DLA Piper commentaries

Do EU investors need loan level data to invest in non-EU issues?

A major uncertainty in the early months and years of the Securitisation Regulation concerned what transparency it (indirectly) required non-EU issuers to provide to potential EU investors so that they could do their due diligence under Article 5(1)(e)

Unfortunately for EU investors, that uncertainty was largely resolved in an unhelpful way by the European Commission's Article 46 review issued on 11th October 2022.  The position for UK investors looking to invest in non-UK issues is significantly better.

By way of a reminder:

  • Article 5 applies to EU institutional investors in securitisations, and Article 5(1)(e) requires the originator, sponsor or SSPE to have "where applicable, made available the information required by Article 7 in accordance with the frequency and modalities provided for in that Article". 
  • Article 7’s “modalities” include using specific templates issued under the disclosure ITS and the associated Annexes
  • Article 7 cannot apply to non-EU issuers without being extra-territorial (which on first principles it should not be, and other parts of the text support this).
  • However, even though Article 7 does not apply directly to an issue, it seems that the issue does have to comply with it indirectly in order to allow non-EU issuers to invest. 

The key question had been what “where applicable” meant in Article 5(1)(e), and the problem was that there were two ways to interpret it, neither of which was satisfactory:

  • if it meant “in a case where Article 7 applies to the issue directly” then some would argue that you could get round the disclosure requirements easily by having a non-EU issue denominated in EUR with EU assets, which would drive a coach and horses through the regulation - although, against this, Recital (9) says “it is essential that institutional investors be subject to proportionate due-diligence requirements…” and Article 5(3) and (4) contain general requirements on EU investors to do proper due diligence before investing, so this was not the "coach and horses" that some might argue it was;
  • if it meant “as the case may be”, you would have an extra-territorial effect that would prevent EU investors buying non-EU issues, thus preventing them diversifying their investments and fragmenting the market.

Different investors had taken different views on this, and in particular some had been happy to buy "EU Lite", presumably based on good faith reliance on legal advice.  The ESAs' Joint Opinion was obviously very unhelpful, but even then the debate raged on and the EBAs views were not generally accepted. 

For EU investors

What changed on 11th October 2022 was the European Commission pretty much endorsing these views, and its views are almost certainly going to be followed by the EU27 national competent authorities. 

The big sticking point had concerned loan-level data disclosure, as Article 7 requires.  In the USA (and apparently Australia and Japan too) this kind of granular loan level disclosure is not the norm.  In the USA, there is no loan level data disclosure required for issues under Rule 144A, just aggregated data; public (prospectus) issues require asset-level data for RMBS, CMBS, and auto loans/leases, but not for credit cards.

The EC received several communications during the course of 2019, such as from AFME, the US-based Structured Finance Association and the FMLC, requesting it to provide clarity, and the 2020 Work Programme of the joint committee of the ESAs identified "the jurisdictional scope of application" as one of the issues requiring their attention, and on 25 March 2021 the ESAs' Joint Opinion was issued.  Unfortunately for the market, it came to the conclusion that, given the reference to complying with the “frequency and modalities” of disclosure referred to in Article 7, a third country securitisation would have to use ESMA templates or, at a minimum, templates with the same content, and that those be disclosed with the same frequency as that of ESMA’s.  The ESAs therefore concluded that:

"it seems very unlikely, or at least very challenging, that EU-located institutional investors would currently be able to discharge the requirement set out in Article 5(1)(e) of the SECR in relation to third country securitisations, as a result of which they will not be able to invest in them". 

The ESAs did admit that "the current verification duty laid out in Article 5(1)(e) of the SECR may be overly inflexible for third country securitisations" and recommended that it "should be reassessed to determine whether more flexibility could be added to the framework without undermining its ultimate objective".

The European Commission was thought to have been disappointed at the muted effect on the securitisation market that had been seen since the Securitisation Regulation came into force, and it seems to remain keen to improve matters, but the EU legislative process can be lengthy, and not all factions within the European Parliament are predisposed to look favourably on securitisation.  

Two possibilities for reform had already been aired before the ESAs' Opinion:

  • one, mooted during 2020 in some quarters, was to promote the idea of "substantive compliance", i.e. that disclosure would be made, even if not on the prescribed official ESMA templates, but the SFA letter (see above) had said that this would still be a problem for its USA-based members.  The revised UK position (see below) is somewhat similar to this;
  • in June 2020, the High Level Forum on Capital Markets Union's final report invited the EC to "allow an EU-regulated investor in third-country securitisations to determine [i.e. for itself] whether it has received sufficient information to meet the requirements of Article 5... to carry out its due diligence obligation proportionate to the risk profile of such securitisation" and suggested "clarificationthat Article 5(1)(e) does not apply to securitisations with non-EU originators, sponsors or SSPEs, and that, instead, the EU investor must receive "sufficient information to meet the requirements for due diligence proportionate to the risk profile of the securitisation exposure".

The ESAs' Joint Opinion of 25 March 2021 suggested a third approach:

  • the EUSR should be amended to include an "equivalence" regime for transparency requirements in relation to third country securitisations i.e. its disclosure obligations should require:
    • "substantially the same information" as that required by Article 7
    • with "sufficient frequency” even if the exact frequency of disclosure is not exactly the same as under Article 7
    • with a “modality” of disclosure in the form of disclosure templates of "similar quality and granularity" as those set out in the Disclosure RTS and the Disclosure ITS
  • an EU institutional investor could then comply with Article 5(1)(e) by verifying disclosure compliance either with Article 7 or the equivalent disclosure regime.

This was in some respects similar to "substantive compliance", and it would not have satisfied the market, because it would require the same granularity of disclosure and so run into the same problem in cases where that is not the market norm in the place where the issue takes place.  In any event, the Article 46 review paid short shrift to any equivalence solutions.  

The EC accepted in the Article 46 review that this “de facto excludes EU institutional investors” and that “the issue might deserve thorough consideration in the context of a future amendment of the Securitisation Regulation”. 

Until that day arrives, the EC can only offer some lukewarm comfort, that the envisaged reduction in the Article 7 disclosure requirements - with the prospect of a significantly reduced reporting requirement for any "private" issues (i.e. that are issued without having to issue a prospectus - which would include most US CLOs) “might help reduce the competitive disadvantage for EU institutional investors”. 

Within two days of the Article 46 review being issued, ESMA began the process of consulting the market, and specifically one of its questions was about what asset classes would not need to have loan level data.  This was promising, and once it is implemented, the problems should pretty much go away, but in the meantime we are left in an awkward position. 

For UK investors

For UK investors, as from 1st January 2021 the problem went away, as regards UK investors buying into EU issues, because the legislation which implemented the Securitisation (Amendment) (EU Exit) Regulations 2019 improved the drafting in Article 5(1)(e), so that (e) applied in relation to originators, sponsors and SPPEs established in the UK, and a new sub-clause (f) applied to those established elsewhere, requiring "substantially" the same information, which contains some latitude and does not require use of the Article 7 templates.  Since the EU/UK article 7 disclosure requirements are unmatched by anything in the USA or Japan or elsewhere in the world, Article 5(1)(f) was of no help to help UK investors other than with regard to EU issues; US issues wanting to attract UK investors would still have "substantially" to meet relevant UK standards. 

We said at the time that it would be better if the UK were to move away from the Article 5(1)(e) and (f) requirements and replace them with a more general and flexible principle, such as is to be found in Article 5(3) and (4), and this has now happened as of 1st November 2024, with the old due diligence provisions in Article 5 of the UK Securitisation Regulation being repealed and replaced by provisions in the PRA and FCA rulebooks (and the amended Securitisation Regulations 2024 for occupational pension investors) which replace Article 5(1)(e) and (f) of the Securitisation Regulation with a “more principles-based and proportionate approach” (with Articles 5(3) and 5(4) being retained). 

So, instead of requiring a potential investor to verify that information will be disclosed in accordance with the detailed requirements of Article 7, we have identical requirements – see our due diligence comparison table for the detail - that they must verify that the sell-side “has made available sufficient information to enable the institutional investor independently to assess the risks of holding the securitisation position and has committed to make further information available on an ongoing basis, as appropriate”. 

The UK rules then go on to specify a minimum level of disclosure (which tracks the Basel requirements) but does not require its disclosure to be in any particular form or using any particular template.  So this is significant for UK investors wanting to invest in US securitisations and other non-EU securitisations (EU securitisations will be subject to more than enough disclosure in any event), and in particular investors must obtain “sufficient information” but it does not need to be on prescribed templates, and does not necessarily have to be loan-level. 

The existing Article 7 disclosure requirements will be retained for UK sell-side parties.  

This is to be welcomed, because it should reduce the compliance cost for PRA-authorised institutional investors’ due diligence, and will do away with the current legal uncertainty over what due diligence is required in relation to overseas securitisations, which will save some legal fees, and provide a boost for UK investors, and US sell-side parties.

Last update 15/5/2024

These comparison tables show at a glance the differences between the EU and UK rules and regulations.  

Key definitions / Due diligence / Risk retention / Transparency/ Credit-granting criteria / STS requirements

Here you will find links to all related EU and UK laws, technical standards, rulebooks, and other useful background materials.

Securitisation at DLA Piper

EUSR Article 9

FCA

PRA

Criteria for credit-granting

1. Originators, sponsors and original lenders shall apply to exposures to be securitised the same sound and well-defined criteria for credit-granting which they apply to non-securitised exposures. To that end, the same clearly established processes for approving and, where relevant, amending, renewing and refinancing credits shall be applied. Originators, sponsors and original lenders shall have effective systems in place to apply those criteria and processes in order to ensure that credit-granting is based on a thorough assessment of the obligor’s creditworthiness taking appropriate account of factors relevant to verifying the prospect of the obligor meeting his obligations under the credit agreement.

8.2 Granting of credit

8.2.1 R

Originators, sponsors and original lenders shall apply to exposures to be securitised (unless they are trade receivables not originated in the form of a loan) the same sound and well-defined criteria for credit-granting which they apply to non-securitised exposures. To that end, the same clearly established processes for approving and (where relevant) amending, renewing and refinancing credits shall be applied.

8.2.2 R

Originators, sponsors and original lenders shall have effective systems in place to apply those criteria and processes in order to ensure credit granting is based on a thorough assessment of the obligor’s creditworthiness, taking appropriate account of factors relevant to verifying the prospect of the obligor meeting the obligor’s obligations under the credit agreement.

ARTICLE 9 CRITERIA FOR CREDIT-GRANTING

1. Originators, sponsors and original lenders shall apply to exposures to be securitised (unless they are trade receivables not originated in the form of a loan) the same sound and well-defined criteria for credit-granting which they apply to non-securitised exposures. To that end, the same clearly established processes for approving and, where relevant, amending, renewing and refinancing credits shall be applied. Originators, sponsors and original lenders shall have effective systems in place to apply those criteria and processes in order to ensure that credit-granting is based on a thorough assessment of the obligor’s creditworthiness taking appropriate account of factors relevant to verifying the prospect of the obligor meeting the obligor’s obligations under the credit agreement.

By way of derogation from the first subparagraph, with regard to underlying exposures that were non-performing exposures at the time the originator purchased them from the relevant third party, sound standards shall apply in the selection and pricing of the exposures.

[No equivalent]

[No equivalent]

The UK rules give effect to recital (14) of the EUSR, i.e. that the credit-granting criteria do not apply to the origination of trade receivables not in the form of a loan.

2. Where the underlying exposures of securitisations are residential loans made after the entry into force of Directive 2014/17/EU, the pool of those loans shall not include any loan that is marketed and underwritten on the premise that the loan applicant or, where applicable, intermediaries were made aware that the information provided by the loan applicant might not be verified by the lender.

8.3 Verification arrangements

8.3.1 R

Where the underlying exposures of securitisations are residential loans made on or after 20 March 2014, the pool of those loans shall not include any loan that is marketed and underwritten on the premise that the loan applicant or, where applicable, intermediaries were made aware that the information provided by the loan applicant might not be verified by the lender.

2. Where the underlying exposures of securitisations are residential loans made on or after 20 March 2014, the pool of those loans shall not include any loan that is marketed and underwritten on the premise that the loan applicant or, where applicable, intermediaries were made aware that the information provided by the loan applicant might not be verified by the lender.

3. Where an originator purchases a third party’s exposures for its own account and then securitises them, that originator shall verify that the entity which was, directly or indirectly, involved in the original agreement which created the obligations or potential obligations to be securitised fulfils the requirements referred to in paragraph 1.

8.3.2 R

Where an originator purchases a third party’s exposures for its own account and then securitises them, that originator shall verify that the entity which was, directly or indirectly, involved in the original agreement which created the obligations or potential obligations to be securitised fulfils the requirements referred to in SECN 8.3.1R (or equivalent PRA rules).

3. Where an originator purchases a third party’s exposures for its own account and then securitises them, that originator shall verify that the entity which was, directly or indirectly, involved in the original agreement which created the obligations or potential obligations to be securitised fulfils the requirements referred to in paragraph 1 of this Article (or equivalent FCA rules).

4. Paragraph 3 does not apply if;

8.3.3 R

SECN 8.3.2R does not apply if:

4. Paragraph 3 of this Article does not apply if;

(a) the original agreement, which created the obligations or potential obligations of the debtor or potential debtor, was entered into before the entry into force of Directive 2014/17/EU; and

(1) the original agreement, which created the obligations or potential obligations of the debtor or potential debtor, was entered into before 20 March 2014; and

(a) the original agreement which created the obligations or potential obligations of the debtor or potential debtor was entered into before 20 March 2014; and

(b) the originator that purchases a third party’s exposures for its own account and then securitises them meets the obligations that originator institutions were required to meet under Article 21(2) of Delegated Regulation (EU) No 625/2014 before 1 January 2019.

