A New Era: The New European Framework for Securitisations

Following a prolonged period of political scrutiny and negotiation, the texts of two regulations implementing significant changes to the regulation and capital treatment of securitisations were broadly agreed by the three EU legislative bodies on May 30, 2017 and are due to be formally adopted later this year. 

On September 30, 2015, the European Commission published two draft regulations as part of the implementation of its Action Plan on Building a Capital Markets Union. The first regulation (the "Securitisation Regulation") will harmonize rules on risk retention, due diligence and disclosure across the different categories of European institutional investors which will apply to all securitisation (subject to grandfathering provisions) and will introduce a new framework for simple, transparent and standardised ("STS") securitisations. The Securitisation Regulation accordingly provides for amendments to be made to the rules relating to securitisations in the Capital Requirements Regulation, the UCITS Directive, the Solvency II Directive, the Alternative Investment Fund Managers Directive, the Credit Rating Agency Regulation and the European Market Infrastructure Regulation. The second regulation will, for the most part, implement the revised Basel framework for securitisation in the EU and implement a more risk sensitive prudential treatment for STS securitisations.

Although both regulations are not yet published in the Official Journal, further changes to the texts are now expected to be minor or technical in nature.  It is anticipated that the European Parliament and Council will vote to formally adopt the regulations in late 2017 and the regulations will then be published in the Official Journal at the end of 2017 or in January 2018.  There are a significant number of regulatory technical standards, delegated acts and guidance which will need to be finalised before the regulations apply from January 1, 2019.  The liquidity coverage ratio requirements under the CRR and the regulatory treatment of securitisations under Solvency II will also need to be updated to reflect the final STS criteria.

The EU regulations, when implemented, will have an impact on securitisation markets far beyond the borders of Europe, as issuers and investors in the U.S., Canada, Australia and elsewhere grapple with the consequences of a two-track securitisation regime very different from what is and likely will be in place in their home countries. 

Please find attached a briefing note on key aspects of the new securitisation framework including summaries of provisions relating to application and grandfathering, the new harmonised rules on due diligence, risk retention and disclosure, the STS criteria, liability and capital treatment.