What is a securitisation? The term 'securitisation' is legally defined. The first German definition can be found in Circular 4/97 of the German Federal Financial Supervisory Authority (BaFin), later in Basel II and in the German Banking Act, and subsequently in the CRR.
With the entry into force of REGULATION (EU) 2017/2402 OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 12 December 2017 laying down a general framework for securitisation and creating a specific framework for simple, transparent and standardised securitisation, and amending Directives 2009/65/EC, 2009/138/EC and 2011/61/EU and Regulations (EC) No 1060/2009 and (EU) No 648/2012 - hereinafter referred to as the 'Securitisation Regulation' - an EU-wide, cross-sectoral uniform framework for the regulatory treatment of securitisations was created for the first time. In this context, a uniform definition of securitisation was also laid down for the first time, which was in Article 2 of the Regulation. Accordingly, securitisation means the following:
'Securitisation means a transaction or scheme, whereby the credit risk associated with an exposure or a pool of exposures is tranched, having all of the following characteristics:
a) payments made in the transaction or scheme are dependent upon the performance of the exposure or pool of exposures;
b) the subordination of tranches determines the distribution of losses during the ongoing life of the transaction orscheme;
c) the transaction or scheme does not create exposures which possess all of the characteristics listed in Article 147(8) of Regulation (EU) No 575/2013'
Due to the high complexity of the regulatory provisions related to the new Securitisation Regulation, TSI offers regular training sessions in which recognised experts explain securitisation regulation in detail. The training courses are held in German and English.
The new regulation consists mainly of two parts:
The new regulations (Securitisation Regulation and CRR) stipulate the following:
The new securitisation rules will apply not only to banks but to all relevant financial market segments where references to the Securitisation Regulation can be found in other relevant regulations. As a result, there is a uniform Europe-wide set of regulations for funds, insurance undertakings etc.
Status of synthetic securitisations
Synthetic securitisations are initially excluded from the STS benefits with the exception of the originator retention for synthetic SME securitisations. Once the EBA has defined a set of STS criteria specific to synthetic securitisations (expected in the second half of 2019), the EU Commission intends to prepare a report and, if appropriate, a legislative proposal to extend the STS framework to this type of synthetic securitisation with a view to the financing of the real economy and in particular SMEs, whichwill benefit most from such securitisations.
With the new version of the whole set of securitisation rules, the EU Commission, EU Parliament and European Council are taking account of the fact that securitisations are an important component of well-functioning financial markets. A solidly structured securitisation is an important instrument for diversifying sources of finance and promotes a broader allocation of risk in the European financial system. Securitisation thus contributes to improving the efficiency of the financial system and to making the conditions of the real economy more stable in a financing environment dominated by banks.
Therefore - as stated in the foreword to regulation - the creation of a simple, transparent and standardised securitisation market is a core component of the Capital Markets Union and contributes to the EU Commission's priority objective of supporting job creation and a return to sustainable growth in Europe.
The new regulation aspires to regulate the capital market instrument securitisation consistently, i.e. from the originator of the securitised asset to the investor, according to uniform criteria.
The Securitisation Regulation as Level 1 regulation of the EU applies directly in all EU member states without the need for implementation and concretisation into national law. Nevertheless, the German legislator, for example, has updated relevant areas in an implementation law (e.g. in the Banking Act) and regulated the tasks required by the Securitisation Regulation (e.g. the designation of the competent national supervisory authorities).
In order to achieve a uniform and clear implementation of the new regulation throughout Europe, the Securitisation Regulation requires ESMA and EBA to issue numerous Level 2 regulations in the form of RTS and ITS (Regulatory and Implementing Technical Standards) as well as Guidelines (Level 3 Regulation). In particular, the extensive STS criteria need to be specified in terms of how they are to be interpreted and how compliance with the STS criteria can be demonstrated and, if necessary, verified by an independent third party verifier.
