Securitisation and regulation

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.

Events hosted by TSI

Basic structure of the new securitisation regulation (STS)

  • Regulations on securitisation are combined in a single regulation applicable to all areas of the financial markets - the Securitisation Regulation.
  • The Securitisation Regulation entered into force in January 2018 and applies to all new issues from 1 January 2019.
  • Securitisation is therefore regulated uniformly across Europe, sector-specific regulations such as CRR, SolvV or the MMF Regulation refer to the Securitisation Regulation.
  • For transactions issued before 1 January 2019, transitional provisions apply until 31 December 2019 for capital backing in accordance with CRR, in which the old risk weights may still be applied by bank investors.
  • From 1 January 2020, the new capital adequacy requirements will then apply uniformly to all bank investors.
  • For all outstanding and newly issued transactions, lower risk weights for capital adequacy will apply if an STS notification is made in accordance with Article 27 of the Securitisation Regulation.

The new regulation consists mainly of two parts:

  • First, the 'EU REGULATION 2017/2402 OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 12 December 2017' ('Securitisation Regulation') defines a general framework for all securitisations and additionally establishes a specific framework for simple, transparent and standardised securitisations (STS). For the first time, a uniform set of rules for securitisations applies to all financial market segments throughout Europe. Sector-specific regulations (in particular, CRR, SolvV and MMF) refer to the Securitisation Regulation and regulate relevant matters for the respective industry. Issues previously regulated in the CRR on the subject of securitisation that are to apply to all regulated market participants in future have been transferred from the CRR to the Securitisation Regulation.
  • Second, from the perspective of banks, the 'EU REGULATION 2017/2401 OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 12 December 2017 amending Regulation (EU) No. 575/2013 on prudential requirements for credit institutions and investment firms', colloquially always referred to as CRR, is particularly relevant. Above all, the hierarchy of rating models and capital weights has been changed.

The new regulations (Securitisation Regulation and CRR) stipulate the following:

Securitisation Regulation

  • A detailed framework for all securitisations, whether synthetic or true sale, ABS, or ABCP transactions. This framework includes

    • the most important definitions
    • most important transparency requirements
    • risk retention issues, and
    • basic requirements for the portfolio to be securitised;

  • The special requirements for 'STS securitisations', separated into requirements for simplicity, transparency and standardisation;
  • The rules and procedures to be followed in the 'notification' (STS notification) of securitisations as well as the sanctions and sanctioning mechanisms in the event of non-compliance with the rules.

CRR

  • The rules and approaches to be applied for the risk weighting of securitisation positions with banks, whether as originator or investor, differentiated into STS and non-STS securitisations;
  • The hierarchy of applicable approaches has changed significantly in comparison with the previously applicable CRR regulations, dependence on external ratings is to be reduced and, by recalibrating the risk weights, cliff effects caused by sudden increases in capital requirements are to be avoided;

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.

Background and motivation for new STS regulation

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.

Implementation of the new regulations and national legislation

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.

All documents at a glance

Securitisation Regulation

Level of regulationTypeDocument / topicDateValid fromEnglishGerman
1RegulationSecuritisation Regulation (EU) 2017/240228 Dec. 20171 Jan. 2019PDF 1,1MBPDF 1,2MB
2 (ESMA)RTS/ITSSTS notification, final report16 July 2018[open]PDF 1,5MB
2 (EBA)RTSHomogeneity, final report28 May 2019[open]PDF 267KBPDF 176KB
2 (EBA)RTSRisk retention, final draft31 July 2018[open]PDF 459KB
2 (ESMA)RTSThird party verification, final report16 July 2018[open]PDF 607KB
2 (ESMA)RTSDisclosure, final report (annex 5.3 concerning opinion)31 Jan. 2019[open]PDF 2,8MB
2 (ESMA)RTS/ITSData repository, final report12 Nov. 2018[open]PDF 1,5MB
3 (EBA)GuidelinesNon-ABCP STS criteria12 Dec. 201815 May 2019PDF 693KB
3 (EBA)GuidelinesABCP STS criteria12 Dec. 201815 May 2019PDF 1,1MB
(ESMA)Q&AOn the Securitisation Regulation31 Jan. 2019n.a.PDF 367KB

Capital markets regulation

Level of regulationTypeDocument / topicDateValid fromEnglishGerman
1RegulationCRR amendments (EU) 2017/240112 Dec. 20171 Jan. 2019PDF 1,6MBPDF 1,6MB
1RegulationLCR amendments (EU) 2018/162013 July 201830 April 2020PDF 430KBPDF 352KB
1RegulationSolvency II STS amendments (EU) 2018/33021 June 20181 Jan 2019PDF 411KBPDF 414KB
1RegulationMMF regulation (EU) 2017/113114 June 201720 July 2017/21 July 2018PDF 641KBPDF 660KB
1RegulationMMF amendments (EU) 2018/99010 April 201821 July 2018/1 Jan. 2019PDF 566KBPDF 424KB

Overview of all regulatory texts

In the following we have compiled the current regulatory texts in English and - if available - in German:

The new Securitisation Regulation

  1. Defines securitisation-relevant terms uniformly;
  2. Defines the requirements that apply uniformly to all securitisations;
  3. Defines the specific requirements applicable to all STS securitisations;
  4. Regulates the third party verification process and the responsibility of the competent authority for the STS third party verification;
  5. Establishes the monitoring and sanction process for non-compliance.
Adopted byDocumentDateStatusEnglishGerman
European Parliament and the European CouncilSecuritisation Regulation (EU) 2017/240228 Dec. 2017In forcePDF 1,1MBPDF 1,1MB

Level 2 Regulations (RTS)

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:

Supervisory authorityDocumentDateStatusEnglish
ESMARTS on STS verification services16 July 2018Final draftPDF 607KB
ESMARTS on STS notification16 July 2018Final draftPDF 1,5MB
ESMARTS on disclosure31 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:

Supervisory authorityDocumentDateStatusEnglish
EBARTS on risk retention31 July 2018Final draftPDF 459KB
EBARTS on homogeneity28 May 2019Final reportPDF 267KB

Level 3 Regulation (Guidelines)

Furthermore, it is the responsibility of the EBA to ensure that STS requirements are interpreted and applied uniformly throughout Europe.