(2) the originator that purchases a third party’s exposures for its own account and then securitises them meets the obligations that originator institutions were required to meet under Article 21(2) of Commission Delegated Regulation (EU) No 625/2014 before 1 January 2019.

(b) the originator that purchases a third party’s exposures for its own account and then securitises them meets the obligations that originators were required to meet under Article 21(2) of Commission Delegated Regulation (EU) No 625/2014 before 1 January 2019.

EUSR Article 5

FCA SECN 4.2 to 4.5

PRA Chapter 2, Article 5

Securitisation Regulations 2024, as amended by the Securitisation (Amendment) Regulations 2024

Applies to EU investors

Applies to FCA-regulated firms

Applies to PRA-regulated firms

Applies to the trustees and managers of UK occupational pension schemes

Due-diligence requirements for institutional investors

SECN 4.2 Before holding a securitisation position

Article 5 Due-diligence requirements for institutional investors

Securitisation Regulations 2024 regulation 32B

1. Prior to holding a securitisation position, an institutional investor, other than the originator, sponsor or original lender, shall verify that:

4.2.1 R

(1) Prior to holding a securitisation position, an institutional investor, other than the originator, sponsor or original lender, shall verify that:

1. Prior to holding a securitisation position, an institutional investor, other than the originator, sponsor or original lender, shall verify that:

32B. (1) Before holding a securitisation position, the trustees or managers of an occupational pension scheme who are not the originator, sponsor or original lender must verify the following matters —

(a) where the originator or original lender established in the Union is not a credit institution or an investment firm as defined in points (1) and (2) of Article 4(1) of Regulation (EU) No 575/2013, the originator or original lender grants all the credits giving rise to the underlying exposures on the basis of sound and well-defined criteria and clearly established processes for approving, amending, renewing and financing those credits and has effective systems in place to apply those criteria and processes in accordance with Article 9(1) of this Regulation;

(a) where the originator or original lender is established in the United Kingdom and is not a CRR firm or FCA investment firm, the originator or original lender grants all the credits giving rise to the underlying exposures (unless they are trade receivables not originated in the form of a loan) on the basis of:

(i) sound and well-defined criteria; and

(ii) clearly established processes for approving, amending, renewing and financing those credits, and has effective systems in place to apply those criteria and processes, in accordance with SECN 8.2 (or equivalent PRA rules);

(a) where the originator or original lender is established in the UK and is not a CRR firm institution or an FCA investment firm as defined in points (2A) and (2AB) of Article 4(1) of CRR, the originator or original lender grants all the credits giving rise to the underlying exposures (unless they are trade receivables not originated in the form of a loan) on the basis of sound and well-defined criteria and clearly established processes for approving, amending, renewing and financing those credits and has effective systems in place to apply those criteria and processes in accordance with Article 9(1) of this Chapter (or equivalent FCA rules);

(a) where the originator or original lender is established in the United Kingdom and is not a CRR firm or an FCA investment firm, that the originator or original lender —

(i)  grants all the credits giving rise to the underlying exposures, unless they are trade receivables not originated in the form of a loan, on the basis of sound and well-defined criteria and clearly established processes for approving, amending, renewing and financing those credits in accordance with any applicable FCA or PRA rules relating to credit-granting requirements, and

(ii)  has effective systems in place to apply those criteria and processes in accordance with any applicable FCA or PRA rules relating to credit-granting requirements;

(b) where the originator or original lender is established in a third country, the originator or original lender grants all the credits giving rise to the underlying exposures on the basis of sound and well-defined criteria and clearly established processes for approving, amending, renewing and financing those credits and has effective systems in place to apply those criteria and processes to ensure that credit-granting is based on a thorough assessment of the obligor’s creditworthiness;

(b) where the originator or original lender is not established in the United Kingdom, the originator or original lender grants all the credits giving rise to the underlying exposures (unless they are trade receivables not originated in the form of a loan) on the basis of:

(i) sound and well-defined criteria; and

(ii) clearly established processes for approving, amending, renewing and financing those credits, and has effective systems in place to apply those criteria and processes, to ensure that credit granting is based on a thorough assessment of the obligor’s creditworthiness;

(b) where the originator or original lender is not established in the UK, the originator or original lender grants all the credits giving rise to the underlying exposures (unless they are trade receivables not originated in the form of a loan) on the basis of sound and well-defined criteria and clearly established processes for approving, amending, renewing and financing those credits and has effective systems in place to apply those criteria and processes to ensure that credit-granting is based on a thorough assessment of the obligor’s creditworthiness;

(b) where the originator or original lender is not established in the United Kingdom, that the originator or original lender —

(i)  grants all the credits giving rise to the underlying exposures, unless they are trade receivables not originated in the form of a loan, on the basis of sound and well-defined criteria and clearly established processes for approving, amending, renewing and financing those credits, and

(ii)  has effective systems in place to apply those criteria and processes to ensure that credit-granting is based on a thorough assessment of the obligor’s creditworthiness;

(c) if established in the Union, the originator, sponsor or original lender retains on an ongoing basis a material net economic interest in accordance with Article 6 and the risk retention is disclosed to the institutional investor in accordance with Article 7;

(c) if established in the United Kingdom, the originator, sponsor or original lender retains on an ongoing basis a material net economic interest in accordance with SECN 5 (or equivalent PRA rules) and the risk retention is disclosed to the institutional investor in accordance with SECN 6, SECN 11 and SECN 12 (or equivalent PRA rules);

(c) if established in the UK, the originator, sponsor or original lender retains on an ongoing basis a material net economic interest in accordance with Article 6 of this Chapter and Chapter 4 (or equivalent FCA rules) and the risk retention is disclosed to the institutional investor in accordance with Article 7 of this Chapter and Chapters 5 and 6 (or equivalent FCA rules);

(c) where the originator, sponsor or original lender is established in the United Kingdom, that —

(i)  the originator, sponsor or original lender continually retains a material net economic interest in accordance with any applicable FCA or PRA rules relating to risk retention requirements, and

(ii)  that risk retention is disclosed to the trustees or managers of the occupational pension scheme in accordance with any applicable FCA or PRA rules relating to transparency requirements;

(d) if established in a third country, the originator, sponsor or original lender retains on an ongoing basis a material net economic interest which, in any event, shall not be less than 5 %, determined in accordance with Article 6, and discloses the risk retention to institutional investors;

(d) if not established in the United Kingdom, the originator, sponsor or original lender retains on an ongoing basis a material net economic interest which, in any event, must not be less than 5%, determined in accordance with SECN 5 (or equivalent PRA rules), and discloses the risk retention to institutional investors; and

(d) if not established in the UK, the originator, sponsor or original lender retains on an ongoing basis a material net economic interest which, in any event, shall not be less than 5%, determined in accordance with Article 6 of this Chapter and Chapter 4 (or equivalent FCA rules), and discloses the risk retention to institutional investors;

(d) where the originator, sponsor or original lender is not established in the United Kingdom —

(i)  that the originator, sponsor or original lender continually retains a material net economic interest which, in any event, must not be less than 5%, determined in accordance with rules made by the FCA or PRA relating to risk retention requirements which would be applicable FCA or PRA rules were the originator, sponsor or original lender to be established in the United Kingdom, and

(ii)  that the originator, sponsor or original lender discloses the risk retention to the trustees or managers of the occupational pension scheme;

(e) the originator, sponsor or SSPE has, where applicable, made available the information required by Article 7 in accordance with the frequency and modalities provided for in that Article;

(e) the originator, sponsor or SSPE has made available sufficient information to enable the institutional investor independently to assess the risks of holding the securitisation position, and has committed to make further information available on an ongoing basis, as appropriate.

(e) the originator, sponsor or SSPE has made available sufficient information to enable the institutional investor independently to assess the risks of holding the securitisation position and has committed to make further information available on an ongoing basis, as appropriate.

(e) that the originator, sponsor or securitisation special purpose entity —

(i)  has made available sufficient information to enable the trustees or managers of the occupational pension scheme independently to assess the risks of holding the securitisation position, and

(ii) has committed to make available further information on an ongoing basis as appropriate.

     

(2) In paragraph (1)(a) —

“CRR firm” has the meaning given in Article 4(1)(2A) of the Capital Requirements Regulation(6);

“FCA investment firm” has the meaning given in Article 4(1)(2AB) of the Capital Requirements Regulation(7).

     

[(3) is set out below.]

 

That information must include at least the following:

That information must include at least the following:

(4) The information referred to in paragraph (1)(e) must include at least the information specified in the first column of Schedule A1, which must be provided at least with the frequency, or on the occasions, specified in the corresponding entry in the second column of that Schedule.

[Schedule A1 is in substance identical to the wording of the FCA and PRA rules. There is one minor clarification, in sub-paragraphs 4 and 6, viz., that, as regards secondary markets investments, the reference to “before pricing” does not apply.

 

Information

Frequency

   

[see Article 7 of the EUSR for the corresponding details]

In the case of a securitisation which is not an ABCP programme or an ABCP transaction, details of the underlying exposures.

At least quarterly.

(i) in the case of a securitisation which is not an ABCP programme or an ABCP transaction, details of the underlying exposures, which is to be provided on at least a quarterly basis;

[see Schedule A1]

 

2  In the case of an ABCP programme or an ABCP transaction, information on the underlying receivables or credit claims.

At least monthly.

(ii) in the case of an ABCP programme or an ABCP transaction, information on the underlying receivables or credit claims, which is to be provided on at least a monthly basis;

[see Schedule A1]

 

3  Investor reports providing periodic updates on:

(i) the credit quality and performance of the underlying exposures;

(ii) any relevant financial or other triggers contained in the transaction documentation, including information on events which trigger changes to the priority of payments or a substitution of any counterparty to the transaction;

(iii) data on the cash flows generated by the underlying exposures and by the liabilities of the securitisation; and

(iv) the calculation and modality of retention of a material net economic interest in the transaction by the originator, sponsor or original lender.

(i) At least quarterly in the case of a securitisation which is not an ABCP programme or an ABCP transaction.

(ii) At least monthly in the case of an ABCP programme or an ABCP transaction.

(iii) investor reports providing periodic updates on the credit quality and performance of the underlying exposures, any relevant financial or other triggers contained in the transaction documentation including information on events which trigger changes to the priority of payments or a substitution of any counterparty to the transaction, data on the cash flows generated by the underlying exposures and by the liabilities of the securitisation and the calculation and modality of retention of a material net economic interest in the transaction by the originator, sponsor or original lender, which is to be provided on at least a quarterly basis in the cases referred to in point (i) and on at least a monthly basis in the cases referred to in point (ii);

[see Schedule A1]

 

4  All information on the legal documentation needed to understand the transaction, including detail of the legal provisions governing the structure of the transaction, any credit enhancement or liquidity support features, the cash flows and loss waterfalls, investors’ voting rights, and any triggers or other events that could result in a material impact on the performance of the securitisation position.

In the case of primary market investments:

(i) before pricing or commitment to invest in draft or initial form;

(ii) no later than 15 days after closing of the transaction in final form;

and

(iii) an updated version as soon as practicable following any material change.

In the case of secondary market investments:

(i) before a commitment to invest in final form; and

(ii) an updated version as soon as practicable following any material change.

(iv) all information on the legal documentation needed to understand the transaction, including detail of the legal provisions governing the structure of the transaction, any credit enhancement or liquidity support features, the cash flows and loss waterfalls, investors’ voting rights and any triggers or other events that could result in a material impact on the performance of the securitisation position, which is to be provided:

for primary market investments, in draft or initial form before pricing or commitment to invest and in final form no later than 15 days after closing of the transaction, or

for secondary market investments, in final form before a commitment to invest,

and for both primary and secondary market investments an updated version as son as practicable following any material change;

[see Schedule A1]

 

5

Information describing any changes or events materially affecting the transaction, including breaches of obligations under the transaction documents.

As soon as practicable following that material change or event.

(v) information describing any changes or events materially affecting the transaction, including breaches of obligations under the transaction documents, which is to be provided as soon as practicable following the material change or event;

[see Schedule A1]

 

6

Any approved prospectus or other offering or marketing document prepared with the cooperation of the originator or sponsor.

In the case of primary market investments:

(i) before pricing or commitment to invest in draft or initial form; and

(ii) no later than 15 days after closing of the transaction in final form.

In the case of secondary market investments, before a commitment to invest in final form.

(vi) any approved prospectus or other offering or marketing document prepared with the cooperation of the originator or sponsor which is to be provided:

for primary market investments, in draft or initial form before pricing or commitment to invest and in final form no later than 15 days after closing of the transaction, or

for secondary market investments, in final form before a commitment to invest; and

[see Schedule A1]

 

7

If there is an STS notification or a notification falling within regulation 12(3)(b) of the Securitisation Regulations 2024 in respect of the transaction, that STS notification or that notification falling within regulation 12(3)(b) of the Securitisation Regulations 2024.

n the case of primary market investments:

(i) before pricing or commitment to invest in draft or initial form;

(ii) no later than 15 days after closing of the transaction in final form; and

(iii) an updated version as soon as practicable following any material change.

In the case of secondary market investments:

(i) before a commitment to invest in final form; and

(ii) an updated version as soon as practicable following any material change.

(vii) if there is an STS notification or a notification falling with regulation 12(3)(b) of the Securitisation Regulations in respect of the transaction, that STS notification, which is to be provided:

for primary market commitment to invest and in draft or initial form before pricing or commitment to invest and in final form no later than 15 days after closing of the transaction, or

for secondary market investments, in final form before a commitment to invest, and

for both primary and secondary market investments an updated version as soon as practicable following any material change.

