Securitisation lawyers know that when structuring an STS issue, one of the “simplicity” requirements in Article 20 of the Securitisation Regulation is that the assets must be homogeneous (see further, “What is homogeneity and how do we know it when we see it?”). The detail is spelt out in the homogeneity RTS, which were onshored at Brexit and so apply in the UK and well as in the EU27, and this means that:
- they must be underwritten in accordance with standards that apply similar approaches for assessing associated credit risk;
- they must be serviced in accordance with similar procedures for monitoring, collecting and administering cash receivables on the asset side of the SSPE;
- one or more of the applicable “homogeneity factors” must apply; and, where the pool consists of corporate loans from more than one jurisdiction, the only available homogeneity factor is the one in Article 2(3)(a) of the RTS: that all the borrowers are either (i) “micro-, small- and medium-sized enterprises”, or are (ii) “other types of enterprises and corporates”.
The EBA needed to revise the existing homogeneity EU RTS to accommodate synthetic STS securitisations, and it had initially proposed that at the same time, it would change the corporate loan “homogeneity factor” from “micro-, small- and medium-sized enterprises” to refer to loans to corporates other than “large corporates” as defined in the CRR.
This touched a nerve with banks contemplating capital relief synthetic securitisations. They were concerned that it would prevent a mixed pool of SMEs, mid-caps and large corporates being securitised together from being classified as STS, even though the underwriting and servicing requirements were the same. This had not really been an issue before the advent of synthetic STS because of the lack of cash securitisations of corporate exposures. Because of the frequent lack of free transferability of corporate loans, these exposures are not done via a “true sale” (cash) securitisation but instead by a synthetic (“on balance sheet”) one. But once it became possible for synthetics to be badged as “STS”, it became an issue.
Some had pushed for all corporate exposures to be regarded as homogeneous, and to limit the criteria to similarity of underwriting and servicing standards. The final draft RTS, issued by the EBA on 14 February 2023, do not go that far, because the EBA takes the view that the homogeneity factors "are important determinants for the achievement of sufficient homogeneity taking into consideration their cash-flow, credit risk and contractual characteristics in line with the definition of homogeneity in Article 20(8)". However, the EBA has dropped the proposal to change the corporate loan “homogeneity factor” from “micro-, small- and medium-sized enterprises” to refer to loans to corporates other than “large corporates” as defined in the CRR, and the EBA has not included any definition of “SME” (and Article 1(c) of the RTS is tweaked so that the requirement for similarity of servicing standards may be met by reference either to the originator’s own procedures, or on the asset side of the SSPE). So, it is for the originator to determine in accordance with its own internal classification processes (as approved by their NCA), whether an obligor falls into that category or not. And bear in mind that SME and non-SME exposures may be combined in a single STS-compliant pool anyway, if the “jurisdiction” homogeneity factor is applied rather than “type of obligor”.
Two minor tweaks are to allow exposures to “enterprises” relating to auto loans and leases and credit cards to be homogeneous with exposures to individuals, if the same credit risk assessment is used for both, and likewise for credit facilities for personal, family or household consumption purposes. Existing STS issues will be grandfathered to the extent (if any) necessary.
The RTS now go to the EC and then scrutiny by the European Parliament and the Council, and barring accidents will come into effect later this year.
These RTS do not of course apply to the UK, but since the UK does not have an STS regime for synthetics, the two regimes – as regards STS cash securitisations – remain pretty much the same.