The European Commission (the "Commission") has recently published a consultation document1 with respect to the functioning of the EU securitisation framework (the "Consultation Paper"). In this Legal Update we consider some of the key aspects of the Consultation Paper.
The EU Securitisation Regulation2 became applicable in the European Union (the "EU") from 1 January 2019 to new securitisations and to existing securitisations entered into before that date where a new securitisation position is created on or after that date. The EU Securitisation Regulation includes requirements relating to investor due diligence, risk retention, disclosure and credit granting, as well as a ban on resecuritisation. In addition, it established a new regime for "simple, transparent and standardised", or "STS", securitisations, allowing certain investors in securitisations that meet the applicable requirements to benefit from lower regulatory capital requirements and other favourable regulatory treatment.
Certain amendments were made to the EU Securitisation Regulation and the Capital Requirements Regulation in April 2021, including the introduction of an STS framework for balance sheet synthetic securitisations and adjustments with respect to securitisations of non-performing exposures.
A number of technical standards have also been published in order to set out certain aspects of the EU Securitisation Regulation in more detail. However, some technical standards have not yet been finalised, in particular those relating to risk retention.3
Under Article 46 of the EU Securitisation Regulation, the Commission is required to present a report to the European Parliament and the Council by 1 January 2021 on the functioning of the EU Securitisation Regulation, and such report may be accompanied by a legislative proposal.
The Consultation Paper is intended to assist the Commission with preparing its report. In addition, the Commission is required to consider the findings of a report by the Joint Committee of the European Supervisory Authorities, which was published in May 2021.4
Article 46 of the EU Securitisation Regulation requires the Commission to consider the following areas:
(a) the effects of the EU Securitisation Regulation, including the introduction of the STS designation, on the functioning of the EU securitisation market, the contribution of securitisation to the real economy, in particular with respect to access to credit for SMEs, and interconnectedness between financial institutions and the stability of the financial sector;
(b) the use of the different modalities of risk retention;
(c) whether there has been a disproportionate rise in "private" securitisations5 and whether market participants have structured transactions in a way to circumvent the obligation under Article 7 to make available information through securitisation repositories which applies to "public" securitisations;
(d) whether there is a need to extend disclosure requirements with respect to "private" securitisations;
(e) whether an STS equivalence regime should be introduced for third-country originators, sponsors and securitisation special purpose entities ("SSPEs"), taking into account international developments in relation to securitisation;
(f) the implementation of the environmental disclosure requirements, which are currently applicable with respect to residential loans and auto loans and leases, and whether they should be extended to other asset classes in order to make environmental, social and governance ("ESG") disclosure more mainstream;
(g) the appropriateness of the third party verification regime with respect to STS securitisations, whether the authorisation regime fosters sufficient competition and whether changes in the supervisory framework are required;
(h) whether a system of limited licensed banks should be established to perform the functions of SSPEs; and
(i) the possibility for further standardisation and disclosure requirements in view of evolving market practices, through the use of templates, for both traditional and synthetic securitisations, including private securitisations.
It is worth noting that a parallel review process is required in the UK with respect to the UK Securitisation Regulation, with a Call for evidence having been published recently by HM Treasury.6
The Consultation Document
The Consultation Document invites market participants to respond to a number of questions, based on the areas mandated by Article 46 of the UK Securitisation Regulation. The questions cover the following areas:
Effects of the regulation: The Consultation Document includes a table in which market participants are invited to comment on the extent to which the EU Securitisation Regulation has achieved certain objectives.
Private securitisations: This section includes questions on whether more private securitisations are being issued since the EU Securitisation Regulation has become applicable, whether supervisors receive the necessary information to carry out their supervisory duties, whether investors receive sufficient information in order to carry out their due diligence requirements, whether the provision of information in the reporting templates is useful and whether the definition of private securitisation needs adjusting. We expect that market participants will be keen to provide responses on these questions.
Due diligence: There are a number of questions relating to due diligence, including with respect to proportionality, what information investors need, the usefulness of asset-level data and whether any aspects of the relevant information are unnecessary. Again, we would expect that market participants will want to express their views on these issues.
Jurisdictional scope: This section considers the issues raised in the ESAs' opinion on the jurisdictional scope of application of the EU Securitisation Regulation.7 It will be very important for market participants to respond to this section, since there are a number of significant issues here, including with respect to risk retention and the question of how the requirements of Article 5(1)(e) should be interpreted in the case of third country securitisations.
Other sections: The Consultation Document includes questions on an equivalence regime for STS securitisations, ESG disclosures, limited licensed banks for securitisations and supervision.
The Consultation Document also raises questions on some important additional points including capital requirements for securitisations, treatment of STS securitisations and ABCP for the purposes of the liquidity coverage ratio, significant risk transfer and Solvency II. Market participants will be pleased that they are being given an opportunity to comment on these issues in addition to those required to be considered pursuant to Article 46.
The Consultation Document represents a key opportunity for market participants to express their views on the EU securitisation framework and to provide their suggestions on how this could be improved.
Responses (including supporting evidence) need to be provided by 17 September 2021.