[see Schedule A1]

Comment:

Article 5(1)(e) and (f) of the EUSR are replaced in the UK by a “more principles-based and proportionate approach” which requires that investors must verify that the sell-side “has made available sufficient information to enable the institutional investor independently to assess the risks of holding the securitisation position and has committed to make further information available on an ongoing basis, as appropriate”.

The UK rules specify a minimum level of disclosure (which follows the Basel Committee requirements), but do not require UK investors to obtain disclosures which match the UK transparency obligations which are binding on the sell side, and so they need not be on prescribed templates, and not necessarily loan-level.

This is a material difference from the EUSR position. The EU position must be assumed, as a result of the EC’s October 2022 Article 46 report, to require reporting on the EU templates.

See further, “Do EU investors need loan level data to invest in non-EU issues?”.

This was one of the five reforms heralded by H.M. Treasury’s December 2022 policy note.

The UK rules now refer to information provided “before pricing or commitment to invest” so as to address the lack of a concept of “pricing” in private securitisations, and distinguish between primary and secondary market investments, so that secondary market investors are not required to conduct due diligence on documents and information that are no longer relevant.

(f) in the case of non-performing exposures, sound standards are applied in the selection and pricing of the exposures.

[no equivalent]

[no equivalent]

[no equivalent]

[no equivalent]

[no equivalent]

[no equivalent]

(3) In the case of a fully-supported ABCP transaction, the trustees or managers of an occupational pension scheme are not required to verify the matters referred to in paragraph (1)(a).

2. By derogation from paragraph 1, as regards fully supported ABCP transactions, the requirement specified in point (a) of paragraph 1 shall apply to the sponsor. In such cases, the sponsor shall verify that the originator or original lender which is not a credit institution or an investment firm grants all the credits giving rise to the underlying exposures on the basis of sound and well-defined criteria and clearly established processes for approving, amending, renewing and financing those credits and has effective systems in place to apply those criteria and processes in accordance with Article 9(1).

[covered by Rule 4.3 below]

2. As regards fully supported ABCP transactions, the requirement specified in point (a) of paragraph 1 of this Article shall apply to the sponsor and not to the institutional investor. In such cases, the sponsor shall verify that the originator or original lender which is not a CRR firm or an FCA investment firm as defined in points (2A) and (2AB) of Article 4(1) of CRR grants all the credits giving rise to the underlying exposures on the basis of sound and well-defined criteria and clearly established processes for approving, amending, renewing and financing those credits and has effective systems in place to apply those criteria and processes in accordance with Article 9(1) of this Chapter (or equivalent FCA rules).

[see 32B(3) above]

     

[(4) appears below.]

3. Prior to holding a securitisation position, an institutional investor, other than the originator, sponsor or original lender, shall carry out a due-diligence assessment which enables it to assess the risks involved. That assessment shall consider at least all of the following:

4.2.2 R

Prior to holding a securitisation position, an institutional investor, other than the originator, sponsor or original lender, shall carry out a due diligence assessment, which enables it to assess the risks involved. That assessment shall consider at least all of the following:

3. Prior to holding a securitisation position, an institutional investor, other than the originator, sponsor or original lender, shall carry out a due-diligence assessment which enables it to assess the risks involved. That assessment shall consider at least all of the following:

(5) Before holding a securitisation position, the trustees or managers of an occupational pension scheme who are not the originator, sponsor or original lender must carry out a due-diligence assessment which enables them to assess the risks involved and consider at least all of the following —

(a) the risk characteristics of the individual securitisation position and of the underlying exposures;

(a) the risk characteristics of the individual securitisation position and of the underlying exposures;

(a) the risk characteristics of the individual securitisation position and of the underlying exposures;

(a) the risk characteristics of the individual securitisation position and of the underlying exposures;

(b) all the structural features of the securitisation that can materially impact the performance of the securitisation position, including the contractual priorities of payment and priority of payment-related triggers, credit enhancements, liquidity enhancements, market value triggers, and transaction-specific definitions of default;

(b) all of the structural features of the securitisation that can materially impact the performance of the securitisation position, including the contractual priorities of payment and priority of payment-related triggers, credit enhancements, liquidity enhancements, market value triggers, and transactionspecific definitions of default;

(b) all the structural features of the securitisation that can materially impact the performance of the securitisation position, including the contractual priorities of payment and priority of payment-related triggers, credit enhancements, liquidity enhancements, market value triggers, and transaction-specific definitions of default;

(b) any of the structural features of the securitisation that could materially impact the performance of the securitisation position, including the contractual priorities of payment and priority of payment-related triggers, credit enhancements, liquidity enhancements, market value triggers, and transaction-specific definitions of default;

(c) with regard to a securitisation notified as STS in accordance with Article 27, the compliance of that securitisation with the requirements provided for in Articles 19 to 22 or in Articles 23 to 26, and Article 27.

(c) with regard to a securitisation included on the list maintained under regulation 10(2) of the Securitisation Regulations 2024, compliance with SECN 2;

(c) with regard to a securitisation included on the list maintained under regulation 10(2) of the Securitisation Regulations, compliance with the STS criteria and with any applicable designated activity rules relating to the notification mentioned in regulation 10(1) of the Securitisation Regulations;

(c) with regard to a securitisation included on the list maintained under regulation 10(2), compliance with the STS criteria and with any applicable designated activity rules relating to the notification mentioned in regulation 10(1);

No EU equivalent – the UK rules relate to the recognition of an EU STS as being equivalent

(d) with regard to a securitisation that appears to the institutional investor to be an overseas STS securitisation as defined in regulation 12(2) of the Securitisation Regulations 2024, whether the securitisation falls within a description of securitisation specified in regulations made from time to time under regulation 13(1) of the Securitisation Regulations 2024

in relation to a country or territory designated under such regulations;

(d) with regard to a securitisation that appears to the institutional investor to be an overseas STS securitisation as defined in regulation 12(2) of the Securitisation Regulations, whether the securitisation falls within a description of securitisation specified in regulations made from time to time under regulation 13(1) of the Securitisation Regulations in relation to a country or territory designated under such regulations;

(d) with regard to a securitisation that appears to the trustees or managers to be an overseas STS securitisation—

(i) whether the securitisation falls within a description of securitisation specified in regulations under regulation 13(1) in relation to a country or territory designated under those regulations, and

(ii) any matters specified for the purposes of regulation 13(7A)(a) in regulations under regulation 13(1);

 

(e) with regard to a securitisation falling within paragraph (3)(b) and (c) of regulation 12 of the Securitisation Regulations 2024, compliance with the requirements referred to in paragraph (3)(a) of that regulation and with Article 27 of the Securitisation Regulation as it had effect in relation to the EU at the time of the notification mentioned in paragraph (3)(b) of that regulation;

(e) with regard to a securitisation falling within paragraph (3)(b) and (c) of regulation 12 of the Securitisation Regulations, compliance with the requirements referred to in paragraph (3)(a) of that regulation and with Article 27 of Regulation (EU) 2017/2402 as it had effect in relation to the European Union at the time of the notification mentioned in paragraph (3)(b) of that regulation;

(e) with regard to a securitisation falling within paragraph (3)(b) and (c) of regulation 12, compliance with the requirements referred to in paragraph (3)(a) of that regulation and with Article 27 of the EU Securitisation Regulation 2017 as it had effect in relation to the European Union at the time of the notification mentioned in paragraph (3)(b) of that regulation.

 

[see 4.2.3 below]

[see 3A below]

(7) The duty in paragraph (5)(c) applies whether or not a third party verifier has assessed compliance of the securitisation with the STS criteria.

Institutional investors may rely to an appropriate extent on the STS notification pursuant to Article 27(1) and on the information disclosed by the originator, sponsor and SSPE on the compliance with the STS requirements, without solely or mechanistically relying on that notification or information.

(f) in considering the matter referred to in point (c), an

institutional investor may rely to an appropriate extent on the STS notification and on the information disclosed by the originator, sponsor and SSPE concerning compliance with the STS criteria, without solely or mechanistically relying on that notification or information; and

(f) in considering the matter referred to in point (c), an institutional investor may rely to an appropriate extent on the STS notification and on the information disclosed by the originator, sponsor and SSPE concerning compliance with the STS criteria, without solely or mechanistically relying on that notification or information;

(8) In considering the matter referred to in paragraph (5)(c), the trustees or managers of an occupational pension scheme may rely to an appropriate extent on the STS notification and on the information disclosed by the originator, sponsor and securitisation special purpose entity concerning compliance with the STS criteria, without solely or mechanistically relying on that notification or information.

[no equivalent]

[no equivalent]

[no equivalent]

(9) In relation to an overseas STS securitisation, the trustees or managers of an occupational pension scheme may rely on a matter specified under regulation 13(7A)(b) to such extent as regulations under regulation 13(1) provide.

[grandfathered EU STS]

(g) in considering the matter referred to in point (d), an institutional investor may rely to an appropriate extent on the notification referred to in regulation 12(3)(b) of the Securitisation Regulations 2024 and on the information disclosed by the originator, sponsor and SSPE to ESMA concerning compliance with the requirements referred to in regulation 12(3)(a) of the Securitisation Regulations 2024, without solely or mechanistically relying on that notification or information.

(g) in considering the matter referred to in point (e), an institutional investor may rely to an appropriate extent on the notification referred to in regulation 12(3)(b) of the Securitisation

Regulations and on the information disclosed by the originator, sponsor and SSPE to the European Securities and Markets Authority concerning compliance with the requirements

referred to in regulation 12(3)(a) of the Securitisation Regulations, without solely or mechanistically relying on that notification or information; and

(10) In considering the matter referred to in paragraph (5)(e), the trustees or managers of an occupational pension scheme may rely to an appropriate extent on the notification referred to in regulation 12(3)(b) and on the information disclosed by the originator, sponsor and securitisation special purpose entity to the European Securities and Markets Authority concerning compliance with the requirements referred to in regulation 12(3)(a), without solely or mechanistically relying on that notification or information.

Notwithstanding points (a) and (b) of the first subparagraph, in the case of a fully supported ABCP programme, institutional investors in the commercial paper issued by that ABCP programme shall consider the features of the ABCP programme and the full liquidity support.

(2) Notwithstanding (1)(a) and (b), in the case of a fully supported ABCP programme, institutional investors in the commercial paper issued by that ABCP programme shall consider the features of the ABCP programme and the full liquidity support.

Notwithstanding points (a) and (b) of the first subparagraph, in the case of a fully supported ABCP programme, institutional investors in the commercial paper issued by that ABCP programme shall consider the features of the ABCP programme and the full liquidity support.

(6) In addition to the matters specified in paragraph (5)(a) and (b), in the case of a fully-supported ABCP programme, the trustees or managers of an occupational pension scheme investing in the commercial paper issued by that ABCP programme must consider the features of the ABCP programme and the full liquidity support.

[No equivalent]

4.2.3 R

The requirements in SECN 4.2.1R and SECN 4.2.2R continue to apply where a third party verifier has provided services under SECN 2.5.2R.

3A. the requirements in paragraphs 1 and 3 of this Article continue to apply where a third party has provided services under SECN 2.5.2R of the FCA Handbook.

[see (7) above.]

[see Article 5(2) above]

4.3 Requirements on sponsors

4.3.1 R

(1) As regards fully supported ABCP transactions the requirement specified in SECN 4.2.1R(1)(a) shall apply to the sponsor and not to the institutional investor.

(2) In such cases, the sponsor must verify that the originator or original lender which is not a CRR firm or an FCA investment firm grants all the credits giving rise to the underlying exposures (other than any underlying exposures that are trade receivables not in the form of a loan) on the basis of:

(a) sound and well-defined criteria; and

(b) clearly established processes for their approving, amending, renewing and financing those credits, and has effective systems in place to apply those criteria and processes, in accordance with SECN 8.2 (or equivalent PRA rules).

[see Article 5(2) above]

[No equivalent but c.f. 32B(3) above]

4. An institutional investor, other than the originator, sponsor or original lender, holding a securitisation position, shall at least:

4.4 While holding a securitisation position

4.4.1 R

An institutional investor, other than the originator, sponsor or original lender, holding a securitisation position, shall at least:

4. An institutional investor, other than the originator, sponsor or original lender, holding a securitisation position, shall at least:

 

(a) establish appropriate written procedures that are proportionate to the risk profile of the securitisation position and, where relevant, to the institutional investor’s trading and non-trading book, in order to monitor, on an ongoing basis, compliance with paragraphs 1 and 3 and the performance of the securitisation position and of the underlying exposures.

(1) establish appropriate written procedures that are proportionate to the risk profile of the securitisation position and, where relevant, to the institutional investor’s trading and non-trading book in order to

monitor, on an ongoing basis, compliance with SECN 4.2.1R and SECN 4.2.2R and the performance of the securitisation position and of the underlying exposures.

(a) establish appropriate written procedures that are proportionate to the risk profile of the securitisation position and, where relevant, to the institutional investor’s trading and non-trading book, in order to monitor, on an ongoing basis, compliance with paragraphs 1 and 3 of this Article and the performance of the securitisation position and of the underlying exposures.

Due-diligence requirements for occupational pension schemes: ongoing requirements

32C.

(1) Where the trustees or managers of an occupational pension scheme hold a securitisation position in relation to which they are not the originator, sponsor or original lender, the trustees or managers must at least establish appropriate written procedures that are proportionate to the risk profile of the securitisation position and, where relevant, to their trading and non-trading book, in order to monitor on an ongoing basis—

(a) compliance with regulation 32B in relation to matters arising while the securitisation position is held, and

(b) the performance of the securitisation position and of the underlying exposures.

