEPs had originally suggested (in the European Parliament's earlier draft Report) raising the retention level from the existing 5% requirement, to 20%. Views on this point clearly still differ (with some far-left MEPs still suggesting 25%, some others suggesting 20% and others happy with 5%). Paul Tang MEP's own amendment retains the 20% figure he first proposed, but appears to change tack from previously giving the European Securities and Markets Authority (ESMA) the power to amend the level of risk retention either for the whole securitisation market or specific segments of it, to now propose that ESMA can amend the level of risk-retention "where the European Systemic Risk Board (ESRB) proposes to deviate from the level of 20%...", effectively introducing another regulatory layer which would give power to the ESRB to decide on risk-retention levels (as well as on risk-weight floors and liquidity requirements). There is widespread support among securitisation market participants for maintaining the existing 5% risk retention level, and little appetite for any increase that could be detrimental to the market's recovery and jeopardise the potential success of the STS framework.
- European Securitisation Data Repository ("ESDR"): the Commission's original proposals suggested the set-up of a free, centralised "website" for the storage of the various pieces of information required to be submitted to ESMA on each transaction (which remains largely unchanged from the original proposal, in terms of STS notifications, deal documentation and reporting forms). Although MEPs show support for this approach and some even suggest relieving the SPV of certain obligations under the reporting rules (such that only the originator and sponsor must comply with certain obligations), they suggest the establishment of a new ESDR as the central storage facility, despite the existence of the 'European DataWarehouse' (EDW) which was set up some years ago to provide central access to (amongst other things) loan-level data on securitisation transactions. Although the use of a single platform for all required reporting obligations in the securitisation market (perhaps without the suggested governance and oversight that would surely add time and costs into the structure - note that it is envisaged that transaction parties would be charged by the ESDR for the costs of its set-up and maintenance) would be helpful, many of ECON's proposed amendments suggest some dual responsibilities (of both the ESDR and ESMA) that may be administratively burdensome. In addition, the "SFIs website" envisaged under broadly overlapping disclosure provisions contained in Article 8b of the EU Regulation on Credit Rating Agencies would represent yet another platform for the disclosure and storage of information on securitisation transactions. ESMA's recently-announced delay to this SFIs website (see under Key Developments for further information) may in fact provide an opportunity for regulators to streamline these various disclosure requirements in favour of a single point of access.
- Disclosures: ECON proposes requiring further disclosures by originators/sponsors/original lenders of loan-level data through the ESDR. While transaction parties have generally become conversant with the various reporting obligations that have been introduced for securitisation transactions over the past few years, ECON proposes some additional disclosures the purpose of which is not fully explained. These include disclosures about investors, with regard to their identities as well as those of their beneficial owners, their country of establishment, plus the size of their investments in securitisations and details of which tranches they are exposed to.
- Third party certification: one of the key sticking points, Tang's earlier draft Report contained no provisions for third-party, external "certification" of a deal's compliance with the STS Criteria (something that industry associations and the securitisation market in general have been pushing for). However, some MEPs have provided strong support for third-party certification (or at least, third party checks on compliance) in their proposed amendments, and at least one MEP suggests that it be an obligation to use a third party to certify a deal's compliance with the STS Criteria, with this being critical to investors' increased confidence in the market for STS securitisations. In addition, ECON proposes provisions that would allow originators/sponsors to file a letter of enquiry with their competent authority to obtain a "binding confirmation of conformity" of a deal's compliance with the STS Criteria.
- Third-country equivalence: proposed new provisions would allow EU investors in non-EU securitisations to rely on their national legal framework(s) instead of complying with the requirements of (proposed) Articles 3 and 4 of the Securitisation Regulation (relating to due diligence and risk retention and specifically the requirement for originators/original lenders to make certain information available to allow investors to complete their due diligence), allowing them to provide the required information on their securitisations without a specific requirement to use the EU-mandated format.
- Grandfathering: noting the importance of providing appropriate treatment for 'legacy' transactions, ECON proposes some grandfathering provisions that would allow deals closed prior to the STS framework taking effect to comply if they meet "certain" (but not necessarilyall) of the STS Criteria. Other grandfathering issues are raised in relation to existing deals to take account of the fact that many will already comply with the current risk retention regime (in existence under Article 404-410 of the CRR, and that existing previously under the Article 122a regime), and to allow for the application of the existing CRR regime to transactions prior to any new Regulatory Technical Standards being adopted under the proposed framework. MEPs make clear that further clarification regarding transitional provisions must be made, and these would potentially be useful clarifications for all securitisations outstanding when the STC framework takes effect.
- Status of parties: ECON's amendments would require the originator, sponsor or SPV to be a "regulated entity" under CRD IV (effectively, a credit institution or investment firm), an ABCP sponsor to be a credit institution under CRD IV (and meet additional financial stability tests), and investors in securitisations to be "institutional investors", potentially restricting certain entities from participating in the market. Appearing to retreat slightly from the Commission's proposed provisions requiring the originator, original lender, sponsor and SPV to be established in the EU, the MEPs propose that a sponsor may be a third-country firm provided its supervision is at least equivalent to the European regime. In addition, proposed requirements to be fulfilled by the trustee (which it is proposed must be an authorised entity) appear onerous and are unlikely to make it into the final form of the Regulations.
- Other issues: among the other issues raised by MEPs include a proposal for a "grace period" if a deal loses STS status, in order to remedy the situation, numerous amendments which support the inclusion of asset-backed commercial paper (ABCP) within the STS framework, the deletion of references to "tranching", which runs somewhat counter to existing legislative definitions of securitisation transactions, some watering-down of the provisions requiring the underlying assets to be "homogenous in terms of asset type" (to allow for, e.g. securitisations of auto loans and leases), numerous suggestions for provisions dealing with credit-impaired debtors and defaults, and provisions that would require the review of the legislation (within a range of proposed timescales) and a report to be drawn up by the Commission on the functioning of the regime. There is also mixed support for the future inclusion of certain "balance sheet" (not arbitrage) synthetic securitisations, with the Commission's original provisions allowing for a report to be drawn up on the possible future inclusion of certain synthetic securitisations within the STS framework.
- Regulation Amending CRR: the key amendments proposed by MEPs appear to insert a proposed minimum level of 13%(!) capital requirement for STS securitisations (compared to 10% and 15% respectively for 1-year and 5-year STS securitisations set out in the Commission's proposal - see Table 4), although it is clear that many MEPs disagree on the levels, such that many different caps and floors are suggested for securitisation risk weights (both for STS and non-STS deals, with some MEPs suggesting the levels should be the same for both) and it will be interesting to see if any of them are taken up by the Commission. In any event, the capital requirements become somewhat academic if risk retention levels are increased such that securitisation transactions become uneconomic altogether. Some MEPs are proposing the removal of the 'SEC-ERBA' (external ratings-based) approach from the hierarchy of approaches for STS deals, but widely diverging views (and the imperative to follow the global, Basel Committee approach to capital requirements for securitisation transactions) mean this may be an unlikely outcome.
What is perhaps even more interesting is what the ECON Reports do not propose amending, such as the substance and detail of the STS Criteria (for term securitisations, with only fairly minor amendments proposed to the ABCP STS Criteria), which suggests that the Commission has struck the right balance between reflecting the Basel Committee's global (STC) framework and providing for the specificities of the European market.
Based on trialogue discussions, compromise proposals of the legislative measures are expected to be negotiated and published in the coming months, ahead of the European Parliament's plenary vote on the proposals which is scheduled for December 2016 (but may be delayed until early 2017).
Regulation Amending CRR (ECON Amendments)