1. INTRODUCTION

On 19 July 2012, the Commission de Surveillance du Secteur Financier ("CSSF") published questions and answers on securitisation matters ("Q&A") on its website1. In these Q&A, which replace the previously used 2007 annual report, the CSSF sets out its prudential supervision practice relating to securitisation vehicles.

We have attempted to highlight some of the more salient points in the Q&A here-below.

Please note that the Q&A only apply to authorised securitisation vehicles (see sections 2.3 and 2.4 below for further explanations on authorised securitisation vehicles) under article 19 of the Law of 22 March 2004 on securitisation (as amended) (the "Securitisation Law").

2. QUESTIONS AND ANSWERS OVERVIEW

2.1. Definition of securitisation

Securitisation is defined in article 1 (1)2 of the Securitisation Law.

The Securitisation Law allows the securitisation of any kind of risks inherent to receivables or any other assets, liabilities or activities. Also, any technique for transferring risks is permitted by the Securitisation Law, ranging from a traditional transfer of assets to complex forms of assumption of risks (such as credit derivatives). Owing to this broad definition of securitisation, a wide range of possibilities is open to securitisation vehicles. Based on the legislative history of the Securitisation Law, it is however clear that the main purpose of a securitisation transaction under the Securitisation Law should in principle always be the economic "transformation" of certain risks in securities through the acquisition or assumption of the risks and the issuance of securities.

The CSSF emphasises that the securitisation vehicles and the transactions contemplated by them have to comply not only with the legal definition of "securitisation", but also with the spirit and purpose of the Securitisation Law. They cannot be used as a means of circumventing the law. In particular, the purpose of creating a Luxembourg securitisation vehicle must not be to avoid the application of stricter prudential rules or to bypass restrictions that may exist for investment in the underlying risks or their distribution.

2.2. Definition of securitisation vehicle

Securitisation vehicle (also called "securitisation undertaking") is defined in article 1 (2)3 of the Securitisation Law.

A securitisation is carried out in two steps: (i) the securitisation vehicle assumes the risks by acquiring the assets from the originator and (ii) the securitisation vehicle issues the securities. In a securitisation transaction, a set of risks is isolated in an ad hoc structure to allow the issuance of securities whose value or yield is linked to these risks. In case of a conventional transaction of one or more claims, this means that the rights of investors depend at any time directly on the value and characteristics of the receivables. However, the Securitisation Law does not require that a securitisation is carried out through one single securitisation vehicle. It may be that the risks are transferred to a vehicle different from the one which is issuing securities, provided that there is an economic interconnection between the securities issued by one vehicle and the risks located in the other vehicle (so called two-tier structure).

2.3. Regulation of securitisation vehicles

The Securitisation Law provides that securitisation vehicles that issue securities to the public on a continuous basis ("ASV") must be authorised by the CSSF to be able to operate. If a securitisation vehicle intends to carry out securitisation transactions that are likely to meet cumulatively both criteria, "on a continuous basis" and "to the public", it must first require (meaning before it starts any activity meeting these two criteria) the authorisation of the CSSF (article 19 of the Securitisation Law). The securitisation vehicle has to make this assessment on its own and then contact the CSSF. The CSSF recommends that securitisation vehicles that do not intend to issue securities to the public on a continuous basis specify this in their articles of association.

2.4. Interpretation of the criteria of "on a continuous basis" and "to the public"

The issue of securities is deemed to be on a continuous basis if the ASV carries out more than three issues of securities to the public per year. The CSSF clarifies that in case of a multiple compartment securitisation vehicle, the number of issues has to be determined on the level of the securitisation vehicle and not on the compartment level. In order to determine the number of annual issuances of the securitisation vehicle, each issue needs to be taken into consideration as a separate issue, unless an assessment of the nature of the program and the different series of notes allows to conclude that the characteristics of these issuances are such that one may consider that the various series of securities constitute a single issue and not separate issues.

Concerning whether or not the issue is made to the public, the CSSF applies the following criteria:

  • issuances which are intended for professional clients as defined in annex II of the directive 2004/39/EU (MiFID) are not considered to be public issues;
  • issuances whose denominations equal or exceed EUR 125,000 are presumed not to be placed with the public;
  • the listing of an issue on a regulated or alternative market does not ipso facto/automatically mean that this issue is intended for the public; and
  • issuances in the form of private placements, regardless of their denomination, are not deemed to be public. The CSSF considers private placements on a case-by-case basis, taking into account the methods of communication used along with the technique for the distribution of the securities. However, the purchase of such securities by a financial intermediary or an institutional investor for subsequent public offering shall make the issuance a public offering.

The CSSF also points out that it will take into consideration what type of investors are targeted to determine if there is a public issue within the meaning of the Securitisation Law.

2.5. Application for authorised securitisation

The CSSF sets out in section 5 of the Q&A what information and documents need to be included in the application file.

There are three categories of documentation / information to be provided to the CSSF:

  • the constitutional documents of the securitisation vehicle

    The CSSF approves the constitutional documents of the securitisation vehicle. The same procedure applies for already existing vehicles, which are applying for an authorisation – in which case the documents should also include information about the financial statements and the previous issuances of securities.
  • the structure, administration and management of the securitisation vehicle

    The securitisation vehicle needs to have sufficient human and material resources in order to be able to carry out, correctly and professionally, its business and securitisation activities.