Supervisory authorityDocumentDateStatusEnglish
EBAGuidelines on STS criteria for ABCP securitisation12 Dec. 2018Final draftPDF 1,1MB
EBAGuidelines on STS criteria for non-ABCP securitisation12 Dec. 2018Final draftPDF 693KB

Questions & Answers

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.

Supervisory authorityDocumentDateStatusEnglish
ESMAQuestions and Answers on the Securitisation Regulation31 Jan 2019Monthly updatePDF 376KB

 

 

Securitisation Regulation and other regulations

Capital adequacy in the CRR

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:

Adopted byDocumentDateStatusEnglishGerman
European Parliament and the European CouncilCRR amendments (EU) 2017/240112 Dec. 2017in forcePDF 1,1MBPDF 1,1MB

Solvency II

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:

  • First, the definitions of securitisation used in the delegated Solvency II act had to be adapted to the definitions of the Securitisation Regulation.
  • Second, due to the direct applicability of the provisions on risk retention and due diligence in the Securitisation Ordinance, the corresponding provisions in Solvency II had to be amended.
  • Third, the capital calculations for insurance investments in securitisations had to be amended.
Supervisory authorityDocumentDateStatusEnglishGerman
COMMISSION DELEGATED REGULATIONSolvency II STS Amendments (EU) 2018/33021 June 2018In forcePDF 411KBPDF 414KB

Money Market Funds (MMF)

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.

Adopted byDocumentDateStatusEnglishGerman
European Parliament and the European CouncilRegulation (EU) 2017/1131 Money Market Funds, MMF 14 June 201714 June 2017In forcePDF 641KBPDF 660KB
European Parliament and the European CouncilMoney Market Funds Regulation STS-amendments 10 April 201810 April 2018In forcePDF 566KBPDF 424KB

STS securitisations in the LCR

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:

  • Transition period:
    The new LCR rules will enter into force Europe-wide upon adoption, are to be applied from 30 April 2020 and require compliance with the STS criteria. Despite this transitional period, however, there is no grandfathering provision for currently LCR-capable transactions that do not involve subsequent STS reporting under Article 27 of the Securitisation Regulation.
  • Consideration at Level 2A:
    STS as a premium segment rightly places extensive requirements on securitisations, but their exclusive representation in LCR Level 2B does not recognise this approach.
  • ABCP:
    Under the same rationale, the non-consideration of fully-supported Asset Backed Commercial Paper (ABCP) is not comprehensible.
Adopted byDocumentDateStatusEnglishGerman
European Parliament and the European CouncilLCR STS amendments13 July 2018In force, applicable from 30 April 2020 onwardsPDF 430KBPDF 352KB

Implementation of STS verification in practice

The process for obtaining STS status for a securitisation

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.

The role of the STS verification bodies

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) [MB1] as the STS Verification Authority.

STS Verification International GmbH (SVI) is an STS verification body approved in accordance with Article 28 of the Securitisation Regulation*. The letter of approval from BaFin as the competent national supervisory authority dated 5 March 2019 was received by SVI on 7 March 2019. The scope of the authorisation includes the following asset classes for all countries of the European Union:

  • Auto loans and Auto Leasing
  • Consumer Loans
  • Equipment Leasing

Further asset classes such as RMBS, ABCP etc., which can be verified by SVI, are planned for the future.

For details please go to www.sts-verification-international.com.

*'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'.

The process of STS verification and the role of the regulatory authority

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.

Use of securitisation as ECB collateral

Securitisation register and loan level data

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.

Eurosystem collateral framework

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:

  • Government bonds

    • covered bonds
    • uncovered bank bonds
    • corporate bonds
    • ABS

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):

  • Denomination in euro
  • Two ratings of at least A- from two of the four accepted credit rating agencies
  • The securitised exposures must be transferred to an SPV in such a way that it is classified as a true sale by the Eurosystem. Synthetic risk transfer is not accepted. The true sale must comply with the laws of an EU member state; external legal opinions are required, but not sufficient. In addition, the ECB forms its own opinion
  • ABS as underlying assets are not permissible
  • No double layer structures
  • Geographical requirements are that both originator and SPV are located within the EEA
  • The debtors of credit claims must be either businesses or consumers.
  • The Eurosystem only accepts senior tranches and no form of subordination.
  • Loan level data must be provided via the European DataWarehouse.

Examination of the eligibility criteria

  • The originator or arranger contacts the relevant central bank in the country of admission to trading.
  • The central bank verifies the eligibility of the bonds to be submitted as collateral with participation of the central bank in the originator's country; in case of doubt, further consultation takes place within the Eurosystem.
  • Final classification and communication with the originator. In the case of eligible bonds, the decision is announced and the bonds are listed on the EADB (Eligible Assets Data Base) website of the ECB.
  • Eurosystem counterparties can use ABS bonds as collateral for money market operations