Where relevant with respect to the securitisation and the underlying exposures, those written procedures shall include monitoring of the exposure type, the percentage of loans more than 30, 60 and 90 days past due, default rates, prepayment rates, loans in foreclosure, recovery rates, repurchases, loan modifications, payment holidays, collateral type and occupancy, and frequency distribution of credit scores or other measures of credit worthiness across underlying exposures, industry and geographical diversification, frequency distribution of loan to value ratios with band widths that facilitate adequate sensitivity analysis.

Where relevant with respect to the securitisation and the underlying exposures, those written procedures shall include monitoring of:

(a) the exposure type;

(b) the percentage of loans more than 30, 60 and 90 days past due;

(c) default rates;

(d) prepayment rates;

(e) loans in foreclosure;

(f) recovery rates;

(g) repurchases;

(h) loan modifications;

(i) payment holidays;

(j) collateral type and occupancy; and

(k) frequency distribution of credit scores or other measures of creditworthiness across underlying exposures, industry and geographical diversification, frequency distribution of loan-to value ratios with bandwidths that facilitate adequate sensitivity

analysis;

Where relevant with respect to the securitisation and the underlying exposures, those written procedures shall include monitoring of the exposure type, the percentage of loans more than 30, 60 and 90 days past due, default rates, prepayment rates, loans in foreclosure, recovery rates, repurchases, loan modifications, payment holidays, collateral type and occupancy, and frequency distribution of credit scores or other measures of credit worthiness across underlying exposures, industry and geographical diversification, frequency distribution of loan to value ratios with band widths that facilitate adequate sensitivity analysis.

(2) The written procedures referred to in paragraph (1) must, where relevant to the securitisation and the underlying exposures, include –

(a) monitoring of the exposure type,

(b) the percentage of loans more than 30, 60 and 90 days past due,

(c) default rates,

(d) prepayment rates,

(e) loans in foreclosure,

(f) recovery rates,

(g) repurchases,

(h) loan modifications,

(i) payment holidays,

(j) collateral type and occupancy, and

(k) frequency distribution of credit scores or other measures of credit worthiness across underlying exposures, industry and geographical diversification, frequency distribution of loan to value ratios with band widths that facilitate adequate sensitivity analysis.

Where the underlying exposures are themselves securitisation positions, as permitted under Article 8, institutional investors shall also monitor the exposures underlying those positions;

[see 4.4.2 below]

Where the underlying exposures are themselves securitisation positions, in accordance with Article 8 of this Chapter or SECN 7.2.1(2)(b) of the FCA Handbook, institutional investors shall also monitor the exposures underlying those positions;

(3) Where the underlying exposures are themselves securitisation positions, in a case where this is not prohibited in relation to the originator, sponsor or original lender by applicable FCA or PRA rules, the trustees or managers must also monitor the exposures underlying those positions.

(b) in the case of a securitisation other than a fully supported ABCP programme, regularly perform stress tests on the cash flows and collateral values supporting the underlying exposures or, in the absence of sufficient data on cash flows and collateral values, stress tests on loss assumptions, having regard to the nature, scale and complexity of the risk of the securitisation position;

(2) in the case of a securitisation other than a fully supported ABCP programme, regularly perform stress tests on the cash flows and collateral values supporting the underlying exposures or, in the absence of sufficient data on cash flows and collateral values, stress tests on loss assumptions, having regard to the nature, scale and complexity of the risk of the securitisation position;

(b) in the case of a securitisation other than a fully supported ABCP programme, regularly perform stress tests on the cash flows and collateral values supporting the underlying exposures or, in the absence of sufficient data on cash flows and collateral values, stress tests on loss assumptions, having regard to the nature, scale and complexity of the risk of the securitisation position;

(4) The trustees or managers of an occupational pension scheme who are not the originator, sponsor or original lender holding a securitisation position must at least —

(a) in the case of a securitisation other than a fully-supported ABCP programme, regularly perform stress tests on the cash flows and collateral values supporting the underlying exposures or, in the absence of sufficient data on cash flows and collateral values, stress tests on loss assumptions, having regard to the nature, scale and complexity of the risk of the securitisation position;

(c) in the case of fully supported ABCP programme, regularly perform stress tests on the solvency and liquidity of the sponsor;

(3) in the case of fully supported ABCP programmes, regularly perform stress tests on the solvency and liquidity of the sponsor;

(c) in the case of fully supported ABCP programmes, regularly perform stress tests on the solvency and liquidity of the sponsor;

(b) in the case of a fully-supported ABCP programme, regularly perform stress tests on the solvency and liquidity of the sponsor;

(d) ensure internal reporting to its management body so that the management body is aware of the material risks arising from the securitisation position and so that those risks are adequately managed;

(4) ensure internal reporting to its management body so that the management body is aware of the material risks arising from the securitisation position and so that those risks are adequately managed;

(d) ensure internal reporting to its management body so that the management body is aware of the material risks arising from the securitisation position and so that those risks are adequately managed;

(c) ensure internal reporting to the trustees or managers so that they are aware of the material risks arising from the securitisation position and so that those risks are adequately managed;

(e) be able to demonstrate to its competent authorities, upon request, that it has a comprehensive and thorough understanding of the securitisation position and its underlying exposures and that it has implemented written policies and procedures for the risk management of the securitisation position and for maintaining records of the verifications and due diligence in accordance with paragraphs 1 and 2 and of any other relevant information; and

(5) be able to demonstrate to the FCA, upon request, that it has a comprehensive and thorough understanding of the securitisation position and its underlying exposures and that it has implemented

written policies and procedures for the risk management of the securitisation position and for maintaining records of the verifications and due diligence in accordance with SECN 4.2.1R and SECN 4.3 and of any other relevant information; and

(e) be able to demonstrate to the PRA, upon request, that it has a comprehensive and thorough understanding of the securitisation position and its underlying exposures and that it has implemented written policies and procedures for the risk management of the securitisation position and for maintaining records of the verifications and due diligence in accordance with paragraphs 1 and 2 of this Article and of any other relevant information; and

(d) be able to demonstrate to the Pensions Regulator, upon request, that they have a comprehensive and thorough understanding of the securitisation position and its underlying exposures and that they have implemented written policies and procedures for the risk management of the securitisation position and for maintaining records of the verifications and due diligence in accordance with regulation 32B and of any other relevant information; and

(f) in the case of exposures to a fully supported ABCP programme, be able to demonstrate to its competent authorities, upon request, that it has a comprehensive and thorough understanding of the credit quality of the sponsor and of the terms of the liquidity facility provided.

(6) in the case of exposures to a fully supported ABCP programme, be able to demonstrate to the FCA, upon request, that it has a comprehensive and thorough understanding of the credit quality of the sponsor and of the terms of the liquidity facility provided.

(f) in the case of exposures to a fully supported ABCP programme, be able to demonstrate to the PRA, upon request, that it has a comprehensive and thorough understanding of the credit quality of the sponsor and of the terms of the liquidity facility provided.

(e) in the case of exposures to a fully-supported ABCP programme, be able to demonstrate to the Pensions Regulator, upon request, that they have a comprehensive and thorough understanding of the credit quality of the sponsor and of the terms of the liquidity facility provided.

[see 4(a) above for EUSR equivalent]

4.4.2 R

Where the underlying exposures of a securitisation are themselves securitisation positions, in accordance with SECN 7 or Article 8 of Chapter 2 of the Securitisation Part of the PRA Rulebook, institutional investors shall also monitor the exposures underlying those securitisation positions

[see 4(a) above for PRA equivalent]

[see 32C(2) above for Securitisation Regulations 2024 equivalent]

5. Without prejudice to paragraphs 1 to 4 of this Article, where an institutional investor has given another institutional investor authority to make investment management decisions that might expose it to a securitisation, the institutional investor may instruct that managing party to fulfil its obligations under this Article in respect of any exposure to a securitisation arising from those decisions.

4.4 Institutional investor delegation

4.4.1 R

Without prejudice to SECN 4.2 and SECN 4.4, where the managing party has been given authority by the institutional investor described below to make investment management decisions that might expose it to a securitisation, the following paragraphs apply in respect of any exposure to a securitisation arising from those decisions. Unless specified below the responsibility for fulfilling the obligations under SECN 4.2 and SECN 4.4 shall remain with the institutional investor:

5. Without prejudice to paragraphs 1 to 4 of this Article, where an institutional investor has been given authority by the institutional investor described below to make investment management decisions that might expose it to a securitisation, the following paragraphs apply in respect of any exposure to a securitisation arising from those decisions. Unless specified below, the responsibility for fulfilling the obligations under paragraphs 1,3 and 4 shall remain with the institutional investor.

Due-diligence requirements for occupational pension schemes: delegation of investment management decisions

32D.

(1) Paragraph (2) applies where—

(a) the trustees or managers of an occupational pension scheme —

(i) have given a relevant institutional investor (“the managing party”) authority to make investment management decisions that might expose the trustees or managers to a securitisation, and

(ii) instruct the managing party to fulfil any of their obligations under regulations 32B and 32C in respect of any exposure to a securitisation arising from those decisions, and

(b) the managing party fails to fulfil an obligation to which those instructions relate.

Member States shall ensure that, where an institutional investor is instructed under this paragraph to fulfil the obligations of another institutional investor and fails to do so, any sanction under Articles 32 and 33 may be imposed on the managing party and not on the institutional investor who is exposed to the securitisation.

(1) Where an institutional investor who is subject to SECN 4.5.1R (‘the managing party’) is instructed under SECN 4.5.1R to fulfil any of the obligations of another institutional investor who is also subject to SECN 4.5.1R and fails to do so, the managing party is responsible for the failure to comply with the relevant obligation and not the institutional investor who is exposed to the securitisation.

Where an institutional investor who is subject to this Article (‘the managing party’) is instructed under this paragraph to fulfil any of the obligations of another institutional investor who is subject to this Article and fails to do so, the managing party is responsible for the failure to comply with the relevant obligation and not the institutional investor who is exposed to the securitisation.

(2) The trustees or managers of the occupational pension scheme are not to be regarded as responsible for the failure to comply with the obligation in question.

 

(2) Where an institutional investor who is subject to SECN 4.5.1R (‘the managing party’) is instructed under SECN 4.5.1R to fulfil any of the obligations of another institutional investor who is subject to Article 5 of Chapter 2 of the Securitisation Part of the PRA Rulebook or to regulation 32A to 32D of the Securitisation Regulations 2024 and fails to do so, the managing party is responsible for the failure to comply with the relevant obligation.

Where an institutional investor who is subject to this Article (‘the managing party’) is instructed under this paragraph to fulfil any of the obligations of another institutional investor who is subject to equivalent rules made by the FCA or to regulations 32A to 32D of the Securitisation

Regulations and fails to do so, the managing party is responsible for the failure to comply with the relevant obligation.

 
 

(3) Where an institutional investor (‘the managing party’) who is subject to Article 5 of Chapter 2 of the Securitisation Part of the PRA Rulebook is instructed under SECN 4.5.1R to fulfil any of the obligations of another institutional investor who is subject to SECN

4.5.1R and fails to do so, the institutional investor who is exposed to the securitisation is not responsible for the failure to comply.

Where an institutional investor who is subject to equivalent rules made by the FCA is instructed under this paragraph to fulfil any of the obligations of another institutional investor who is

subject to this Article and fails to do so, the institutional investor who is exposed to the securitisation is not responsible for the failure to comply.

 
     

(3) In this regulation “relevant institutional investor” means an institutional investor which is an authorised person.

EUSR Article 5(5) provides that an institutional investor which has given another institutional investor authority to make investment management decisions that might expose it to a securitisation may instruct it to fulfil its Article 5 due diligence obligations (e.g. a pension fund could delegate the investment decisions to an FCA-authorised asset manager). Article 5(5) is ambiguous as to whether the responsibility for doing proper due diligence may be delegated. However, the FCA and PRA rules, and Article 32D, are clear that it can be. However, the transfer of responsibilityfor compliance with the due diligence requirements under the FCA rules does not occur except as expressly permitted. The FCA and PRA rules, and Article 32D, do not permit institutional investors to delegate responsibility to AIFMs which are not authorised in the UK, as they no longer fall within the definition of “institutional investor” (the exclusion of AIFMs which are not authorised in the UK from the definition of “institutional investor” is a change expressly made by the Securitisation Regulations 2024, and is reflected in the FCA and PRA rulebook definitions).

EUSR Article 2

Securitisation Regulations 2024

Regulation 3(1)

Comments

credit institution” (EUSR cross-refers to EU CRR definition)

credit institution” means an undertaking the business of which is to take deposits or other repayable funds from the public and to grant credits for its own account;

The UK has the same definition of “credit institution” as the EUSR had at the time of Brexit. The EUSR cross-refers to the definition in Article 4(1)(1) of the EU CRR, and this has since been amended by the Investment Firms Regulation, but this was not part of retained EU law and was not onshored.

[No EU equivalent]

established in the United Kingdom” means constituted under the law of a part of the United Kingdom –

(a) with a registered office in any part of the United Kingdom, or

(b) if the person does not have a registered office, with a head office in any part of the United Kingdom;

No EU equivalent.

The UK Regulations make it clear that the UK branch of a non-UK incorporated firm is not established in the UK. The FCA and PRA rules cross-refer to this and repeatedly use it to define the geographical scope of the FCA and PRA rules.

