Following the conclusion of a lengthy period of political debate and legislative negotiation, the final texts of the European legislation comprising the framework for "simple, transparent and standardised" ("STS") securitisation were published in the Official Journal of the EU on 28 December 2017. The package comprises two Regulations which entered into force (i.e. became EU law) on 17 January 2018, and will take effect (i.e. require compliance) from 1 January 2019, subject to some transitional provisions:
- The "Securitisation Regulation" (Regulation (EU) 2017/2402) which sets out EU-wide rules for all securitisations (including a re-casting of the existing risk-retention, due diligence and transparency provisions, as well as the creation of some new requirements), establishes the new framework for STS securitisations for both "traditional" deals and asset-backed commercial paper (ABCP) programmes which comprises a set of 50+ STS Criteria, and makes several consequential amendments to current EU legislation; and
- The "Regulation Amending the Capital Requirements Regulation (CRR)" (Regulation (EU) 2017/2401), which amends the existing CRR to set out the (differing) capital treatment of STS and non-STS securitisations, the "hierarchy" of capital calculation methodologies and the various risk-weight floors and caps (the "Regulation Amending CRR"), largely reflecting the Basel Committee's "Revisions to the Securitisation Framework" which was finalised in July 2016.
Our series of Client Alerts examines the key aspects of the STS framework in further detail during the year until its implementation in 2019. Part 1 of the series set out additional background on the STS legislative package and an overview of some of the key high-level issues as well as a comparative analysis of the various risk-weights, floors and caps under the STS framework with the global equivalent under Basel III and the existing European regime under the CRR. This Part 2 focuses on the STS Criteria, compliance with which will be required in order for investments in/exposures to STS securitisations to benefit from the corresponding lower capital requirements provided by the Regulation Amending the CRR. We focus on the STC Criteria as they apply to "non-ABCP" (i.e. "traditional" securitisations), and will examine the separate ABCP Criteria in a future part of the series.
The STS Criteria
With a view to restarting European securitisation markets on a more sustainable basis in the post-financial crisis era, the STS Criteria aim at differentiating "soundly structured" transactions from more "complex, opaque and risky instruments". On this basis, certain types of securitisation are excluded from the STS framework, including securitisations with managed portfolios of assets, commercial mortgage-backed securities, and synthetic securitisations (although the future extension of the STS Criteria to certain (balance-sheet) synthetic deals is specifically envisaged).
In accordance with the Securitisation Regulation (see Articles 18 and 19), in order to use the designation of STS for a securitisation, the following requirements must be met:
- All of the relevant STS Criteria - either for "non-ABCP" transactions (Chapter 4, Section 1) or "ABCP" transactions (Chapter 4, Section 2) - must be met;
- The securitisation is included in a list of STS securitisations as notified to the European Securities and Markets Authority ("ESMA") jointly by the originator and sponsor (sponsor only for ABCP transactions); and
- Each of the originator, sponsor and securitisation special purpose vehicle ("SSPE") involved in the STS securitisation must be established in the European Union.
The Securitisation Regulation makes clear that, while the originator/sponsor "notify" a transaction as STS to ESMA (using a detailed, standard template which is currently being consulted upon), the inclusion of a deal in ESMA's list of STS securitisations does not imply that ESMA (or a competent authority) has certified the deal's compliance with the STS Criteria. An authorised "third party" may be used to "check" a deal's compliance with the STS Criteria but liability remains with the originator, sponsor and/or SSPE for their various obligations under the framework.
Broadly, the STS framework applies to new transactions issued after 1 January 2019 (as well as existing deals which issue new securities after that date). However, the framework provides some "grandfathering" treatment for deals issued before 1 January 2019, allowing them to use the STS designation provided all of the STS Criteria are met - some as at the date of issuance, and others at the date of the STS notification. Other transitional provisions apply variously in terms of risk-retention and transparency such that the precise application of the grandfathering regime in practice merits further detailed examination in a future Part of this series.
59 separate Criteria
The accompanying table sets out the STS Criteria with our numbered break-down (in our analysis there are 59 separate STS Criteria), points to the required guidance and accompanying technical standards on certain aspects of the STS Criteria, and incorporates the detail of various references to other pieces of legislation as well as other articles within the Securitisation Regulation. We also indicate which of the STS Criteria must be met at the time of issuance or notification by a pre-1 January 2019 deal seeking to utilise the grandfathering regime to achieve an STS designation.
As mentioned above, this table covers the STS Criteria applicable to "non-ABCP", or "traditional" securitisations, according to the definitions set out in Articles 2(1) and 2(9) of the Securitisation Regulation. The relevant STS Criteria outlined in the table are set out in Articles 20, 21 and 22 of the Securitisation Regulation. An additional provision in Article 19(2) tasks the European Banking Authority ("EBA") with adopting guidelines and recommendations on the harmonised interpretation and application of Articles 20, 21 and 22, so we can expect further interpretative guidance to be issued in due course.
We look forward to providing you with further detail as this work is progressed. Future Parts in this series of Client Alerts will examine in further detail the STS Criteria framework for ABCP, the risk-retention, disclosure and transparency aspects of the framework, the crucial grandfathering provisions, the sanctions regime and the potential impact of Brexit on UK participants in the securitisation market. With over 20 technical standards and pieces of guidance also required to accompany the STS framework, the full scope and detail of its practical operation will emerge over the coming year (and beyond).