In addition, the three European supervisory authorities EBA, ESMA and EIOPA coordinate their work and that of the competent national authorities within the Joint Committee of European Supervisory Authorities in order to ensure cross-sectoral coherence and to assess practical issues related to the Securitisation Regulation in general and STS securitisations in particular.
|Level of regulation||Type||Document / topic||Date||Valid from||English||German|
|1||Regulation||Securitisation Regulation (EU) 2017/2402||28 Dec. 2017||1 Jan. 2019||PDF 1,1MB||PDF 1,2MB|
|2 (ESMA)||RTS/ITS||STS notification, final report||16 July 2018||[open]||PDF 1,5MB|
|2 (EBA)||RTS||Homogeneity, final report||28 May 2019||[open]||PDF 267KB||PDF 176KB|
|2 (EBA)||RTS||Risk retention, final draft||31 July 2018||[open]||PDF 459KB|
|2 (ESMA)||RTS||Third party verification, final report||16 July 2018||[open]||PDF 607KB|
|2 (ESMA)||RTS||Disclosure, final report (annex 5.3 concerning opinion)||31 Jan. 2019||[open]||PDF 2,8MB|
|2 (ESMA)||RTS/ITS||Data repository, final report||12 Nov. 2018||[open]||PDF 1,5MB|
|3 (EBA)||Guidelines||Non-ABCP STS criteria||12 Dec. 2018||15 May 2019||PDF 693KB|
|3 (EBA)||Guidelines||ABCP STS criteria||12 Dec. 2018||15 May 2019||PDF 1,1MB|
|(ESMA)||Q&A||On the Securitisation Regulation||31 Jan. 2019||n.a.||PDF 367KB|
|Level of regulation||Type||Document / topic||Date||Valid from||English||German|
|1||Regulation||CRR amendments (EU) 2017/2401||12 Dec. 2017||1 Jan. 2019||PDF 1,6MB||PDF 1,6MB|
|1||Regulation||LCR amendments (EU) 2018/1620||13 July 2018||30 April 2020||PDF 430KB||PDF 352KB|
|1||Regulation||Solvency II STS amendments (EU) 2018/3302||1 June 2018||1 Jan 2019||PDF 411KB||PDF 414KB|
|1||Regulation||MMF regulation (EU) 2017/1131||14 June 2017||20 July 2017/21 July 2018||PDF 641KB||PDF 660KB|
|1||Regulation||MMF amendments (EU) 2018/990||10 April 2018||21 July 2018/1 Jan. 2019||PDF 566KB||PDF 424KB|
In the following we have compiled the current regulatory texts in English and - if available - in German:
|European Parliament and the European Council||Securitisation Regulation (EU) 2017/2402||28 Dec. 2017||In force||PDF 1,1MB||PDF 1,1MB|
Furthermore, the Securitisation Regulation contains various authorisations for what are known as Level 2 regulations for the European supervisory authorities ESMA and EBA commissioned by the EU Commission to prepare drafts for Regulatory Technical Standards (RTS), which are to be put into final effect by the EU Commission once they have been issued.
The ESMA drafts relate to the implementation of the Regulation and thus cover the requirements for third-party verification, the STS notification by the originator, sponsor or securitisation special purpose vehicle and the implementation of the transparency requirements as laid down in the Securitisation Regulation:
|ESMA||RTS on STS verification services||16 July 2018||Final draft||PDF 607KB|
|ESMA||RTS on STS notification||16 July 2018||Final draft||PDF 1,5MB|
|ESMA||RTS on disclosure||31 Jan. 2019||[open]||PDF 2,8MB|
The preparation of the RTS for risk retention and for the homogeneity requirements for the portfolio to be securitised was delegated to EBA:
|EBA||RTS on risk retention||31 July 2018||Final draft||PDF 459KB|
|EBA||RTS on homogeneity||28 May 2019||Final report||PDF 267KB|
Furthermore, it is the responsibility of the EBA to ensure that STS requirements are interpreted and applied uniformly throughout Europe.
|EBA||Guidelines on STS criteria for ABCP securitisation||12 Dec. 2018||Final draft||PDF 1,1MB|
|EBA||Guidelines on STS criteria for non-ABCP securitisation||12 Dec. 2018||Final draft||PDF 693KB|
In order to assist market participants in the uniform and compliant application of the new rules, the supervisory authorities are expected to publish Q&A Reports on a monthly basis and in an updated version.
|ESMA||Questions and Answers on the Securitisation Regulation||31 Jan 2019||Monthly update||PDF 376KB|
The CRR contents for securitisations have also been amended. All securitisation-relevant definitions have now been uniformly incorporated into the STS Regulation and the rules for capital adequacy for investors in securitisation positions have been fundamentally revised and changed. These rules are contained in the following documents:
|European Parliament and the European Council||CRR amendments (EU) 2017/2401||12 Dec. 2017||in force||PDF 1,1MB||PDF 1,1MB|
The Solvency II Directive (2009/138/EC (1)) introduced a modernised and risk-based supervisory framework for insurance and reinsurance undertakings in the European Union. A delegated Commission Regulation containing dedicated implementing provisions for Solvency II, including risk calibrations for the calculation of capital requirements for certain categories of assets, was adopted by the Commission on 10 October 2014.