See also “The meaning of "established" and of "the Union"

institutional investor” means an investor which is one of the following:

institutional investor” means an investor which is one of the following -

 

(a) an insurance undertaking as defined in point (1) of Article 13 of Directive 2009/138/EC;

(a) an insurance undertaking as defined in section 417(1) of FSMA 2000;

 

(b) a reinsurance undertaking as defined in point (4) of Article 13 of Directive 2009/138/EC;

(b) a reinsurance undertaking as defined in section 417(1) of FSMA 2000;

 

(c) an institution for occupational retirement provision falling within the scope of Directive (EU) 2016/2341 of the European Parliament and of the Council in accordance with Article 2 thereof, unless a Member States has chosen not to apply that Directive in whole or in parts to that institution in accordance with Article 5 of that Directive; or an investment manager or an authorised entity appointed by an institution for occupational retirement provision pursuant to Article 32 of Directive (EU) 2016/2341;

(c) the trustees or managers of an occupational pension scheme;

(d) a fund manager of an occupational pension scheme appointed under section 34(2) of the Pensions Act 1995 that, in respect of activity undertaken pursuant to that appointment, is authorised for the purposes of section 31 of FSMA 2000;

 

(d) an alternative investment fund manager (AIFM) as defined in point (b) of Article 4(1) of Directive 2011/61/EU that manages and/or markets alternative investment funds in the Union;

(e) an AIFM (as defined in regulation 4 of the Alternative Investment Fund Managers Regulations 2013) -

(i) with permission under Part 4A of FSMA 2000(f) in respect of the activity specified by article 51ZC of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001(g) (managing an AIF), and

(ii) which markets or manages an AIF (as defined in regulation 3 of the 2013 Regulations) in the United Kingdom,

and for the purposes of sub-paragraph (ii), an AIFM markets an AIF when the AIFM makes a direct or indirect offering or placement of units or shares of an AIF managed by it to or with an investor domiciled or with a registered office in the United Kingdom, or when another person makes such an offering or placement at the initiative of, or on behalf of, the AIFM;

The UK definition excludes from scope unauthorised non-UK AIFMs which market or manage an AIF in the UK (and the FCA and PRA rules cross-refer to this definition), so the only AIFMs covered by the UK due diligence requirements are UK-authorised ones.

The EU definition does not exclude non-EU AIFMs.

This was one of the five reforms heralded by H.M. Treasury’s December 2022 policy note.

[included in [d) above]

(f) a small registered UK AIFM;

Small UK AIFMs are registered with, but not authorised by, the FCA. They were in scope pre-Brexit.

(e) an undertaking for the collective investment in transferable securities (UCITS) management company, as defined in point (b) of Article 2(1) of Directive 2009/65/EC;

(g) a management company as defined in section 237(2) of FSMA 2000;

 

(f) an internally managed UCITS, which is an investment company authorised in accordance with Directive 2009/65/EC and which has not designated a management company authorised under that Directive for its management;

(h) a UCITS, as defined in section 236A of FSMA 2000(i), which is an authorised open ended investment company as defined in section 237(3) of FSMA 2000;

 

(g) a credit institution as defined in point (1) of Article 4(1) of Regulation (EU) No 575/2013 for the purposes of that Regulation or an investment firm as defined in point (2) of Article 4(1) of that Regulation;

(i) a CRR firm as defined in Article 4(1)(2A) of the Capital Requirements Regulation;

(j) an FCA investment firm as defined in Article 4(1)(2AB) of the Capital Requirements Regulation;

 

original lender” means an entity which, itself or through related entities, directly or indirectly, concluded the original agreement which created the obligations or potential obligations of the debtor or potential debtor giving rise to the exposures being securitised;

original lender”, in relation to a securitisation, means an entity which, itself or through related entities, directly or indirectly, concluded the original agreement which created the obligations or potential obligations of the debtor or potential debtor giving rise to the exposures being securitised;

Same in UK and EU

originator” means an entity which:

(a) itself or through related entities, directly or indirectly, was involved in the original agreement which created the obligations or potential obligations of the debtor or potential debtor giving rise to the exposures being securitised; or

(b) purchases a third party’s exposures on its own account and then securitises them;

originator”, in relation to a securitisation, means an entity which -

(a) itself or through related entities, directly or indirectly, was involved in the original agreement which created the obligations or potential obligations of the debtor or potential debtor giving rise to the exposures being securitised, or

(b) purchases a third party’s exposures on its own account and then securitises them;

Same in UK and EU

securitisation” means a transaction or scheme, whereby the credit risk associated with an exposure or a pool of exposures is tranched, having all of the following characteristics:

(a) payments in the transaction or scheme are dependent upon the performance of the exposure or of the pool of exposures;

(b) the subordination of tranches determines the distribution of losses during the ongoing life of the transaction or scheme;

(c) the transaction or scheme does not create exposures which possess all of the characteristics listed in Article 147(8) of Regulation (EU) No 575/2013.

securitisation” means a transaction or scheme, whereby the credit risk associated with an exposure or a pool of exposures is tranched, having all of the following characteristics —

(a) payments in the transaction or scheme are dependent upon the performance of the exposure or of the pool of exposures,

(b) the subordination of tranches determines the distribution of losses during the ongoing life of the transaction or scheme, and

(c) the transaction or scheme does not create exposures which possess all of the following characteristics —

(i) the exposure is to an entity which was created specifically to finance or operate physical assets or is an economically comparable exposure;

(ii) the contractual arrangements give the lender a substantial degree of control over the assets and the income that they generate;

(iii) the primary source of repayment of the obligation is the income generated by the assets being financed, rather than the independent capacity of a broader commercial enterprise;

Same in UK and EU (the UK spells out the three “specialised lending” characteristics contained in Article 147(8) of the CRR but in the same terms).

If Article 147(8) of the CRR were to be amended, this could lead to divergence, but there is no reason to think this is likely.

See also “The definition of securitisation”.

sponsor” means a credit institution, whether located in the Union or not, as defined in point (1) of Article 4(1) of Regulation (EU) No 575/2013, or an investment firm as defined in point (1) of Article 4(1) of Directive 2014/65/EU other than an originator, that:

(a) establishes and manages an asset-backed commercial paper programme or other securitisation that purchases exposures from third-party entities, or

(b) establishes an asset-backed commercial paper programme or other securitisation that purchases exposures from third-party entities and delegates the day-to-day active portfolio management involved in that securitisation to an entity authorised to perform such activity in accordance with Directive 2009/65/EC, Directive 2011/61/EU or Directive 2014/65/EU;

sponsor” means a credit institution or an investment firm as defined in paragraph 1A of Article 2 of Regulation 600/2014/EU, whether located in the United Kingdom or in a country or territory outside the United Kingdom, which -

(a) is not an originator, and

(b) either -

(i) establishes and manages an ABCP programme or other securitisation that purchases exposures from third party entities, or

(ii) establishes an ABCP programme or other securitisation that purchases exposures from third party entities and delegates the day-to-day active portfolio management involved in that securitisation to an entity which is authorised to manage assets belonging to another person in accordance with the law of the country or territory in which the entity is established;

The UK version clearly includes non-UK investment firms, whereas the EUSR is ambiguous about non-EU ones.

See also “Who can be a sponsor”.

tranche” means a contractually established segment of the credit risk associated with an exposure or a pool of exposures, where a position in the segment entails a risk of credit loss greater than or less than a position of the same amount in another segment, without taking account of credit protection provided by third parties directly to the holders of positions in the segment or in other segments;

tranche” means a contractually established segment of the credit risk associated with an exposure or a pool of exposures, where a position in the segment entails a risk of credit loss greater than or less than a position of the same amount in another segment, without taking account of credit protection provided by third parties directly to the holders of positions in the segment or in other segments;

Same in UK and EU

STS

EU

FCA 2024/18 Annex I Securitisation sourcebook (SECN)

Article 18

Use of the designation ‘simple, transparent and standardised securitisation’

2.2 STS criteria: Simple, transparent and standardised non-ABCP securitisation

Originators, sponsors and SSPEs may use the designation ‘STS’ or ‘simple, transparent and standardised’, or a designation that refers directly or indirectly to those terms for their securitisation, only where:

(a) the securitisation meets all the requirements set out in Section 1, 2 or 2a of this Chapter, and ESMA has been notified pursuant to Article 27(1); and]

(b) the securitisation is included in the list referred to in Article 27(5).

The originator, sponsor and SSPE involved in a securitisation considered STS shall be established in the Union.

2.2.1 R

A securitisation which is not an ABCP programme or an ABCP transaction

must fulfil the following requirements to be considered an STS

securitisation:

(1) those in SECN 2.2.2R to SECN 2.2.29R; and

(2) the FCA must have received an STS notification in respect of that securitisation and the securitisation must appear on the list it publishes under regulation 10(2) of the Securitisation Regulations 2024; and

(3) the originator and sponsor involved in the securitisation must be established in the United Kingdom.

Commentaries: Brexit - impacts and changes for securitisations in the UK and Europe; The meaning of "established" and of "the Union".

 

Article 19

Simple, transparent and standardised non-ABCP traditional securitisation

 

1. Traditional securitisations, except for ABCP programmes and ABCP transactions, that meet the requirements set out in Articles 20, 21 and 22, shall be considered to be STS.

2. By 18 October 2018, the EBA, in close cooperation with ESMA and EIOPA, shall adopt, in accordance with Article 16 of Regulation (EU) No 1093/2010, guidelines and recommendations on the harmonised interpretation and application of the requirements set out in Articles 20, 21 and 22.

 

Article 20 Requirements relating to simplicity

Simplicity requirements

1. The title to the underlying exposures shall be acquired by the SSPE by means of a true sale or assignment or transfer with the same legal effect in a manner that is enforceable against the seller or any other third party. The transfer of the title to the SSPE shall not be subject to severe clawback provisions in the event of the seller’s insolvency.

2.2.2 R

(1) Any SSPE must acquire title to the underlying exposures in a manner enforceable against the seller or any other third party, whether transfer of title is by means of:

(a) true sale;

(b) assignment; or

(c) another transfer with the same legal effect as (a) or (b).

(2) If the seller becomes insolvent, the transfer of the title to the SSPE must not be subject to severe clawback provisions.

Related recitals: Recital (22), Recital (23).

 

Commentaries: Synthetics; Severe clawback

 

EBA Guidelines
Background and rationale para. 16
Guidelines para. 10-12
Q&A 1-2

 

2. For the purpose of paragraph 1, any of the following shall constitute severe clawback provisions:

2.2.3 R

For the purposes of SECN 2.2.2R(2), the following are severe clawback provisions:

(a) provisions which allow the liquidator of the seller to invalidate the sale of the underlying exposures solely on the basis that it was concluded within a certain period before the declaration of the seller’s insolvency;

(1) those allowing the seller’s liquidator to invalidate the sale of the underlying exposures solely because it was concluded within a certain period before the declaration of the seller’s insolvency;

(b) provisions where the SSPE can only prevent the invalidation referred to in point (a) if it can prove that it was not aware of the insolvency of the seller at the time of sale.

(2) provisions where the SSPE can prevent the invalidation referred to in (1) only if it can prove it was unaware of the seller’s insolvency at the time of sale.

EBA Guidelines
Background and rationale para. 18-19
Q&A 2

 

3. For the purpose of paragraph 1, clawback provisions in national insolvency laws that allow the liquidator or a court to invalidate the sale of underlying exposures in the case of fraudulent transfers, unfair prejudice to creditors or transfers intended to improperly favour particular creditors over others shall not constitute severe clawback provisions.

2.2.4 R

For the purposes of SECN 2.2.2R(1), if provisions of national insolvency laws allow a liquidator or court to invalidate the sale of underlying exposures in the following circumstances, such provisions are not severe clawback provisions:

(1) fraudulent transfers; or

(2) unfair prejudice to creditors or transfers intended to improperly favour particular creditors over others.

4. Where the seller is not the original lender, the true sale or assignment or transfer with the same legal effect of the underlying exposures to that seller, whether that true sale or assignment or transfer with the same legal effect is direct or through one or more intermediate steps, shall meet the requirements set out in paragraphs 1 to 3.

2.2.5 R

If the seller is not the original lender, the transfer of the underlying exposures to that seller by any of the means in SECN 2.2.2R(1) (whether direct or through one or more intermediate steps) must meet the requirements in SECN 2.2.1 to SECN 2.2.3.

EBA Guidelines
Background and rationale para. 19

 

5. Where the transfer of the underlying exposures is performed by means of an assignment and perfected at a later stage than at the closing of the transaction, the triggers to effect such perfection shall include at least the following events:

2.2.6 R

If the transfer of the underlying exposures is performed by assignment and perfected after the transaction’s closing, the triggers to effect such perfection must be set broadly enough to require perfection in all of the following events:

(a) severe deterioration in the seller credit quality standing;

(1) severe deterioration in the seller’s credit quality standing;

(b) insolvency of the seller; and

(2) the seller’s insolvency; and

(c) unremedied breaches of contractual obligations by the seller, including the seller’s default.

(3) unremedied breaches of the seller’s contractual obligations, including the seller’s default.

EBA Guidelines
Background and rationale para. 20
Guidelines para. 13-14
Q&A 4

 

Commentary: Minimum perfection triggers

 

6. The seller shall provide representations and warranties that, to the best of its knowledge, the underlying exposures included in the securitisation are not encumbered or otherwise in a condition that can be foreseen to adversely affect the enforceability of the true sale or assignment or transfer with the same legal effect.

2.2.7 R

The seller must provide representations and warranties that, to the best of its knowledge, the underlying exposures included in the securitisation are not encumbered or otherwise in a condition that can be foreseen to adversely affect the enforceability of the transfer by the means in SECN 2.2.2R(1).

