The new regulations are particularly aimed at diversifying the funding sources for businesses in Europe and allocating risk more widely within the EU financial system. An increase in securitisation activity can help free up banks’ balance sheets, which would also allow for further lending to the real economy.

The regulations are based on drafts that the European Commission published two years ago as part of its action plan on building a capital markets union (see expert article and BaFinJournal of November 2015; only available in German) in order to sustainably revive the European securitisation market. Shortly after, the European Economic and Financial Affairs Council (Ecofin) published its negotiating position (see BaFinJournal of December 2015; only available in German).

Cross-sectoral securitisation regulation

The new Securitisation Regulation applies to all those involved in securitisation transactions, i.e. institutional investors, originators, sponsors, original lenders and securitisation special purpose entities (SSPEs). The Regulation creates, for the first time, a cross-sectorally applicable, common framework across the EU for the regulatory treatment of securitisations. In addition, it includes specific criteria for simple, transparent and standardised (STS) securitisations which, for instance, receive preferential treatment in the area of capital requirements for institutions.

The Regulation also defines key legal terms for regulating securitisation and stipulates that retail clients may invest in securitisation instruments under strict conditions only. According to the Regulation, SSPEs may only be established in third countries provided that they meet a number of minimum standards relating to money laundering prevention and cooperation on tax-related matters.

General ban on resecuritisation

The underlying exposures used in a securitisation shall in general no longer include securitisation positions. This is based on the fact that such resecuritisations have complex structures in some cases, making it difficult to assess the risks involved.

Resecuritisations will therefore remain permissible only if they serve the purpose of winding up a credit institution, an investment firm or a financial institution, avoiding the winding-up of such institutions, or preserving the interests of investors where the underlying exposures are non-performing.

Due diligence, risk retention and transparency requirements

The sector-specific due diligence, risk retention and transparency requirements for investors that were introduced in response to the financial crisis have been broadly maintained in the Securitisation Regulation despite some minor changes.

For instance, institutional investors may continue to hold securitisation positions only if they have fulfilled specific due diligence requirements first. They must also verify whether the credits giving rise to the underlying exposures were granted on the basis of sound criteria, processes and systems, and whether the originator, sponsor or original lender has retained risk in compliance with the Regulation's requirements. Further requirements relate to the due-diligence assessment of the risks involved in securitisation positions and the minimum requirements for taking securitisation positions into account for the purpose of internal risk management.

What is new is that entities without a broad business purpose that have been established or operate for the sole purpose of securitising exposures shall no longer be allowed to retain risk as the originator. Rather, this may only be done by an originator with a broader business purpose, the sponsor or the original lender. In addition, it is now expressly prohibited to select assets to be securitised with the aim of rendering the losses on such assets – measured over a maximum of four years after the securitisation – higher than the losses on comparable assets remaining on the balance sheet of the originator without disclosing this accordingly to investors.

The transparency requirements that will become applicable will require originators, sponsors and SSPEs to provide the holders of securitisation positions with comprehensive information either prior to them being exposed to the securitisation or as part of regular reporting, depending on the type of information. If a prospectus must be drawn up for a securitisation pursuant to the Prospectus Directive, this information must be made available using one of the securitisation repositories newly introduced by the Regulation. These will be registered with the European Securities and Markets Authority (ESMA) and will also be subsequently supervised. ESMA will further refine the details on how to apply for registration and the application format. Information on the individual securitised exposures that must be made available on a regular basis may be provided in aggregated form in some specific cases. This applies to asset-backed commercial papers (ABCPs) and customer, original lender or debtor information that is subject to specific data protection rules or contractual confidentiality obligations.

Framework for STS securitisations

A key element of the new Securitisation Regulation are the STS criteria which are based on the proposals put forward by the European Banking Authority (EBA) and a joint paper by the Basel Committee on Banking Supervision (BCBS) and the International Organization of Securities Commissions (IOSCO).

Due to significantly different structural features – particularly with regard to the maturities of securitisation positions transferred to the investors and the credit risk inherent to these securitisation positions that is borne by the sponsor – the Regulation comprises separate STS criteria for securitisation in the context of ABCP programmes that are fully supported by the sponsor. However, there are only a few differences between these criteria and the STS criteria for other securitisations.

The STS criteria are particularly aimed at ensuring that the structures of securitisations are not overly complex. All of the aspects that are relevant for institutional investors when assessing the risks involved must be laid down clearly, and all of the required information must be made available promptly. In addition, the STS criteria exclude the securitisation of non-performing exposures, for instance, but do not contain any additional requirements that are directly aimed at limiting the credit risk of securitised exposures.

In future, STS securitisations will have to be notified to the ESMA, which will then publish information about these securitisations on its website. When checking whether a securitisation meets the STS criteria, the originator, sponsor or SSPE may appoint a third party that is authorised by a national competent authority in accordance with a procedure specified in the Regulation to assess whether their securitisation complies with the STS criteria. Member States will be required, within a year of the entry into force of the Regulation, to designate one or more competent authorities to supervise the compliance with the STS requirements by originators, sponsors and SSPEs and the compliance with the requirements for third parties that are authorised to check STS compliance.

Sanctions regime

In case of breaches of certain of its requirements that occur either intentionally or negligently, the Regulation provides for a range of sanctions that the competent authorities have to be empowered to impose. A high degree of legal certainty with regard to the unspecified legal terms contained in the Regulation is therefore essential.

