Securitisation markets across Europe faced challenges in 2023. Headwinds included high interest rates, inflation and other macroeconomic factors – not to mention a number of significant geopolitical events. Notwithstanding that, the securitisation markets have proved resilient and at the time of writing there are some early promising signs for 2024.

Meanwhile, regulatory evolution continued apace in 2023. This article will explore some of the main legal and regulatory developments that impacted the securitisation market in Ireland in 2023 and that are likely to impact the securitisation market in 2024. As a hub for securitisation activity in the EU, the legal framework in Ireland tracks both EU and domestic Irish legislation. The impact of new and proposed EU laws and regulations on Irish issuers of securitisation debt, and which will be of interest to market participants generally, are considered below. We also advised on the Irish tax implications for securitisation transactions and on the listing of securitisation transactions throughout 2023 – although such matters are outside the scope of this article.

Credit Servicing Directive

On 28 December 2021, the EU Directive on Credit Servicers and Credit Purchasers (EU/2021/2167) (the "Credit Servicing Directive") entered into force. EU member states were required to transpose the Credit Servicing Directive into national law by 29 December 2023. At the time of writing, the Irish Department of Finance (the "Department") has not yet completed the transposition of the Credit Servicing Directive under Irish law but has confirmed that it intends to meet this deadline.

The Credit Servicing Directive applies to the sales and servicing of non-performing loans issued by a credit institution established in the EU. EU credit institutions must comply with new pre-sale and post-sale disclosure and reporting obligations. Credit servicers must obtain an authorisation in their home EU member state and will then have the right to provide those services in other EU member states. In-scope credit purchasers do not need to be authorised although they must comply with certain obligations, including an obligation to appoint an authorised credit servicer, an EU credit institution or an EUsupervised consumer credit or mortgage creditor to service their non-performing loans with certain specified types of borrowers.

There is an obligation on EU member states to transpose the minimum requirements of the Credit Servicing Directive but a limited number of discretionary options have been identified for consideration by EU member states on certain issues in relation to the Credit Servicing Directive. In January 2023, the Department launched a public consultation on the transposition of the Credit Servicing Directive in Ireland. The consultation paper sought feedback on the ten points in the Credit Servicing Directive where EU member states have an element of discretion. In June 2023, the Department published its decisions following this consultation. The published outcome of the consultation sets out the initial decisions taken by the Department as to which discretions will be exercised in the context of the transposition of the Credit Servicing Directive into Irish law.

There is an existing Irish credit servicing regulatory framework (which was introduced by the Irish Consumer Protection (Regulation of Credit Servicing Firms) Act 2015 and has subsequently been further amended) under Part V of the Irish Central Bank Act 1997. Amongst other matters and although the Department decisions are subject to change, the published decisions document appears to clarify a couple of key items in terms of the likely impact of the Credit Servicing Directive on the existing credit servicing regulatory framework in Ireland.

Firstly, the Department has indicated that the existing Irish credit servicing regulatory framework will operate alongside this new EU regime (once introduced) – effectively creating two parallel regimes. The decisions document provides as follows: "It has been decided to maintain the existing domestic regulatory regime for credit servicers and credit purchasers (including the obligation on the holder of the legal title to the rights of the creditor to be authorised) for matters and agreements not expressly covered by the scope of the Directive".

Secondly, there will be an automatic recognition of existing Irish credit servicing firm authorisations under the Credit Servicing Directive. The decisions document provides that "entities carrying out credit servicing activities under the provisions of Part V of the Central Bank Act 1997 will be recognized as authorized credit servicers" under the Credit Servicing Directive.

Credit Securities Depository Regulation

Article 3 of the Central Securities Depository Regulation (CSDR) aims to centralise the ownership record and improve traceability in respect of transferable securities, by requiring them to be recorded in book-entry form. Since 1 January 2023, Irish issuers of certain transferable securities that are traded, or admitted to trading, on EEA trading venues have been required to represent new issuances in book-entry form. Issuers have until 1 January 2025 to convert legacy inscope securities still existing in certificated form into book-entry form.

In 2023, compliance with Article 3 of the CSDR was a central focus for Irish issuers of listed securities which are not traded through the clearing systems, and will continue to be so in 2024, as these issuers must not only ensure compliance for new issuances, but also turn their attention to the significant task of making legacy securities Article 3-compliant in advance of the January 2025 deadline.

In 2024, we will also see the entry into force of an amendment (brought in under Commission Delegated Regulation (EU) 2023/1626) to Article 19 of the regulatory technical standards on settlement discipline under the CSDR which will impose an obligation on central securities depositories (CSDs) to carry out the calculation, collection and distribution of cash penalties for settlement fails on cleared transactions. While this obligation currently lies with central counterparties (CCPs), following a European Securities and Markets Authority (ESMA) consultation process, it was decided that CSDs should take over this process, as they already have obligations in relation to the penalties process for settlement fails for uncleared transactions. This amendment also aims to reduce operational risk, technical complexities and costs. The change will not take effect until 2 September 2024, in order to give CCPs and CSDs time to implement any necessary changes to their internal systems and procedures.