EBA Guidelines
Background and rationale para. 21
Q&A 5

 

Commentary: Underlying exposures unencumbered and enforceable

 

7. The underlying exposures transferred from, or assigned by, the seller to the SSPE shall meet predetermined, clear and documented eligibility criteria which do not allow for active portfolio management of those exposures on a discretionary basis. For the purpose of this paragraph, substitution of exposures that are in breach of representations and warranties shall not be considered active portfolio management. Exposures transferred to the SSPE after the closing of the transaction shall meet the eligibility criteria applied to the initial underlying exposures.

2.2.8 R

(1) The underlying exposures the seller transfers to the SSPE (if an SSPE is used) or that are otherwise securitised must meet predetermined, clear and documented eligibility criteria prohibiting active portfolio management of those exposures on a discretionary basis.

(2) For the purposes of SECN 2.2.8R(1), substitution of exposures that are in breach of representations and warranties is not considered active portfolio management.

(3) Exposures transferred to the SSPE (if an SSPE is used) or otherwise added to the securitisation after the closing of the transaction must meet the eligibility criteria applied to the initial underlying exposures.

Related recital: Recital (25)

 

EBA Guidelines
Background and rationale para. 23-26
Guidelines para. 15-19
Q&A 6-7

 

8. The securitisation shall be backed by a pool of underlying exposures that are homogeneous in terms of asset type, taking into account the specific characteristics relating to the cash flows of the asset type including their contractual, credit-risk and prepayment characteristics. A pool of underlying exposures shall comprise only one asset type. The underlying exposures shall contain obligations that are contractually binding and enforceable, with full recourse to debtors and, where applicable, guarantors.

2.2.9 R

(1) The securitisation must be backed by a pool of underlying exposures that are homogeneous in terms of asset type, considering the specific characteristics relating to the asset type’s cash flows, including their contractual, credit-risk and prepayment characteristics.

(2) Further details specifying which underlying exposures are homogeneous for the purposes of (1) are set out at SECN 2.4.

(3) The underlying exposures must contain contractually binding and enforceable obligations, with full recourse to debtors and, where applicable, guarantors.

The underlying exposures shall have defined periodic payment streams, the instalments of which may differ in their amounts, relating to rental, principal, or interest payments, or to any other right to receive income from assets supporting such payments. The underlying exposures may also generate proceeds from the sale of any financed or leased assets.

(4) The underlying exposures must have defined periodic payment streams (the instalments of which may differ in their amounts) relating to rental, principal, or interest payments, or to any other right to receive income from assets supporting such payments. The underlying exposures may also generate proceeds from the sale of any financed or leased assets.

The underlying exposures shall not include transferable securities, as defined in point (44) of Article 4(1) of Directive 2014/65/EU [MiFID II]], other than corporate bonds that are not listed on a trading venue.

(5) The underlying exposures must not include any transferable security, other than corporate bonds not listed on a trading venue.

EBA Guidelines
Background and rationale para. 27-30
Guidelines para. 20-21
Q&A 8-9

The FCA rules provide, similar to the EU Homogeneity RTS, that “loans to certain corporates will be treated as homogeneous with loans to individuals if the relevant underwriting approaches and servicing procedures… are the same or similar”.

SECN 2.2.9 expressly states that the pool of securitised exposures may include unlisted corporate bonds (this appears in recital (27) of the EUSR), and SECN 2.4.3 states that BTL and owner-occupied mortgages are generally not homogenous unless underwritten and serviced with similar standards.

Related recital: Recital (27)

 

Related RTS: RTS on homogeneity

 

Commentaries: What is homogeneity and how do we know it when we see it?; A brief history of homogeneity

 

9. The underlying exposures shall not include any securitisation position.

2.2.10 R

The underlying exposures must not include any securitisation position.

EBA Guidelines
Background and rationale para. 31-32

 

Commentary: Resecuritisations

 

10. The underlying exposures shall be originated in the ordinary course of the originator’s or original lender’s business pursuant to underwriting standards that are no less stringent than those that the originator or original lender applied at the time of origination to similar exposures that are not securitised. The underwriting standards pursuant to which the underlying exposures are originated and any material changes from prior underwriting standards shall be fully disclosed to potential investors without undue delay.

2.2.11 R

(1) The underlying exposures must be originated:

(a) in the ordinary course of the originator’s or original lender’s business; and

(b) following underwriting standards at least as rigorous as those the originator or original lender applied at the time of origination to similar unsecuritised exposures, to the extent there are any.

(2) The originator or the original lender (as the case may be) must fully disclose to potential investors, without undue delay:

(a) the underwriting standards pursuant to which the underlying exposures are originated; and

(b) any material changes from former underwriting standards.

In the case of securitisations where the underlying exposures are residential loans, the pool of loans shall not include any loan that was marketed and underwritten on the premise that the loan applicant or, where applicable, intermediaries were made aware that the information provided might not be verified by the lender.

(3) For securitisations with residential loans as underlying exposures, the pool of loans must not include any loan that was marketed and underwritten on the premise that the loan applicant or, where applicable, intermediaries were made aware that the lender might not verify the information provided.

The assessment of the borrower’s creditworthiness shall meet the requirements set out in Article 8 of Directive 2008/48/EC or paragraphs 1 to 4, point (a) of paragraph 5, and paragraph 6 of Article 18 of 2014/17/EU [Mortgage Credits Directive] or, where applicable, equivalent requirements in third countries.

(4) The assessment of the borrower’s creditworthiness must meet the requirements in:

(a) CONC 5.2A.7R;

(b) MCOB 11.6.2R(1)(a), MCOB 11.6.2R(1)(b), MCOB 11.6.2R(2), MCOB 11.6.5R(1), MCOB 11.6.60R and MCOB 11A.2.1R; or

(c) where applicable, equivalent requirements in a third country.

The originator or original lender shall have expertise in originating exposures of a similar nature to those securitised.

(5) The originator or original lender must have expertise in originating exposures of a similar nature to those securitised.

Related recitals: Recital (11); Recital (28)

 

11. The underlying exposures shall be transferred to the SSPE after selection without undue delay and shall not include, at the time of selection, exposures in default within the meaning of Article 178(1) of Regulation (EU) No 575/2013 [CRR] or exposures to a credit-impaired debtor or guarantor, who, to the best of the originator’s or original lender’s knowledge:

(a) has been declared insolvent or had a court grant his creditors a final non-appealable right of enforcement or material damages as a result of a missed payment within three years prior to the date of origination or has undergone a debt-restructuring process with regard to his non-performing exposures within three years prior to the date of transfer or assignment of the underlying exposures to the SSPE, except if:

(i) a restructured underlying exposure has not presented new arrears since the date of the restructuring, which must have taken place at least one year prior to the date of transfer or assignment of the underlying exposures to the SSPE; and

(ii) the information provided by the originator, sponsor and SSPE in accordance with points (a) and (e)(i) of the first subparagraph of Article 7(1) explicitly sets out the proportion of restructured underlying exposures, the time and details of the restructuring as well as their performance since the date of the restructuring;

(b) was, at the time of origination, where applicable, on a public credit registry of persons with adverse credit history or, where there is no such public credit registry, another credit registry that is available to the originator or original lender; or

(c) has a credit assessment or a credit score indicating that the risk of contractually agreed payments not being made is significantly higher than for comparable exposures held by the originator which are not securitised.

2.2.12 R

(1) After the underlying exposures have been selected, they must be transferred to the SSPE (if an SSPE is used) or otherwise securitised without undue delay.

(2) At the time of selection, the underlying exposures must not include exposures in default within the meaning of Article 178(1) of the UK CRR or exposures to a credit-impaired debtor or guarantor who, to the best of the originator’s or original lender’s knowledge:

(a) was, at the time of origination, where applicable:

(i) on a public credit registry of persons with adverse credit history; or

(ii) if there is no such public credit registry, another credit registry that is available to the originator or original lender;

(b) has a credit assessment or a credit score indicating that the risk of contractually agreed payments not being made is significantly higher than for comparable unsecuritised exposures the originator holds, if any;

(c) has been declared insolvent;

(d) had a court grant its creditors a final non-appealable right of enforcement or material damages as a result of a missed payment within 3 years before the date of origination; or

(e) has undergone a debt restructuring process with regard to its non-performing exposures within 3 years before the date of transfer of the underlying exposures to the SSPE (if an SSPE is used) or other means of securitising the underlying exposure.

(3) If a credit-impaired debtor or guarantor has undergone a debt restructuring process as described in (2)(e), the underlying exposures may include exposures to that credit-impaired debtor or guarantor if:

(a) the restructured underlying exposure has not presented new arrears since the date of the restructuring, which must have taken place at least 1 year before the date the underlying exposures were transferred to the SSPE (if an SSPE is used) or otherwise securitised; and

(b) the information the originator, sponsor and SSPE have provided in accordance with SECN 6.2.1R(1) and SECN 6.2.1R(5)(a) explicitly sets out:

(i) the proportion of total underlying exposures, which have been restructured;

(ii) the time and details of the restructuring; and

(iii) their performance since the date they were restructured.

Related recital: Recital (26)

 

EBA Guidelines
Background and rationale para. 39-40
Guidelines para. 37-45
Q&A 13-15

 

12. The debtors shall, at the time of transfer of the exposures, have made at least one payment, except in the case of revolving securitisations backed by exposures payable in a single instalment or having a maturity of less than one year, including without limitation monthly payments on revolving credits.

2.2.13 R The debtors must, at the time the exposures are transferred, have made at least one payment, except in the case of revolving securitisations backed by exposures payable in a single instalment or with a maturity of less than 1 year (including, without limitation, monthly payments on revolving credits).

EBA Guidelines
Background and rationale para. 41-42
Guidelines para. 46-47
Q&A 16

 

13. The repayment of the holders of the securitisation positions shall not have been structured to depend predominantly on the sale of assets securing the underlying exposures. This shall not prevent such assets from being subsequently rolled-over or refinanced.

The repayment of the holders of the securitisation positions whose underlying exposures are secured by assets the value of which is guaranteed or fully mitigated by a repurchase obligation by the seller of the assets securing the underlying exposures or by another third party shall not be considered to depend on the sale of assets securing those underlying exposures.

2.2.14 R

(1) A securitisation must not be structured so that repayment of investors depends predominantly on the sale of the assets securing the underlying exposures.

(2) Paragraph (1) must not prevent such assets from subsequently being rolled over or refinanced.

(3) If a securitisation’s underlying exposures are secured by assets, and the value of those assets is guaranteed or fully mitigated by an obligation on the seller or another third party to repurchase them, that securitisation does not contravene the prohibition in (1).

Related recitals: Recital (29)

 

Commentaries: Reliance on asset sales; CMBS - a cinderella asset class?

 

EBA Guidelines
Background and rationale para. 43-46
Guidelines para. 48-50

 

14. The EBA, in close cooperation with ESMA and EIOPA, shall develop draft regulatory technical standards further specifying which underlying exposures referred to in paragraph 8 are deemed to be homogeneous.

 

The EBA shall submit those draft regulatory technical standards to the Commission by 18 July 2018.]

 

The Commission is empowered to supplement this Regulation by adopting the regulatory technical standards referred to in this paragraph in accordance with Articles 10 to 14 of Regulation (EU) No 1093/2010.]

 

Article 21

 

Requirements relating to standardisation

Standardisation requirements

1. The originator, sponsor or original lender shall satisfy the risk-retention requirement in accordance with Article 6.

2.2.15 R The originator, sponsor or original lender must satisfy the risk-retention requirement in accordance with SECN 5.

EBA Guidelines
Background and rationale para. 47-48

 

2. The interest-rate and currency risks arising from the securitisation shall be appropriately mitigated and any measures taken to that effect shall be disclosed. Except for the purpose of hedging interest-rate or currency risk, the SSPE shall not enter into derivative contracts and shall ensure that the pool of underlying exposures does not include derivatives. Those derivatives shall be underwritten and documented according to common standards in international finance.

2.2.16 R

(1) The interest rate and currency risks arising from the securitisation must be appropriately mitigated. Any measures taken to that effect must be disclosed.

(2) The securitisation must be structured such that:

(a) the SSPE does not enter into derivative contracts, unless to hedge interest rate or currency risk; and

(b) the pool of underlying exposures does not include derivatives.

(3) Any derivatives into which the SSPE does enter in accordance with (2)(a) must be underwritten and documented according to common standards in international finance.

Commentary: Standard reference rates

 

EBA Guidelines
Background and rationale para. 49-52
Guidelines para. 51-56
Q&A 19

 

3. Any referenced interest payments under the securitisation assets and liabilities shall be based on generally used market interest rates, or generally used sectoral rates reflective of the cost of funds, and shall not reference complex formulae or derivatives.

2.2.17 R

Any referenced interest payments under the securitisation assets and liabilities must:

(1) be based on generally used market interest rates or generally used sectoral rates reflective of the cost of funds; and

(2) not reference complex formulae or derivatives.

