Amendments to the Securitisation Regulation and Capital Requirements Regulation and Publication of ESAS' Opinion and Q&A

Jurisdictional scope of the application of the obligations:

Current regulation and oversights in the drafting

ESAs’ Opinion

Where all sell-side parties¹ are outside of the EU

Articles 6,7 and 9 of the Securitisation Regulation (structural and quality requirements) do not directly apply. However, in practice the securitisation may still need to comply with the requirements indirectly by virtue of Article 5.

Article 5 is a due diligence obligation imposed on institutional investors. Where the investor verifies that the sell-side party in the third country has failed to comply with any applicable requirement therein, it may not invest in the securitisation. 

Where the securitisation features all of the sell-side parties in a third country then the Articles do not apply directly to that securitisation but rather indirectly through EU investor verification. See further below. 

Where some sell-side entities are outside the EU

Questions are raised as to how such transactions would comply with Articles 6,7 and 9 taking into account that the designated competent authority would have no powers to enforce compliance on these Articles on the parties to the securitisation located outside of the EU.

The ESAs are of the opinion that the Securitisation Regulation does not require that all securitisation’s sell-side parties need to be located in the EU, and provide two potential interpretations;

Option 1: Treat the securitisation as not being directly subject to the requirements of Articles 6, 7 and 9, but as per the above scenario where all sell-side parties are outside of the EU the securitisation would still be indirectly subject to those requirements by virtue of the investor verification requirements laid out in Article 5.

Any breach of the relevant Articles that remained uncured would render the securitisation non-compliant with the Securitisation Regulation, as a result the EU institutional investor would not be able to invest, of if the breach happened after issuance the EU institutional investor should sell the notes.

Option 2: Without prejudice and in addition to the investor verification, treat the EU-based sell-side party as directly responsible for complying with the obligations set out in Articles 6, 7 and 9.

The ESAs recommends option 2 to the Commission, in the event that the Commission determines that the option 2 interpretation may not be upheld under the current Securitisation Regulation, then the ESAs invites the Commission in the upcoming securitisation framework review to propose the necessary amendments to those Articles to allow for option 2.

Where EU institutional investors are investing in securitisations with a third country nexus

Whilst article 5 (verification duties on the institutional investors) is silent on the location of the transaction parties, the obligation to verify that the sell-side party has complied with Article 7 may be understood to apply to third country securitisations.

Such an approach could make it extremely difficult for institutional investors based in the EU to invest in third country securitisations, as it is unlikely that the third country law governing the relevant securitisation would comply with all the requirements imposed by the Securitisation Regulation (in particular the transparency requirements in Article 7).

The ESAs call for the European Commission to assess the feasibility of incorporating a third country equivalence regime for transparency requirements in relation to third country securitisations in order to add some much needed flexibility to the framework. 

Where the investors are third country subsidiaries of EU institutional investors

Third country subsidiaries of EU institutional investors are indirectly captured by Article 5 of the Securitisation Regulation by virtue of the obligation imposed by Article 14 of the Capital Requirements Regulation (CRR) on the EU-based parent company. There is uncertainty as to whether the third country subsidiary needs to comply with Article 5 to the same extent as if it were itself an EU established institutional investor.

The parent company is obliged to ensure that the third country subsidiary is compliant with the Securitisation Regulation. As a result third country subsidiaries of EU parents face the same challenges as an EU institutional investor investing in third country securitisation, as set out above. However these challenges may be compounded as a result of the weaker links with the EU, creating a significant compliance burden on and competitive disadvantage for EU headed groups with operations in third countries compared with local investors.

The ESAs are of the opinion that Article 14 of the CRR should be amended so that in addition to the EU based parent ensuring full compliance with the due diligence requirements, there be an additional option to ring fence the relevant third country subsidiary.  This would allow the EU parent to ring-fence from its EU group, the third country subsidiary where it is investing in a third country securitisation. Where such ring-fencing is not possible or unduly burdensome, the ESAs propose that the competent authority should be able to impose proportionate investment limits on the subsidiary’s investments in third country securitisations. 

Where the institutional investor is an alternative investment fund manager (AIFM)

There is current uncertainty surrounding the application of the definition of institutional investors under the Securitisation Regulation to non-EU AIFMs. A literal reading of the definition suggests that if an AIFM manages and/or markets one or more AIF in the EU it will fall within the scope of the definition and as a result subject to the verification requirements under Article 5, even where the marketing activities in the EU are limited.

The ESAs are of the opinion that the application of the Securitisation Regulation to non-EU AIFMs should be clarified and that the Securitisation Regulation and AIFMD amended to ensure that non-EU AIFMs comply with the required due diligence obligations set out in Article 17 of the AIFMD and Article 5 of the Securitisation Regulation.

They seek clarification on i) whether third country AIFMs who market AIFs in the EU should be regarded as “institutional investors”; ii) the powers of EU national regulators to enforce due diligence requirements on third country AIFMs; iii) whether “sub threshold”² are considered to be “institutional investors” and therefore within scope of the due diligence requirements; iv) the ability of a fund manager and a sponsor to delegate their obligations under the Securitisation Regulation to third country AIFMs.

Heading of Q&A

Response

Summary of the underlying documentation

The ESAs have confirmed that Article 7(1) which provides that the sell-side parties may provide a summary of the documentation concerned is only available where disclosure of the underlying documentation would result in a breach of national and EU confidentiality and data protection law. In all other cases, as per Article 7(1)(b), the documentation shall be provided in full.

Required level of completeness of pre-pricing information

Article 7(1) requires that certain documents, including the offering document and transactions documents, are made available before pricing. The ESAs have confirmed that information that is to be made available before pricing must be at least in draft or initial form.

The ESAs further clarified that they expect that only minor changes should be made post-pricing, including financial variables (e.g. interest rates, final issued amounts), time data (e.g. optional redemption dates), and reference data (e.g. ISIN codes). 

Underlying exposure documentation

The ESAs have clarified that what is required to comply with Article 7(1)(b), to make available all underlying documentation that is essential for the understanding of the transaction, will vary depending on the nature of the transaction. For example, whilst a facility agreement, intercreditor agreements and hedging agreements may not be essential for the understanding of a securitisation, a different approach may be taken in a commercial mortgage-backed securities (CMBS) transaction with only a few large underlying exposures.

STS requirements on transaction documentation

The ESAs have confirmed that the requirements under Article 21(9) to detail certain information clearly within the specified transaction documents in order for a securitisation to be considered “standardised”, falls to the originator and sponsor.

Provision of STS+ certification by third party verifier agent (TPV)

STS+ certification is granted by TPVs when both the STS requirements set out in the Securitisation Regulation and the additional criteria required for preferential treatment under legislation such as the CRR is met. In conducting the STS+ assessment certification the TPV is not considered to be giving advice to the originator, sponsor or SSPE within the meaning of Article 28 (1)(c ) of the Securitisation Regulation.

The ESAs confirmed that by virtue of Article 28(1) TPVs must notify their competent authorities of any STS+ assessments as this is considered a material change to the information that a TPV is required to provide to the competent authority.

The ESAs do not consider that the provision of STS+ certification services should generally require specific governance arrangements beyond those required by Article 28(1).