This legal framework already contained provisions for securitisations, differentiating between Type 1 and Type 2 securitisation products. However, the requirements for Type 1 products were not necessarily in line with the market, with the result that only a few transactions could meet them at all. In contrast, the capital requirements for Type 2 products were prohibitively high.
With the aim of creating a uniform legal framework for securitisations under the new Securitisation Regulation, a number of amendments to the delegated act on Solvency II have also become necessary:
|COMMISSION DELEGATED REGULATION||Solvency II STS Amendments (EU) 2018/3302||1 June 2018||In force||PDF 411KB||PDF 414KB|
Regulation (EU) 2017/1131 on Money Market Funds (MMFs) was published on 14 June 2017. Its objective is to preserve the integrity and stability of the internal market. It aims to make money market funds more resilient and to limit contagion to other financial institutions. The 2017 MMF Regulation already contains references to STS securitisations as eligible investments.
At the time of adoption of the Money Market Funds Regulation, the Securitisation Regulation had not yet been completed. The Commission was therefore empowered to adopt additional requirements for STS investments with regard to reverse repo transactions, credit quality assessment and criteria for eligible STS ABS or ABCP investments. This has since been implemented with the MMF STS Amendments of 10 April 2018.
|European Parliament and the European Council||Regulation (EU) 2017/1131 Money Market Funds, MMF 14 June 2017||14 June 2017||In force||PDF 641KB||PDF 660KB|
|European Parliament and the European Council||Money Market Funds Regulation STS-amendments 10 April 2018||10 April 2018||In force||PDF 566KB||PDF 424KB|
On 13 July 2018, the EU Commission published its delegated act on the treatment of STS securitisations in the LCR (Liquidity Coverage Ratio). The possibility of taking STS securitisations into account and including them in the LCR is in line with the objectives formulated by the legislator in the new SecuritisationRegulation.
However, there were also critical comments from the market:
|European Parliament and the European Council||LCR STS amendments||13 July 2018||In force, applicable from 30 April 2020 onwards||PDF 430KB||PDF 352KB|
Where originators, sponsors and securitisation vehicles wish to use the STS designation for their securitisations, investors, competent authorities and ESMA must be notified that the securitisation complies with the STS requirements. The notification must explain how the individual STS criteria are met. ESMA must then include the securitisation in a list of reported STS securitisations which it makes available on its website for information purposes. Inclusion of an issued securitisation in the ESMA list of reported STS securitisations does not imply that ESMA or any other competent authority has certified compliance with the STS requirements. Compliance with the STS requirements remains the sole responsibility of the originators, sponsors and securitisation vehicles. This is to ensure that originators, sponsors and securitisation vehicles are liable for their claims that a particular securitisation meets the STS criteria and that the market is transparent.
Against the background of the complex criteria, which often require interpretation, as well as the complex supervisory process and the extensive sanctioning possibilities, the involvement of an independent third party (pursuant to §28 of the SecuritisationRegulation) in the review of a securitisation for compliance with the STS requirements for investors, originators, sponsors and securitisation special purpose vehicles is extremely helpful and will have a confidence-building effect on the market for STS securitisations.
These third parties, known as STS verification bodies, will be approved by the competent national supervisory authority. Their assessment is included in the originator's, sponsor's or SPV's notification to ESMA in accordance with Article 27 (2) of the Securitisation Regulation and provides some certainty in the market that the rules will be applied in high quality and uniform manner.
The TSI Group provides market services through STS Verification International GmbH (SVI) as the STS Verification Authority.
STS Verification International GmbH (SVI) is a STS third party verifier licensed since 7 March 2019 in accordance with Article 28 of the Securitisation Regulation*. In a first step, BaFin's approval covered the asset classes car loans and car leasing, consumer loans and equipment leasing as well as the ABS transaction type.