EBA Guidelines
Background and rationale para. 53-54
Guidelines para. 57-58
Q&A 20

 

4. Where an enforcement or an acceleration notice has been delivered:

2.2.18 R

If an enforcement or an acceleration notice has been delivered:

(a) no amount of cash shall be trapped in the SSPE beyond what is necessary to ensure the operational functioning of the SSPE or the orderly repayment of investors in accordance with the contractual terms of the securitisation, unless exceptional circumstances require that an amount be trapped to be used, in the best interests of investors, for expenses in order to avoid the deterioration in the credit quality of the underlying exposures;

(1) no cash may be trapped in the SSPE above what is needed to ensure the SSPE’s operational functioning or the orderly repayment of investors under the securitisation’s contractual terms. However, an amount of cash may be so trapped if exceptional circumstances require it to be used (in the investors’ best interests) to pay expenses to prevent deterioration in the underlying exposures’ credit quality;

(b) principal receipts from the underlying exposures shall be passed to investors via sequential amortisation of the securitisation positions, as determined by the seniority of the securitisation position;

(2) principal receipts from the underlying exposures must be passed to investors via sequential amortisation of the securitisation positions, as determined by the securitisation positions’ seniority;

(c) repayment of the securitisation positions shall not be reversed with regard to their seniority; and

(3) repayment of the securitisation positions must not be reversed with regard to their seniority; and

(d) no provisions shall require automatic liquidation of the underlying exposures at market value.

(4) no provisions may require automatic liquidation of the underlying exposures at market value.

EBA Guidelines
Background and rationale para. 55-58
Guidelines para. 59-65
Q&A 21

 

5. Transactions which feature non-sequential priority of payments shall include triggers relating to the performance of the underlying exposures resulting in the priority of payments reverting to sequential payments in order of seniority. Such performance-related triggers shall include at least the deterioration in the credit quality of the underlying exposures below a predetermined threshold.

2.2.19 R

Transactions featuring non-sequential priority of payments must include triggers relating to the performance of the underlying exposures resulting in the priority of payments reverting to sequential payments in order of seniority. Such performance-related triggers must include the deterioration in the credit quality of the underlying exposures below a predetermined threshold.

EBA Guidelines
Background and rationale para. 59-60
Guidelines para. 66
Q&A 22

 

6. The transaction documentation shall include appropriate early amortisation provisions or triggers for termination of the revolving period where the securitisation is a revolving securitisation, including at least the following:

2.2.20 R

The transaction documentation must include appropriate early amortisation provisions or, in the case of a revolving securitisation, triggers for termination of the revolving period, including in the following circumstances:

(a) a deterioration in the credit quality of the underlying exposures to or below a predetermined threshold;

(1) the underlying exposures’ credit quality deteriorating to or below a predetermined threshold;

(b) the occurrence of an insolvency-related event with regard to the originator or the servicer;

(2) an insolvency-related event with regard to the originator or the servicer occurring;

(c) the value of the underlying exposures held by the SSPE falls below a predetermined threshold (early amortisation event); and

(3) the value of the underlying exposures falling below a predetermined threshold (early amortisation event); and

(d) a failure to generate sufficient new underlying exposures that meet the predetermined credit quality (trigger for termination of the revolving period).

(4) failing to generate sufficient new underlying exposures meeting the predetermined credit quality (trigger for termination of the revolving period).

EBA Guidelines
Background and rationale para. 61-62
Guidelines para. 67
Q&A 23

 

7. The transaction documentation shall clearly specify:

2.2.21 R

The transaction documentation must clearly specify:

(a) the contractual obligations, duties and responsibilities of the servicer and the trustee, if any, and other ancillary service providers;

(1) the servicer’s, any trustee’s and other ancillary service providers’ contractual obligations, duties and responsibilities;

(b) the processes and responsibilities necessary to ensure that a default by or an insolvency of the servicer does not result in a termination of servicing, such as a contractual provision which enables the replacement of the servicer in such cases; and

(2) the processes and responsibilities necessary to ensure that the servicer’s default or insolvency does not result in servicing terminating, such as a contractual provision enabling the servicer to be replaced in such cases; and

(c) provisions that ensure the replacement of derivative counterparties, liquidity providers and the account bank in the case of their default, insolvency, and other specified events, where applicable.

(3) provisions ensuring derivative counterparties, liquidity providers and the account bank are replaced in the case of their default, insolvency and other specified events, where applicable.

Related recital: Recital (25)

 

EBA Guidelines
Background and rationale para. 63-64
Q&A 24

 

8. The servicer shall have expertise in servicing exposures of a similar nature to those securitised and shall have well-documented and adequate policies, procedures and risk-management controls relating to the servicing of exposures.

2.2.22 R

The servicer must have:

(1) expertise in servicing exposures of a similar nature to those securitised; and

(2) well-documented and adequate policies, procedures and risk management controls relating to the exposures’ servicing.

EBA Guidelines
Background and rationale para. 65-67
Guidelines para. 68-72
Q&A 25-26

 

9. The transaction documentation shall set out in clear and consistent terms definitions, remedies and actions relating to delinquency and default of debtors, debt restructuring, debt forgiveness, forbearance, payment holidays, losses, charge offs, recoveries and other asset performance remedies. The transaction documentation shall clearly specify the priorities of payment, events which trigger changes in such priorities of payment as well as the obligation to report such events. Any change in the priorities of payments which will materially adversely affect the repayment of the securitisation position shall be reported to investors without undue delay.

2.2.23 R

(1) The transaction documentation must clearly and consistently set out definitions, remedies and actions relating to:

(a) delinquency and default of debtors;

(b) debt restructuring;

(c) debt forgiveness;

(d) forbearance;

(e) payment holidays;

(f) losses;

(g) charge offs;

(h) recoveries; and

(i) other asset performance remedies.

(2) The transaction documentation must clearly specify:

(a) the priorities of payment and events triggering any change to these; and

(b) the obligation to report such events.

(3) Any change in the priorities of payments which will materially adversely affect a securitisation position’s repayment must be reported to investors without undue delay.

Related recital: Recital (26)

 

EBA Guidelines
Background and rationale para. 70-71
Guidelines para. 73
Q&A 27

 

10. The transaction documentation shall include clear provisions that facilitate the timely resolution of conflicts between different classes of investors, voting rights shall be clearly defined and allocated to bondholders and the responsibilities of the trustee and other entities with fiduciary duties to investors shall be clearly identified.

2.2.24 R

The transaction documentation must include clear:

(1) provisions facilitating timely resolution of conflicts between different classes of investors;

(2) definitions of voting rights;

(3) allocation of voting rights to classes of investor; and

(4) identification of responsibilities of the trustee and other entities with fiduciary duties to investors.

EBA Guidelines
Background and rationale para. 70-71
Guidelines para. 74
Q&A 28

 

Article 22

 

Requirements relating to transparency

Transparency requirements

1. The originator and the sponsor shall make available data on static and dynamic historical default and loss performance, such as delinquency and default data, for substantially similar exposures to those being securitised, and the sources of those data and the basis for claiming similarity, to potential investors before pricing. Those data shall cover a period of at least five years.

2.2.25 R

Before pricing or original commitment to invest, the originator and the sponsor must make available to potential investors:

(1) data covering a period of at least 5 years about static and dynamic historical default and loss performance, such as delinquency and default data, for substantially similar exposures to those being securitised; and

(2) the sources of the data in (1) and the reasons those exposures are substantially similar exposures to those being securitised.

EBA Guidelines
Background and rationale para. 72-73
Guidelines para. 75-77
Q&A 29

 

2. A sample of the underlying exposures shall be subject to external verification prior to issuance of the securities resulting from the securitisation by an appropriate and independent party, including verification that the data disclosed in respect of the underlying exposures is accurate.

2.2.26 R

(1) An appropriate and independent external party must verify a sample of the underlying exposures before the securities resulting from the securitisation are issued.

(2) That verification must confirm that the data disclosed in respect of the underlying exposures is accurate.

EBA Guidelines
Background and rationale para. 74-75
Guidelines para. 78-81
Q&A 30

 

3. The originator or the sponsor shall, before the pricing of the securitisation, make available to potential investors a liability cash flow model which precisely represents the contractual relationship between the underlying exposures and the payments flowing between the originator, sponsor, investors, other third parties and the SSPE, and shall, after pricing, make that model available to investors on an ongoing basis and to potential investors upon request.

2.2.27 R

(1) Before pricing or original commitment to invest, the originator or the sponsor must make available to potential investors a liability cashflow model precisely representing the contractual relationship between the underlying exposures and the payments flowing between:

(a) the originator;

(b) the sponsor;

(c) the investors;

(d) other third parties; and

(e) the SSPE.

(2) After pricing or original commitment to invest, the originator or the sponsor must continually make that model available to investors and potential investors on request.

EBA Guidelines
Background and rationale para. 76-77
Guidelines para. 82-83
Q&A 31

 

4. In the case of a securitisation where the underlying exposures are residential loans or auto loans or leases, the originator and sponsor shall publish the available information related to the environmental performance of the assets financed by such residential loans or auto loans or leases, as part of the information disclosed pursuant to point (a) of the first subparagraph of Article 7(1).

2.2.28 R

For a securitisation whose underlying exposures are residential loans or auto loans or leases, the originator and sponsor must publish the available information about the environmental performance of the assets financed by such residential loans or auto loans or leases as part of the information disclosed pursuant to SECN 6.2.1R(1).

By way of derogation from the first subparagraph, originators may, from 1 June 2021, decide to publish the available information related to the principal adverse impacts of the assets financed by underlying exposures on sustainability factors.

 

Related recital: Recital (30)

 

Commentary: Environmental disclosures

 

EBA Guidelines
Background and rationale para. 78-79
Guidelines para. 84
Q&A 32-33

 

5. The originator and the sponsor shall be responsible for compliance with Article 7. The information required by point (a) of the first subparagraph of Article 7(1) shall be made available to potential investors before pricing upon request. The information required by points (b) to (d) of the first subparagraph of Article 7(1) shall be made available before pricing at least in draft or initial form. The final documentation shall be made available to investors at the latest 15 days after closing of the transaction.

2.2.29 R

(1) Before pricing or original commitment to invest, the following information must be made available to potential investors:

(a) that required by SECN 6.2.1R(1); and

(b) at least in draft or initial form, that required by SECN 6.2.1R(2) to SECN 6.2.1R(4).

(2) The final documentation must be made available to investors at the latest 15 days after closing of the transaction.

6. By 10 July 2021, the ESAs shall develop, through the Joint Committee of the European Supervisory Authorities, draft regulatory technical standards in accordance with Articles 10 to 14 of Regulations (EU) No 1093/2010, (EU) No 1094/2010 and (EU) No 1095/2010 on the content, methodologies and presentation of information referred to in the second subparagraph of paragraph 4 of this Article, in respect of the sustainability indicators in relation to adverse impacts on the climate and other environmental, social and governance-related adverse impacts.

 

Where relevant, the draft regulatory technical standards referred to in the first subparagraph shall mirror or draw upon the regulatory technical standards developed pursuant to the mandate given to the ESAs in Regulation (EU) 2019/2088 [Sustainable Finance Disclosure Regulation], in particular in Article 2a and Article 4(6) and (7) thereof.

 

The Commission is empowered to supplement this Regulation by adopting the regulatory technical standards referred to in the first subparagraph in accordance with Articles 10 to 14 of Regulations (EU) No 1093/2010, (EU) No 1094/2010 and (EU) No 1095/2010.

 

References

 

EBA Guidelines
Background and rationale para. 80-81
Q&A 34

 

The STS criteria for ABCP are not set out here

The STS criteria for ABCP are not set out here

The homogeneity RTS

2.4 STS criteria: Homogeneity of underlying exposures

[These are not set out here; they correspond to SECN 2.4]

[SECN 2.4 is not set out here; it corresponds to the homogeneity RTS]

Article 27

 

STS notification

2.5 STS notification

1. Originators and sponsors shall jointly notify ESMA by means of the template referred to in paragraph 7 of this Article where a securitisation meets the requirements set out in Articles 19 to 22, Articles 23 to 26 or Articles 26a to 26e (“STS notification”)...

2.5.1 R (1) If a securitisation which is not an ABCP programme or an ABCP transaction meets the relevant STS criteria, the originator and sponsor jointly may notify the FCA of that fact as described in SECN 2.6.

This extract is shown to highlight one small helpful divergence in the wording between Article 27 and SECN 2.5.1. Article 27(1) on the face of it requires notification if the STS criteria are met even if the originator or sponsor does not wish to have the issue registered as STS. The FCA rules clarifies (“may” rather than “shall”) that notification is not required unless the originator or sponsor wishes to have the issue registered as STS.

EUSR Article 6 and Risk Retention RTS (CDR 2023/2175)

FCA SECN 5

PRA Chapter 1, Chapter 2, Article 6 and Chapter 4 

RTS Article 1 (Definitions)

For the purposes of this Regulation, the following definitions shall apply:

(a) ‘synthetic form of retention’ means the retention of a material net economic interest through the use of derivative instruments;

(b) ‘contingent form of retention’ means the retention of a material net economic interest through the use of credit support that ensures an immediate enforcement of the retention, including by guarantees, letters of credit, or similar forms of credit support.

5.1 Interpretation and application

5.1.3 R

(1) ‘contingent form of retention’ means retention of a material net economic interest through the use of guarantees, letters of credit and other similar forms of credit support ensuring an immediate enforcement of the retention;

(2) ‘synthetic form of retention’ means retention of a material net economic interest through the use of derivative instruments; and

(3) ‘UK Solvency II Firm’ has the same definition as in Article 2.1 of Chapter 2, Solvency II Firms: Insurance General Application of the PRA Rulebook.

1. Applications and definitions

contingent form of retention

means retention of a material net economic interest through the use of guarantees, letters of credit and other similar forms of credit support ensuring an immediate enforcement of the retention.

synthetic form of retention

means retention of a material net economic interest through the use of derivative instruments.

Article 6 Risk retention

1. The originator, sponsor or original lender of a securitisation shall retain on an ongoing basis a material net economic interest in the securitisation of not less than 5 %. That interest shall be measured at the origination and shall be determined by the notional value for off-balance-sheet items.