    It is made clear by the CSSF that all the accounting and other documentation deemed important for the securitisation vehicle (e.g. register of shareholders / noteholders, corporate services agreement, minutes of EGMs, AGMs and board meetings, etc.) would need to be maintained in Luxembourg and made available to the CSSF upon request.
  • management and shareholders

    The identity of the management team (and their CVs), of the originator of the securitisation project and of the beneficial owners must be disclosed to the CSSF. The CSSF will assess the honorability and the professional experience of the directors of the securitisation vehicle on a case-by-case basis.

    The CSSF also accepts the management of an authorised securitisation vehicle by legal entities, in which case the honorability and experience criteria mentioned above will be assessed at the level of both the legal entities and the persons designated to represent the latter.

    Finally the CSSF requests that an originator of a new securitisation project meet with the CSSF in its premises to present and discuss its project.

2.6. Techniques to assume the securitised risks

One of the purposes of the Securitisation Law is to allow the securitisation of a large variety of risks linked to all property/ assets, whether movable or immovable, tangible or intangible, as well as those resulting from commitments assumed by third parties or inherent to all or part of the activities carried out by third parties. The assumption of risks by securitisation vehicles can result from transfers of assets, but also from other forms of risk transfer whereby securitisation vehicles assume risks that the company wishes to be freed of or hedge against. Thus apart from the traditional true sale securitisation carried out through the transfer of assets to the securitisation vehicle, the Securitisation Law also embraces "synthetic securitisation" where only the risk linked to the assets, but not the assets themselves, is transferred (e.g. through credit default swaps) and whole or partial business securitisation.

2.7. Forms of securitisation of loan receivables

The CSSF points out that while a securitisation of loan receivables generally implies the purchase of loans from an originator, in certain specific circumstances, transactions in which the securitisation vehicle is granting loans, rather than acquiring them, may be considered as a securitisation. The CSSF's consent to loan origination by a securitisation vehicle is subject to (i) the securitisation vehicle not making a business out of the granting of the loans and (ii) the issue documents describing precisely either (a) the underlying assets on which the repayment of the loans depends or (b) the borrower(s) and/or the criteria pursuant to which the latter are chosen, in order for the investors to have an adequate assessment of the potential risks at the time of the issuance of the securities. In such cases, the issue documents will need to provide a detailed description of the loans.

2.8. Other forms of securitisation

Different types of securitisation transactions are possible, provided that the contemplated transactions fall under the scope of the legal definition of "securitisation", but also respect the spirit and purpose of the Securitisation Law and are consistent with best market practices as appreciated by the CSSF.

The CSSF stresses that the activity of the securitisation vehicle (in particular asset management and also the frequency and manner of redemption of securities issued by the vehicle) must be such that it does not fall within the scope of the regulations governing the operation and management of undertakings for collective investment in transferable securities and alternative investment funds.

The CSSF also provides some explanations on the securitisation of commodities, e.g. precious metals or similar assets. In this context, it is specified that a securitisation transaction may take the form of a purchase of such assets, provided that the purpose of this transaction will be the financing or refinancing, whereby said assets will serve as a guarantee for the repayment of the funds invested in the securitisation vehicles. However, in no case may the securitisation vehicle take part in any activity by way of which it may be considered to be an undertaking in the sense of the European legislation.

The securitisation vehicle may also issue securities in the form of structured products, which give to the investors an exposure to the price fluctuations of the underlying commodities. For such investment products, the management of the securitisation vehicle should put in place and make available to the investors an "opting-out" mechanism which does not require that the securitisation vehicle will need to participate on a regular basis in the sale and purchase of commodities.

2.9. Possibilities of financing of the authorised securitisation vehicle

The securitisation vehicle is financed by issuing securities whose value or yield depends on the risks assumed by the securitisation vehicle or, if applicable, the acquisition vehicle when the securitised risks are held by an entity distinct from that which issues securities. However, the CSSF considers that it is acceptable that securitisation vehicles use loans or intra-group financing to pre-finance the acquisition of assets in view of their securitisation while waiting to proceed with the issuance of securities to investors (warehousing) at an appropriate time, taking into account market conditions.

In addition to financing through the issuance of securities, a securitisation vehicle may also use on a permanent but limited basis loan financing.

It is important to note that a loan can be used as an ancillary means of financing and/or when a credit line is temporarily necessary. A loan is however acceptable only if the financing of a securitisation transaction also includes the issuance of securities for an amount that is substantial compared to the loan funding. Loan borrowings are assessed by the CSSF on a case-by-case basis, taking into account in particular the characteristics of the securitisation transaction and the nature of the securitised risks. Especially for securitisation entities whose securities are issued to the public, the CSSF expects that the loan is limited and mainly used for structuring purposes. Investors must be sufficiently informed by the issue documents of 1) the additional risk they may incur due to the use of loans by the securitisation vehicle, 2) the existence of collateral granted in relation with the loans and 3) the maximum amount of loan funding and credit conditions.