As of 11 July 2019, BaFin has now expanded the approval. SVI is thus an approved STS third party verifier for all asset classes for all countries of the European Union for the transaction types ABS and ABCP.
*'REGULATION (EU) 2017/2402 OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 12 December 2017 laying down a general framework for securitisation and creating a specific framework for simple, transparent and standardised securitisation, and amending Directives 2009/65/EC, 2009/138/EC and 2011/61/EU and Regulations (EC) No 1060/2009 and (EU) No 648/2012', as amended and hereinafter referred to as the 'Securitisation Regulation'.
Where in respect of a securitisation reported as an STS securitisation, a competent authority has determined that the securitisation does not comply with the requirements and there is reason to believe that the originator acted negligently and not in good faith, the responsible authority, i.e. the regulator of the originator, shall impose administrative sanctions and shall also inform ESMA without delay to include the sanctions concerned in its list of STS notifications in order to inform investors of the sanctions and the reliability of the STS notifications. Therefore, originators, sponsors or securitisation vehicles are required to prepare their reports carefully in order to avoid damage to their reputation. The involvement of an independent STS verification body is an important contribution to the careful application of the Regulation.
The authority responsible for Germany for monitoring, imposing sanctions and approving the STS verification body is BaFin. It has the necessary supervisory, investigative and sanctioning powers. As investors, originators, sponsors, original lenders and securitisation vehicles are usually located in different member states and may be subject to the supervision of different sectoral authorities, close cooperation, through mutual exchange of information and administrative assistance, between the relevant competent authorities, including the European Central Bank (ECB), and the European Supervisory Authorities in the performance of the specific tasks assigned to it by Council Regulation (EU) No 1024/2013 (1 ) is indispensable. As previously mentioned, extensive and possibly far-reaching sanctions may be imposed for intentional or negligent infringements.
The complex European structure of financial supervision entails a complicated coordination process to ensure consistent decision-making practice, particularly in cases of breaches of the Securitisation Regulation. Here, too, a qualified STS verification body can provide important input when it comes to coherent and consistent interpretation of the rules in order to avoid negligent interpretations and applications.
The requirements for the use of the term 'simple, transparent and standardised' ('STS') securitisations will be further specified in EBA guidelines and supervisory practices over time. The experience of an STS verification body is a valuable input for further developing the proper application of the rules.
Since the introduction of the Loan Level Data requirements by the ECB in 2013, the European Data Warehouse (EDWH) has been operating its platform through which originators can provide (potential) investors and all other interested market participants with individual contract data from securitised exposure portfolios in a clearly defined scope and format. The new Securitisation Regulation adopts this principle, extends it to other areas of information (e.g. standardised format of investor reporting, insider reports) and, in the case of public, STS-compliant transactions, prescribes comprehensive reporting via a 'securitisation register'.
It is to be expected that the ECB will in future recognise a securitisation register approved by ESMA for its loan level data requirements. The extent to which compliance with the STS criteria will be taken into account remains to be seen.
The eligibility of ABS bonds as collateral for the ECB is of crucial importance for any investor, as it gives them security in a financial crisis to have financial instruments that the ECB accepts as collateral for repo transactions as part of its monetary policy measures in the event of a financial crisis.
In addition, many 'retained transactions' have existed ever since 2008. Here, a bank securitises parts of its portfolio solely for the purpose of producing eligible collateral, holding it as a liquidity reserve and, if necessary, refinancing with the ECB on its favourable terms.
The Single List of the Eurosystem has been in place since 2007. In it, the ECB provides detailed information on the rules for monetary policy implementation and the collateral framework.
Since then, the ECB has amended or replaced the previous Guideline on the implementation of the Eurosystem's operational framework for monetary policy, most recently by ECB/2018/3, ECB/2018/4 and ECB/2018/5. More detailed information can be found at the following link: www.ecb.europa.eu/ecb/legal/1002/1014/html/index-tabs.en.html
The following debt instruments are eligible as marketable assets:
Of particular importance here are the qualitative requirements for marketable collateral and the haircuts applied to this collateral. It is still unclear whether and to what extent the ECB will take STS into account as a criterion in calculating haircuts in the future.
The special criteria for ABS are currently (as of December 2018):
Examination of the eligibility criteria