On 10 October 2014, the Commission published the final version of the delegated regulation (the "Delegated Regulation") with regard to liquidity coverage requirement ("LCR") for credit institutions and investment firms under Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 (CRR). Under the Delegated Regulation, a broad category of assets will be accepted for the purpose of calculating the LCR ratio, including securitisations exposures. The assets are subject to certain eligibility criteria and a haircut. In this newsflash the criteria for securitisations exposures set out in Article 13 of the Delegated Regulation  (Level 2B securitisation) which are of particular interest to securitisations in the Netherlands are discussed.

Loan-to-value ratio (LtV) and loan-to-income ratio (DtI)

The eligibility criteria for securitisations exposures vary depending on the underlying asset type. For residential mortgaged-backed securities (RMBS) issued after 1 October 2015 with underlying assets consisting of residential mortgage receivables, an average loan-to-value ratio (LtV) of 80 per cent. or less applies. Alternatively, the criteria also allow a loan-to-income ratio (DtI) per obligor below the limits as set out in national law with a maximum of 45 per cent. The Dutch temporary mortgage loan act (Tijdelijke regeling hypothecair krediet) includes loan-to-income ratios with a maximum of 37,5 or 42,5 per cent., depending on the age of the debtor and the loan amount. The loan-to-income ratio is included to allow RMBS with underlying assets with an average loan-to-value ratio of higher than 80 per cent., as is often the case in the Netherlands, and is welcomed by Dutch originators. 

Servicing continuity

Furthermore, the eligibility criteria for securitisations exposures, irrespective of the underlying asset type, include a requirement relating to the servicing. Pursuant to this requirement, the servicing agreement shall include servicing continuity provisions that ensure, at a minimum, that a default or insolvency of the servicer does not result in a termination of the servicing. In many existing transactions it is agreed that, upon a default (which is continuing) or insolvency of the servicer an alternative servicer will be appointed and the servicing with the defaulting/insolvent servicer will be terminated thereafter. We expect that the existing provisions should satisfy the above requirement and that the requirement does not imply that the issuing entity will have to appoint a back-up servicer for the lifetime of the transaction.  

Other criteria

Other eligibility criteria (for all asset types) include the requirement that the exposure has the highest level of seniority at all times during the life of the transaction and a minimum rating or, in the absence of a credit rating, a minimum risk weight, the issue size is at least 100 million and the remaining weighted average life of the exposure is 5 years or less (which may be calculated on the assumption that the call is exercised on the first permitted date). In addition, revolving transactions should contain mechanics to avoid a cash-trap.  

The Delegated Regulation is considered a milestone as it is the first time detailed liquidity rules are introduced on an European level. Prior to publishing the Delegated Regulation, the Commission requested the EBA for its views on the possibility of defining a category of "high quality securitisations". At this moment it is unclear whether the EBA's advice will lead to changes to the Delegated Regulation.