The EU has, on 6 November 2019, published in the Official Journal a delegated regulation1 (the "Delegated Regulation") supplementing the EU Securitisation Regulation2 (the "Securitisation Regulation") with regard to regulatory technical standards ("RTS") on the homogeneity of the underlying exposures in securitisation. The Delegated Regulation will enter into force 20 days after publication.
The STS Framework
The Securitisation Regulation has applied across the European Union (the "EU") since 1 January 2019 to all securitisations (as defined therein) where the securities have been issued since that date (or in respect of securitisations which do not involve the issuance of securities, where the securitisation positions have been created since that date).3
The Securitisation Resolution includes criteria for "simple, transparent and standardised", or "STS" securitisations. There is a separate set of criteria which need to be met for non-ABCP and ABCP securitisations, and in the latter case, there are separate requirements with respect to ABCP transactions, sponsors of ABCP programmes and ABCP programmes. In addition, the originator, sponsor and securitisation special purpose entity ("SSPE") need to be established in the EU in order for the securitisation to qualify as STS.4
If a securitisation is designated as STS5 and provided that certain additional criteria under the Capital Requirements Regulation6 (the "CRR"), as amended by Regulation 2017/2401,7 are met, then an EU bank can obtain preferential regulatory capital treatment for its exposure to such a securitisation, as compared with the regulatory capital treatment for non-STS securitisations. A transaction qualifying as STS will also benefit from lower capital requirements for insurance and reinsurance undertakings subject to regulation under Solvency II8 and will be eligible for inclusion in high quality liquid assets by banks for the purposes of the CRR liquidity coverage ratio9 (subject, in each case, to additional criteria being met), as well as being eligible for investment by money market funds subject to the Money Market Funds Regulation.10
As at the date of this Legal Update, over 90 transactions have been notified to the European Securities and Markets Authority ("ESMA") as being STS, in a range of asset classes (auto loans and leases, residential mortgages, trade receivables, credit cards, consumer loans, SME loans and leases) and both public and private.11
The current STS framework does not apply to synthetic securitisations12 but a consultation is under way with respect to the creation of an STS framework for balance sheet synthetic securitisations pursuant to a discussion paper (the "Synthetic STS Discussion Paper") published by the European Banking Authority (the "EBA") in September 2019.13
The EBA has published a set of guidelines with respect to the ABCP and non-ABCP STS criteria (the "EBA Guidelines").14
The Homogeneity Requirement
One of the STS criteria for both non-ABCP transactions15 and ABCP transactions16 is that the securitisation must be backed by "a pool of underlying exposures that are homogeneous in terms of asset type, taking into account the specific characteristics relating to the cash flows of the asset type including their contractual, credit-risk and prepayment characteristics". The Synthetic STS Discussion Paper also contains a proposed criterion in relation to homogeneity.
The Recitals to the Securitisation Regulation explain the overall purpose of the homogeneity requirement as follows: "To ensure that investors perform robust due diligence and to facilitate the assessment of underlying risks, it is important that securitisation transactions are backed by pools of exposures that are homogenous in asset type, such as pools of residential loans, or pools of corporate loans, business property loans, leases and credit facilities to undertakings of the same category, or pools of auto loans and leases, or pools of credit facilities to individuals for personal, family or household consumption purposes."17
The EBA was required, in close cooperation with ESMA and EIOPA,18 to develop draft RTS specifying which underlying exposures are deemed to be homogeneous. The EBA published its final draft RTS on homogeneity on 31 July 201819 and the European Commission published the Delegated Regulation based on the draft RTS on 28 May 2019.
The Delegated Regulation
The Delegated Regulation sets out four conditions for the underlying exposures in a securitisation to be considered homogeneous:
(i) they fall within the same specified asset type20;
(ii) they have been underwritten according to similar underwriting standards for assessing the associated credit risk;
(iii) they are serviced according to similar procedures for monitoring, collecting and administering cash receivables; and
(iv) at least one of the applicable "homogeneity factors" for such asset type is applied.
The rationale for using these conditions is explained in the Recitals to the Delegated Regulation.
As regards asset types, it is stated that a pool of underlying exposures should only be considered homogenous where it contains exposures of a single asset type. As a result, distinct asset types have been identified, based on market practice. Furthermore, there is also a category for underlying exposures which do not correspond to one of those asset types, but that are considered by the originator or sponsor to constitute a distinct asset type.
The Recitals state that underwriting standards are designed to measure and assess the credit risk associated with the underlying exposures and are therefore useful indicators of their homogeneity. Consequently, the application of similar underwriting standards is an indicator of similar risk profiles.
The Recitals also recognise the fact that the servicing of underlying exposures has a substantial impact on the cash flows expected from those exposures. If similar procedures, systems and governance are used with respect to the servicing of the underlying exposures, this should allow an investor to confidently assess the impact of the servicing within similar parameters.
The specified "homogeneity factors" vary according to the asset type. One or more of the homogeneity factors should be applied on a case-by-case basis. They include factors relating to the type of immovable property and the ranking of security rights (with respect to residential or commercial mortgages) or the type of obligor (with respect to other asset types) and the jurisdiction of such properties or obligors.
In the case of credit facilities provided to individuals for personal, family or household consumption purposes, and trade receivables, it was determined that those asset types are sufficiently homogeneous provided that similar underwriting standards and servicing procedures are applied, and it is not necessary for a homogeneity factor to apply. This is on the basis that requiring homogeneity factors to apply to those asset types would lead to excessive concentrations in the relevant securitised portfolios.
In the event that there are changes in the characteristics of the underlying exposures for reasons outside of the control of the originator or the sponsor after origination, this will not prevent such exposures from being deemed to be homogeneous.