2.10. Types of transferable securities that an authorised securitisation vehicle can issue

Securities issued by authorised securitisation vehicles are generally debt securities that are usually subject to foreign law. The articles of association may reserve the right to carry out securitisations through the issuance of shares. Securitisation vehicles may also issue warrants.

Furthermore securitisation vehicle may issue subordinated securities by using the technique of tranching whereby it issues securities whose repayment is subject to the prior repayment of other securities, certain claims or certain categories of shares.

By applying the principle of lex contractus (for debt securities), respectively lex societatis (for equity securities) in private international law, are considered as securities under the Securitisation Law, securities as defined in or considered by foreign law and / or securities within the meaning of the Directive on markets in financial instruments (MiFID).

2.11. Restrictions to the creation of the security interest by ASV

Concerning securities that may be granted by a securitisation vehicle over its assets, the CSSF refers to the wording of article 61 (3)4 of the Securitisation Law.

2.12. Asset management

The securitisation vehicle can manage its assets itself or entrust the management to third parties, including the seller, within the limits defined by the Securitisation Law.

The management must be performed in accordance with article 61 of the Securitisation Law, which requires that the articles of association of the securitisation vehicle provide, at least in principle, for the possibility and terms of sale of securitised assets and risks guaranteeing investors rights. However, the CSSF accepts that articles of association refer to the offering documents, which must then set out for each issue (a) the decision-making process and (b) the terms of the sale of securitised assets and risks.

2.13. Limits to the portfolio management

A securitisation vehicle should only (a) administer financial flows related to the securitisation transaction itself and (b) duly manage the securitised risks. Any activity likely to be qualified as conduct of business, such as for example the provision of services to third parties or trading in the underlying assets, is excluded.

2.14 Rules governing the compartments

Securitisation vehicles may be subdivided into separate compartments. The ring-fenced nature of each compartment means that the assets of a compartment are exclusively available to satisfy the claims of the investors who funded them and of the creditors whose claims arose in connection with those assets.

The possibility to create compartments shall be provided by the articles of association or the management regulations of the securitisation vehicle. The decision to do so rests with the board of directors or the management company and can be taken throughout the life of the securitisation. In case of securitisation vehicles with multiple compartments, the articles of association should normally include a clause laying down the method of allocation of general fees incurred by the securitisation vehicle as a whole and which are not related to a compartment.

Securitisation entities with multiple compartments are required to prepare financial statements including a breakdown of their assets and liabilities per compartment. In the presentation of the annual accounts and financial notes thereto, the financial data of each individual compartment must be clear and the certificate of the auditor will cover the compliance of the financial statements with the principle of true and fair view (image fidèle) both for the company and its compartments.

2.15. Different forms of representations of the investors

When a securitisation vehicle issues debt securities, the bondholders of such securities can be represented in accordance with articles 86 and following of the Law of 10 August 1915 on commercial companies. The CSSF also accepts the appointment of a trustee acting under foreign law for the benefit of investors, provided that the regime of this representation is defined in the agreements relating to the issuance of securities. When an authorised securitisation vehicle appoints a foreign law trustee to represent the interests of investors, the trustee must have sufficient organisation and human, financial and material resources in order to carry on its business in a professional manner. Information relating to the trustee is to be attached to the application file.

2.16. Voluntary dissolution and liquidation of the authorised securitisation vehicle

Securitisation vehicles are presumed to continue to exist for the purposes of their liquidation. The liquidation of a compartment of a securitisation vehicle does not affect other compartments and a compartment may therefore be separately liquidated. In the case of a securitisation company, the liquidation of the last compartment does not trigger the liquidation of the company itself.

2.17 Information to be submitted to the CSSF either on a regular basis or spontaneously

The CSSF mentions a list of various documents and information which it requires to be provided with in order for it to be able to exercise its prudential supervision.

2.18 Accounting rules applicable to securitisation vehicles with multiple compartments

Securitisation vehicles with multiple compartments are required to submit their annual accounts and notes thereto in such form that the financial information / statements regarding each separate compartment are comprehensible, so that its activity can be easily followed.

2.19 CSSF contact

The CSSF may be contacted by email to securitisation.question@cssf.lu.

Footnotes

1 Please refer to http://www.cssf.lu/titrisation/.

2 Securitisation is defined as «the transaction by which a securitisation vehicle acquires or assumes, directly or through another undertaking, risks relating to claims, other assets or obligations assumed by third parties or inherent to all or part of the activities of third parties and issues securities, whose value or yield depends on such risks".

3 Securitisation vehicles are « undertakings which carry out the securitisation in full, and undertakings which participate in such a transaction by assuming all or part of the securitised risks - the acquisition vehicles - , or by the issuing of securities to ensure the financing thereof - the issuing vehicles -, and whose articles of association, management regulations or issue documents provide that they are subject to the provisions of this law".

4 "the securitisation vehicle may not create security interests over its assets or transfer its assets for guarantee purposes, except to secure the obligations it has assumed for their securitisation or in favour of its investors, their fiduciary-representative or the issuing vehicle participating in the securitisation."

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.