Lastly, a provisional agreement was reached between the Council of the EU and the European Parliament on 27 June 2023 on a proposed CSDR "Refit" regulation. It was formally approved by the European Parliament on 9 November 2023 and by the Council of the EU on 27 November 2023. Publication of the CSDR "Refit" regulation in the Official Journal is still awaited at time of writing. The updated regime is intended to reduce the financial and regulatory burden on CSDs and improve their ability to operate across borders. The key areas it will focus on are:

  • a simpler CSD passporting regime;
  • improving co-operation between supervisory authorities;
  • banking-type ancillary services for CSDs
  • an amended settlement discipline regime; and
  • the oversight of third country CSDs.

Securitisation Regulation

There were a number of developments regarding Regulation (EU) 2017/2402 (the "Securitisation Regulation") throughout 2023 and which are of relevance to Irish issuers. Some of the most important are outlined below.

Risk retention RTS

On 18 October 2023, Commission Delegated Regulation (EU) 2023/2175 (the "Risk Retention RTS") was published in the Official Journal. It entered into force on 7 November 2023 and replaced the existing 2014 regulatory technical standards under the Capital Requirements Regulation.

The key issues dealt with under the Risk Retention RTS include the following:

  • Hedging – the Risk Retention RTS provide that:
    1. a retention holder is entitled to hedge against risks other than the credit risk of the retained securitisation positions;
    2. edging is permitted where it was undertaken prior to the securitisation as a legitimate means of credit granting or risk management subject to investors not being disadvantaged; and
    3. where a retention holder retains more than 5% of the economic interest, hedging against any retained interest exceeding 5% is permissible.
  • NPE securitisations – the Risk Retention RTS clarify that the requirement to retain a minimum material net economic interest of 5% can be calculated against the net value of the non-performing exposures (NPEs) rather than the nominal amount.
  • Sole purpose test – in order for an entity not to be deemed as having the sole purpose of securitising assets:
    1. it must have the business strategy and capacity to meet its payment obligations from income that is not derived from the securitised exposures; and
    2. its management must have the relevant experience to pursue the established business strategy.
  • Own-issued instruments – providing a securitisation is comprised of solely own-issued debt instruments, risk retention requirements will not apply.
  • Change of retention holder – the Risk Retention RTS clarify that the entity retaining the risk can be changed in certain situations (eg, if the retention holder becomes insolvent, is no longer in a position to act as the retention holder for reasons beyond the control of the retainer or its shareholders, or if retention is on a consolidated basis).

EBA consultation on STS synthetic securitisations

The consultation relating to guidelines on the simple, transparent and standardised (STS) criteria for on-balance-sheet securitisations closed on 7 July 2023 with the European Banking Authority (EBA) committing to publish their final draft guidelines by Q1 2024.

These draft guidelines are expected to comprise of three separate guidelines on the following topics:

  • amended guidelines for asset backed commercial paper ("ABCP");
  • amended guidelines for non-ABCP; and
  • guidelines relating to synthetic securitisations which became eligible for STS status following an amendment to the Securitisation Regulation in April 2021.

EU Capital Markets Union

The European Commission published a series of proposed measures in December 2022 to further develop the EU's Capital Markets Union, including measures:

  • to make EU clearing services more attractive and resilient (the "Derivatives Proposal");
  • to harmonise certain corporate insolvency rules across the EU (the "Insolvency Proposal"); and
  • to alleviate, through a new Listing Act, the administrative burden for companies (particularly SMEs) on stock exchanges (the "Listing Act Proposal").

The Derivatives Proposal extends beyond a focus on central clearing and makes a number of other amendments to the European Market Infrastructure Regulation (EMIR) as part of a broader review colloquially known as "EMIR 3.0". For example, the Derivatives Proposal amends the EMIR to provide non-financial counterparties that become subject for the first time to the obligation to exchange collateral for OTC derivative contracts not cleared by a central counterparty, with an implementation period of four months in order to negotiate and test the arrangements to exchange collateral.

The Insolvency Proposal lays down harmonised rules for insolvency proceedings, including on the annulment of transactions entered into by a debtor prior to insolvency (avoidance actions).

Finally, the Listing Act Proposal extends beyond enabling SMEs to access the capital markets and includes proposed amendments to the Prospectus Regulation, the Market Abuse Regulation and the Markets in Financial Instruments Directive.

At the time of writing, the Derivatives Proposal remains under review by the European Parliament and the Council of the EU. The Insolvency Proposal is currently at first reading before the Council of the EU. Lastly, the Council of the EU is urging to finalise the Listing Act Proposal before the end of the current legislative cycle in June 2024 and this proposal continues to progress through the legislative process.

Whilst the proposals are subject to change, it is important that corporates and financial market participants continue to monitor developments in 2024. The proposals are arguably of particular relevance to Ireland given its central role in EU securitisation transactions.

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