This is also a reason why the Securitisation Regulation invites the European supervisory authorities (ESAs) to draw up draft regulatory and implementing technical standards and issue guidelines for the Securitisation Regulation’s interpretation before it becomes applicable.

Transitional provisions

Securitisations involving securities issued on or after 1 January 2019 will be subject to the new regulatory regime in its entirety.

Less recent transactions will be subject to specific transitional provisions. For instance, securitisations that do not relate to ABCP securitisation positions and involve securities that were all issued before 1 January 2019 may be eligible for STS status provided that they meet a number of amended requirements.

Amendments to the CRR

The amendments to the CRR date back to the revisions to the Basel securitisation framework in 2014 and 2016 and implement these to a significant extent. The revisions were aimed at addressing a number of shortcomings unveiled by the financial crisis.

Key amendments relate to the hierarchy of approaches, the risk drivers to be used when applying the respective approach, and the applicable minimum capital requirements for securitisation positions. In addition, the capital requirements for simple, transparent and comparable (STC) securitisations have been defined in more detail. The criteria that apply to STC securitisations largely correspond to the STS criteria set forth in the Securitisation Regulation.

Hierarchy of approaches

In contrast to the hierarchy of approaches applicable thus far for the calculation of minimum capital requirements and in order to avoid over-reliance on external credit ratings, the Internal Ratings Based Approach for Securitisations (SEC-IRBA) is now at the top of the hierarchy in lieu of the External Ratings Based Approach. Institutions must apply the SEC-IRBA if they are able to calculate at least 95% of the underlying exposure amounts of a securitisation. If this is not the case, the Standardised Approach for Securitisations (SEC-SA) must be used. If the institution cannot use this approach either, the External Ratings Based Approach for Securitisations (SEC-ERBA) is to be used. Furthermore, the Internal Assessment Approach (IAA) may be applied in respect of unrated ABCP-related securitisation positions that fall within the scope of an IAA authorised by a supervisory authority. Securitisation positions to which none of the approaches above can be applied must be assigned a risk weight of 1,250%.

The application of the SEC-SA as the second approach in the hierarchy is subject to various exceptions and requirements. One requirement is that a minimum risk weight calculated in accordance with the SEC-SA must be reached in the case of both STS securitisations and other securitisations. In the case of securitisations backed by pools of auto loans, auto leases and equipment lease transactions, the SEC-ERBA is to be used at all times. In addition, institutions may choose to use the SEC-ERBA instead of the SEC-SA for all externally rated securitisation positions. Finally, the supervisory authorities may prohibit the application of the SEC-IRBA or the SEC-SA on a case-by-case basis.

Relevant risk drivers

Among the three hierarchy approaches that may be used for calculating the risk weight of a securitisation position, both the SEC-IRBA and, most recently, the SEC-SA are based on a supervisory formula. SEC-ERBA risk weights are determined based on a look-up table with which the risk weights to be applied can be deduced, depending on the external credit rating, seniority and maturity of a securitisation position.

Under the SEC-IRBA or the SEC-SA, the seniority of a securitisation position in the loss waterfall remains a significant risk parameter as do the capital requirements for the pool of the securitised exposures had those not been securitised. While the latter are to be calculated using the IRBA under the SEC-IRBA, the Standardised Approach for credit risk is to be applied under the SEC-SA.

In the case of the SEC-IRBA and the SEC-SA, the newly introduced parameter p indicates the extent to which the capital requirements for a given pool increase after securitisation compared with the level before securitisation. Another new aspect is the fact that the maturity of a securitisation position will be taken into account, which plays a role both in the SEC-IRBA and in the SEC-ERBA.

Minimum capital requirements

Due to the recalibration of risk weights resulting from the approaches to be applied, the capital requirements for more senior securitisation positions are set to rise while those for subordinated securitisation positions are expected to fall. Overall, the capital requirements for securitisation positions will increase but the procyclical effects associated with risk weights will decrease.

For the most senior securitisation positions, the collateralisation effect of subordinated positions is recognised, which means that for these most senior positions the applicable maximum risk weight is limited to the average weighted risk weight applicable to the securitised exposures. This even applies if the calculated risk weight is lower than the minimum risk weight to be applied using one of the approaches described above.

Preferential treatment for STS securitisation positions

Securitisations that qualify as STS securitisations under the Securitisation Regulation and also meet the other requirements for preferential treatment under the CRR are assigned more favourable risk weights in comparison as a result of the lower losses to be expected. For instance, the most senior STS securitisation positions are subject to a minimum risk weight of 10% instead of 15%.

The lower capital requirements for STS securitisations are generally limited to traditional securitisations, where the underlying exposures are transferred legally. However, the preferential treatment that applies to STS securitisations may also apply to synthetic securitisations to a limited extent. This means that originators can determine the risk weight of the most senior synthetic securitisation positions that has been retained based on the rules for STS securitisations if the synthetic securitisation fulfils certain STS criteria, is mostly backed by a pool of SME loans, and a guarantee or counterguarantee by certain guarantors, such as a central government or the central bank of a Member State, has been provided for the synthetic securitisation. Institutional investors may also act as guarantors if their guarantee commitment is backed with cash collateral.