European Union: The New EU Securitisation Framework

From 1 January 2019, the EU Securitisation Regulation will replace the current sector-specific approach to regulating securitisations with a set of rules that will apply to all European securitisations whether public or private and regardless of the 'investor type' (the Regulation).

The Regulation also creates a framework for simple, transparent and standardised (STS) securitisations and includes rules covering such matters as due diligence, risk retention and investor disclosures.

Scope of the Regulation

The Regulation will apply to all securitisations issued on or after 1 January 2019 and to legacy securitisations where the STS designation is sought.

The term 'securitisation' is largely unchanged and is intended to capture any transaction where the credit risk associated with an exposure or pool of exposures is tranched. Payments under the transaction are dependent upon the performance of the exposure or pool of exposures, and the subordination of tranches determines the
distribution of losses.

The Regulation clarifies that specialised lending exposures established in accordance with article 147(8) of the EU Credit Requirements Regulation (575/2013/EU) are not within scope of the Regulation. Resecuritisation transactions, which are transactions where at least one of the underlying exposures is a securitisation position, are banned under the Regulation (subject to certain exceptions).

Securitisations are considered as "generally not appropriate" for retail investors and certain criteria must be satisfied (as set out in the Regulation) in order for a seller to sell securitisations to retail investors.

Risk retention requirements

The current minimum risk retention level (MRRL) requirement to hold 5 per cent of the net economic interest in the securitisation is unchanged. The MRRL must be held for the life of the securitisation transaction.

The form in which the MRRL must be held (i.e., the vertical slice, revolving assets slice, random selection slice, first loss tranche slice or first loss exposure slice) is unchanged by the Regulation.

Originators, sponsors and original lenders (together, the risk retention holders (RRHs)) will be under a new positive obligation to retain the MRRL in securitisation transactions. This will mean that the risk retention requirements will apply to RRHs regardless of whether the investors are based inside or outside the EU.

The default position, assuming a lack of agreement to the contrary, is that the originator is required to retain the MRRL. The Regulation allows the RRHs to agree to collectively hold the MRRL on a pro rata basis if the RRHs are the same type (i.e., either all originators or all original lenders or all sponsors).

Originator test

The definition of 'originator' has been tightened under the Regulation so that "an entity shall not be considered to be an originator [for the purposes of the risk retention requirements] where the entity has been established or operates for the sole purpose of securitising exposures". Originators will need to demonstrate that they have a "broader business enterprise".

The draft Securitisation RTS explains that factors that should be taken into account in determining whether an entity has a broader business enterprise include:

  • demonstrating the capacity to meet payment obligations consistent with a broader business enterprise (involving material support from capital, assets, fees or other income available to the entity, disregarding any securitisation assets and income); and
  • having responsible decision makers with the required experience to enable the entity to pursue the established business strategy and an adequate corporate governance arrangement.

The difference between an originator and an original lender is that an originator can securitise loans that it purchases from third parties as well as loans that it makes.

Due diligence

The existing due diligence requirement for EU institutional investors to ensure that the minimum risk retention requirements are satisfied prior to investing in securitisations is unchanged.

In summary, this means that EU institutional investors will need to have arrangements in place to verify that:

  • the RRHs are complying with the risk retention requirements;
  • the originator, sponsor and securitisation special purpose entities (SSPEs) have complied with the transparency requirements in the Regulation; and
  • the originator or original lender (if they are not credit institutions or investment firms) follow sound and well-defined criteria, and have established processes for approving, amending, renewing and financing credits that form the underlying exposures of the securitisation.

Transparency

Originators, sponsors and SSPEs will be required to provide investors, regulators and, upon request, potential investors with certain information on the transaction and the underlying exposures (on a quarterly basis) as well as with the essential documentation used in the transaction and the final offering document, prospectus or
transaction summary. The disclosure requirements are extensive.

In certain instances, this information must be disclosed via a registered securitisation repository or, if no registered securitisation repository exists, via a website that meets specified requirements as to data control and security.

The precise application of the transparency requirements will depend on whether the securitisation is public or private.

Simple, transparent and standardised securitisations

The Regulation provides that certain securitisation transactions can be treated as STS transactions if they satisfy specific eligibility criteria. It is important to note that investing in an STS securitisation may afford certain investors more favourable regulatory capital treatment.

The specific eligibility criteria for STS transactions include:

  • the originator, sponsor and SSPE in an STS securitisation transaction must be established in the EU;
  • only true sales are eligible for inclusion (and so synthetic securitisations are excluded);
  • the transaction must be backed by pools of exposures that are homogeneous in asset type, and must not include transferable securities (other than certain types of corporate bonds);
  • clear specification requirements must be met for the relevant transaction documentation and obligation to provide a precise liability cash flow model to potential investors; and
  • transactions must not include actively managed assets.

Originators and sponsors will be required to jointly notify the European Securities and Markets Authority (ESMA) that a securitisation meets the STS requirements. The notification, which must include an explanation of how the STS criteria are satisfied, will be published by the ESMA on its website.

Sanctions for breaches

Currently, the penalty for noncompliance is a punitive capital charge against investors' balance sheets.

Under the Regulation, originators, original lenders, SSPEs and sponsors may potentially be subject to a broad range of administrative (or even criminal) sanctions.

In the UK, the Financial Conduct Authority (FCA) will be given certain supervisory, disciplinary and investigatory powers over persons who are subject to the regulation (irrespective of whether they are authorised and regulated by the FCA), including the power to impose a fine, censure certain individuals, issue a public rebuke, apply for an injunction or restitution orders, require restitution or impose temporary prohibitions on individuals holding management functions.

Originally published 10 December 2018

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions