The current EU securitisation framework, consisting of the Securitisation Regulation (“SR”) and the amended Capital Requirements Regulation (“CRR”) came into force in January 2018 and became applicable on 1 January 2019. We have previously written about various amendments to the SR and about the EU’s Capital Market Recovery Package.
On 17 May 2021, the joint committee of the European Supervisory Authorities (“ESAs”) published their report on the implementation of the SR. The report is based on stakeholder feedback to two surveys produced by the ESAs, and sets out recommendations in several key areas which will be of interest to market participants. In this update we discuss a few key take-aways from the report.
According to the report, the current definition of “private securitisations” in the SR (which includes all securitisations that are not subject to the Prospectus Regulation) is too far-reaching, which in turn extends the related disclosure requirements to too many entities; a more precise definition would clearly identify those private securitisations that should comply with the disclosure requirements. For example, the report suggests that private securitisations not involving third party investors could be exempted from the transparency requirements. Such an exemption would be very welcome in the market, as it would help to ensure that certain private securitisations such as intra-group structures or fund holding structures are not inadvertently caught by the onerous reporting requirements of the SR.
Currently, the SR is silent on how information about private securitisations must be made available in order to comply with the transparency requirements. The report suggests that private securitisation reporting entities should make the information available by means of a securitisation repository (in the same way as for public securitisations) and that this should be clarified in the SR.
The report suggests that ESMA should further explore how to improve supervisory convergence of transparency requirements and promote data quality.
Simple, Transparent and Standardised (“STS”) Securitisation
No amendments are recommended to the STS criteria for non-Asset-Backed Commercial Paper issuances (non-ABCP), as most of the issues raised by stakeholders are due to limitations deliberately prescribed by the SR, or could be solved by further guidance on the interpretation of the STS criteria. However, the report notes, as more STS issuances are executed and the STS market stabilises, further analysis should be conducted to determine whether the STS criteria could be simplified while respecting the required standards. In addition, while the report acknowledges that the STS label is significantly limited by the ineligibility of certain common types of securitisation such as CLOs and CMBS, there is no appetite amongst the ESAs to permit such transactions to become STS compliant in the future.
As regards ABCP programmes, the report notes that the existing requirements have proven difficult for sponsors to meet and that the business need for an STS label at programme level has so far been rather limited. Legislators may therefore want to consider introducing targeted adjustments to the STS criteria for ABCP programmes when the business case for an STS label at programme level becomes more evident, and in this regard the report suggests that the European Commission (“EC”) should examine the adequacy of the prudential treatment of STS ABCP programmes. Although specific amendments are not being proposed at this stage, this recognition of the difficulties faced by ABCP programmes and the suggestion that this aspect of the STS regime be reviewed in the future will be welcomed by issuers and sponsors of ABCP in the EU.
The report notes that there is currently no procedure for cooperation between competent authorities when an STS securitisation transaction involves entities in multiple jurisdictions, and recommends that the EC should consider promptly publishing regulatory technical standards (RTS) on cooperation between competent authorities and the ESAs.
Amendment to the SR is recommended to emphasise that, while third-party verifiers (“TPVs”) may verify the compliance of a securitisation with the STS criteria at issuance, securitising parties are nevertheless under an ongoing obligation to check compliance with those requirements throughout the life of the transaction.
The report invites the EC to investigate whether the overall regulatory treatment of STS securitisations is commensurate with its risk profile in order to ensure that the STS framework remains safe but also reasonably attractive for market participants.
The report considers it necessary to explore i) how to develop common EU supervisory tools; ii) potential alternatives to the current STS supervisory framework, in particular for those jurisdictions with limited STS securitisation issuances; and iii) the relevance of a common EU approach to the ongoing supervision of authorisation conditions for TPVs. The EBA should also consider the relevance of complementing its guidelines on the STS criteria to cover new practical aspects arising from the implementation of the SR.
Due diligence and risk retention requirements
The report states that regulatory guidance would be useful to specify how proportionality could be implemented in the area of due diligence to facilitate the entrance of new investors into the EU securitisation market.
The report also calls for increased cooperation and communication between competent authorities in relation to the due diligence and risk retention requirements, in order to improve the effective supervision of those requirements. The development of a common EU best practices supervisory guide on due diligence for national supervisors would also be useful, the report claims.
In relation to risk retention, the report calls for the adoption of the risk retention RTS to be finalised as soon as possible, in order to restore market participants’ confidence in the SR risk retention regime.
As regards the jurisdictional scope of the due diligence and risk retention requirements, the report refers back to a recent opinion of the ESAs on that topic, which we discussed at the time, and reiterates the recommendation that the jurisdictional scope of the requirements should be clarified either by way of an amendment to the level 1 text or by the issuance of interpretative guidance.
Broadly speaking, market participants will welcome the recommendations made in the report. In particular, the proposal to exempt certain private securitisations from the transparency requirements and the acknowledgment of the difficulties faced by ABCP programmes in complying with the STS requirements should give hope that the next iteration of the SR will be tailored to the needs of the European capital markets.
Looking forward, later this year the European Systemic Risk Board (“ESRB”) is expected to publish its macro-prudential report on securitisations, which will provide further insight into the current state of the market. The observations of the ESAs and the ESRB will likely feed into the formal review of the SR and the CRR which are expected to be completed by the EC by January 2022, and which may be accompanied by proposals for amendments to those regulations.