5.2 Retention of a material net economic interest

5.2.1 R

The originator, sponsor or original lender of a securitisation shall retain on an ongoing basis a material net economic interest in the securitisation of not less than 5%. That interest shall be measured at the origination and shall be determined by the notional value for off-balance-sheet items.

Chapter 2, Article 6 Risk retention

1. The originator, sponsor or original lender of a securitisation shall retain on an ongoing basis a material net economic interest in the securitisation of not less than 5%. That interest shall be measured at the origination and shall be determined by the notional value for off-balance-sheet items.

Where the originator, sponsor or original lender have not agreed between them who will retain the material net economic interest, the originator shall retain the material net economic interest.

5.2.2 R

Where the originator, sponsor or original lender have not agreed between them who will retain the material net economic interest, the originator shall

retain the material net economic interest.

Where the originator, sponsor or original lender have not agreed between them who will retain the material net economic interest, the originator shall retain the material net economic interest.

There shall be no multiple applications of the retention requirements for any given securitisation.

5.2.3 R

There shall be no multiple applications of the retention requirements for any given securitisation.

There shall be no multiple applications of the retention requirements for any given securitisation.

The material net economic interest shall not be split amongst different types of retainers and not be subject to any credit-risk mitigation or hedging.

5.2.4 R

The material net economic interest shall not be split amongst different types of retainers and shall not be subject to any credit-risk mitigation or hedging.

The material net economic interest shall not be split amongst different types of retainers and shall not be subject to any credit-risk mitigation or hedging.

For the purposes of this Article, an entity shall not be considered to be an originator where the entity has been established or operates for the sole purpose of securitising exposures.

5.2.5 R

For the purposes of SECN 5, an entity shall not be considered to be an originator where the entity has been established or operates for the sole purpose of securitising exposures.

For the purposes of this Article and Chapter 4, an entity shall not be considered to be an originator where the entity has been established or operates for the sole purpose of securitising exposures.

RTS Article 2 (Retainers of a material net economic interest)

1. The requirement laid down in Article 6(1), first subparagraph, of Regulation (EU) 2017/2402, which states that the retained material net economic interest shall not be split amongst different types of retainers, shall be fulfilled by any of the following:

(a) the originator or originators;

(b) the sponsor or sponsors;

(c) the original lender or original lenders;

(d) the servicer or servicers in a traditional NPE securitisation, provided that they meet the requirement on expertise set out in Article 19 of this Regulation.

[see 5.3.1 below]

Chapter 4, Article 2 Retainers of material net economic interest

1. The requirement that the retained material net economic interest shall not be split amongst different types of retainers under Article 6(1) of Chapter 2 shall be fulfilled by any of the following:

(a) the originator or originators;

(b) the sponsor or sponsors; or

(c) the original lender or original lenders;

[See Article 6(2) below]

5.2.6 R

Subject to SECN 5.2.7R, originators shall not select assets to be transferred to the SSPE with the aim of rendering losses on the assets transferred to the SSPE, measured over the life of the transaction, or over a maximum of 4 years where the life of the transaction is longer than 4 years, higher than the losses over the same period on comparable assets held on the balance sheet of the originator.

[See Article 6(2) below]

2. Where more than one originator is eligible to fulfil the retention requirement, each originator shall fulfil that requirement on a pro rata basis by reference to the securitised exposures for which it is the originator.

[see 5.3.2 below]

2. Where more than one originator is eligible to fulfil the retention requirement, each originator shall fulfil that requirement on a pro rata basis by reference to the securitised exposures for which it is the originator.

[The FCA rule tracks EUSR Recital (11):

“… However, that obligation should not prejudice in any way the right of originators or sponsors to select assets to be transferred to the SSPE that ex ante have a higher-than-average credit-risk profile compared to the average credit-risk profile of comparable assets that remain on the balance sheet of the originator, as long as the higher credit-risk profile of the assets transferred to the SSPE is clearly communicated to the investors or potential investors…”]

5.2.7 R

Originators may select assets to be transferred to the SSPE that ex ante have a higher than average credit risk profile as compared to the comparable assets, if any, that remain on the balance sheet of the originator provided that the higher credit risk profile of the assets transferred to the SSPE is clearly communicated to the investors or potential investors.

[see 2A below]

[see Article 6(3)]

5.2.8 R

[This corresponds to Article 6(3) in the EUSR and the PRA rules, and so is set out below alongside those]

[see Article 6(3)]

See Article 6(4) below]

5.2.9 R (1)

Where:

(a) a mixed financial holding company;

(b) a UK parent institution;

(c) a financial holding company that is established in the United Kingdom; or

(d) a subsidiary of such a company or institution,

as an originator or sponsor, securitises exposures from one or more CRR firms, FCA investment firms or other financial institutions which are included in the scope of supervision on a consolidated basis, the requirements set out in SECN 5.2.1R to SECN 5.2.5R may be satisfied based on the consolidated situation of the mixed financial holding company, UK parent institution or financial holding company concerned.

See Article 6(4) below]

See Article 6(4) below]

(2) Subject to the modifications for FCA investment firms in (3), (1) applies only if CRR firms, FCA investment firms or financial institutions which created the securitised exposures:

(a) comply with the requirements in Chapter 4 of the Internal Capital Adequacy Assessment Part of the PRA Rulebook; and

(b) deliver the information needed to satisfy the requirements in SECN 4 or equivalent PRA rules, in a timely manner, to the originator or sponsor and, if the originator or sponsor is a subsidiary, to the mixed financial holding company, UK parent institution or financial holding company which is the parent undertaking of the subsidiary.

See Article 6(4) below]

[No equivalent]

(3) In the case of FCA investment firms, compliance with the requirements set out in Article 4.2 of Chapter 4 of the Internal Capital Adequacy Assessment Part of the PRA Rulebook are modified in accordance with this subparagraph:

(a) FCA investment firms must have internal methodologies that enable them to assess the credit risk of exposures to individual obligors, securities or securitisation positions and credit risk at the portfolio level;

(b) the internal methodologies must not rely solely or mechanistically on external credit ratings; and

(c) where an FCA investment firm determines the amount of own funds that it should hold by reference to a rating by an external credit assessment institution or by reference to the fact that an exposure is unrated, this does not exempt the FCA investment firm from additionally considering other relevant information for assessing its allocation of internal capital.

[No equivalent]

 

(4) In SECN 5.2.9R ‘subsidiary’ has the meaning given in Article 4(1)(16) of UK CRR.

 
 

5.2.10 R

[This corresponds to Article 6(5) in the EUSR and the PRA rules, and so is set out below alongside those]

 
 

5.2.11 R

[This corresponds to Article 6(6) in the EUSR and the PRA rules, and so is set out below alongside those]

 

[See RTS Article 2(1) above]

5.3.1 R

The requirement that the retained material net economic interest shall not be split among different types of retainers under SECN 5.2.4R shall be fulfilled by any of the following:

(1) the originator or originators;

(2) the sponsor or sponsors; or

(3) the original lender or original lenders.

[See Chapter 4, Article 2(1) above]

[See RTS Article 2(2) above]

5.3.2 R

Where more than one originator is eligible to fulfil the retention requirement each originator shall fulfil that requirement on a pro rata basis by reference to the securitised exposures for which it is the originator.

[See Chapter 4, Article 2(2) above]

3. Where more than one original lender is eligible to fulfil the retention requirement, each original lender shall fulfil that requirement on a pro rata basis by reference to the securitised exposures for which it is the original lender.

5.3.3 R

Where more than one original lender is eligible to fulfil the retention requirement, each original lender shall fulfil that requirement on a pro rata basis by reference to the securitised exposures for which it is the original lender.

3. Where more than one original lender is eligible to fulfil the retention requirement, each original lender shall fulfil that requirement on a pro rata basis by reference to the securitised exposures for which it is the original lender.

4. By way of derogation from paragraphs 2 and 3, the retention requirement may be fulfilled in full by a single originator or original lender provided that one of the following conditions is met:

5.3.4 R

By way of derogation from SECN 5.3.2R and SECN 5.3.3R, the retention requirement may be fulfilled in full by a single originator or original lender provided that either of the following conditions is met:

4. By way of derogation from paragraphs 2 and 3, the retention requirement may be fulfilled in full by a single originator or original lender provided that either of the following conditions is met:

(a) the originator or original lender has established and is managing the asset-backed commercial paper (ABCP) programme or other securitisation;

(1) the originator or original lender has established and is managing the ABCP programme or other securitisation; or

(a) the originator or original lender has established and is managing the ABCP programme or other securitisation; or

(b) the originator or original lender has established the ABCP programme or other securitisation and has contributed more than 50 % of the total securitised exposures measured by nominal value at origination.

(2) the originator or original lender has established the ABCP programme or other securitisation and has contributed over 50% of the total securitised exposures measured by nominal value at origination.

(b) the originator or original lender has established the ABCP programme or other securitisation and has contributed over 50% of the total securitised exposures measured by nominal value at origination.

5. Where more than one sponsor is eligible to fulfil the retention requirement, the retention requirement shall be fulfilled by either:

5.3.5 R

Where more than one sponsor is eligible to fulfil the retention requirement, the retention requirement shall be fulfilled by either:

5. Where more than one sponsor is eligible to fulfil the retention requirement, the retention requirement shall be fulfilled by either:

(a) the sponsor whose economic interest is most closely aligned with the investor’s interest as agreed by all involved sponsors on the basis of objective criteria, including all of the following:

(i) the transaction’s fee structure;

(ii) the sponsor’s involvement in the establishment and management of the ABCP programme or other securitisation; and

(iii) the exposure to the credit risk of the securitisations; or

(1) the sponsor whose economic interest is most appropriately aligned with investors as agreed by the multiple sponsors on the basis of objective criteria including, but not limited to, the transaction’s fee structure, the sponsor’s involvement in the establishment and management of the ABCP programme or other securitisation and exposure to credit risk of the securitisations; or

(a) the sponsor whose economic interest is most appropriately aligned with investors as agreed by the multiple sponsors on the basis of objective criteria including, but not limited to, the transaction’s fee structure, the sponsor’s involvement in the establishment and management of the ABCP programme or other securitisation and exposure to credit risk of the securitisations; or

(b) each sponsor in proportion to the total number of sponsors.

(2) by each sponsor in proportion to the total number of sponsors.

(b) by each sponsor in proportion to the total number of sponsors.

6. Where more than one servicer is eligible to fulfil the retention requirement, the retention requirement shall be fulfilled by either:

(a) the servicer with the predominant economic interest in the successful workout of the exposures of the traditional NPE securitisation, as agreed by all servicers involved on the basis of objective criteria, including the transaction’s fee structure and the servicer’s available resources and expertise to manage the exposures’ workout process; or

(b) each servicer on a pro rata basis by reference to the securitised exposures that it manages, which shall be calculated as the sum of the net value of the securitised exposures that qualify as non-performing exposures and of the nominal value of the performing securitised exposures.

[No equivalent]

[No equivalent]

Only the EUSR permits the servicer (in respect of a securitisation of NPEs) to hold the risk retention.

7. An entity shall not be considered to have been established or to operate for the sole purpose of securitising exposures as referred to in Article 6(1), second subparagraph, of Regulation (EU) 2017/2402 where all of the following applies:

5.3.6 R

The following must be taken into account when assessing whether an entity has been established or operates for the sole purpose of securitising exposures as referred to in SECN 5.2.5R:

6. The following must be taken into account when assessing whether an entity has been established or operates for the sole purpose of securitising exposures, as referred to in the fifth sub-paragraph of Article 6(1) of Chapter 2:

(a) the entity has a strategy and the capacity to meet payment obligations consistent with a broader business model that involves material support from capital, assets, fees or other sources of income, by virtue of which the entity does not rely on the exposures to be securitised, on any interests retained or proposed to be retained in accordance with Article 6 of Regulation (EU) 2017/2402, or on any corresponding income from such exposures and interests, as its sole or predominant source of revenue;

(1) the entity has a business strategy and the capacity to meet payment obligations consistent with a broader business model and involving material support from capital, assets, fees or other income available to the entity, relying neither on the exposures being securitised, nor on any interests retained or proposed to be retained in accordance with SECN 5, as well as any corresponding income from such exposures and interests; and

(a) the entity has a business strategy and the capacity to meet payment obligations consistent with a broader business model and involving material support from capital, assets, fees or other income available to the entity, relying neither on the exposures being securitised, nor on any interests retained or proposed to be retained in accordance with Article 6 of Chapter 2, as well as any corresponding income from such exposures and interests; and

(b) the members of the management body have the necessary experience to enable the entity to pursue the established business strategy, as well as adequate corporate governance arrangements.

(2) the members of the management body have the necessary experience to enable the entity to pursue the established business strategy, and the entity has adequate corporate governance arrangements.

(b) the members of the management body have the necessary experience to enable the entity to pursue the established business strategy, as well as adequate corporate governance arrangements.

The PRA and FCA broadly follow the now-superseded EBA draft risk retention RTS in requiring that it should be “taken into account” whether the entity has a business strategy and payment capacity “consistent with a broader business model” and whether the members of its management body have the necessary experience to enable the entity to pursue the established business strategy and the entity has adequate corporate governance arrangements. Article 2(7) of the EU risk retention RTS (CDR 2023/2175) has made this into a safe harbour rather than a ”take into account” requirement, and the “predominant” requirement makes the safe harbour less accessible: the securitised exposures, the retained interest, and any corresponding income, must not be its “predominant source of revenue”. This seems to mean these cannot exceed 49% of its total income (assuming that “predominant” means “main”). Of course, if it does not meet the safe harbour test, that does not necessarily mean that it fails the sole purpose test: the RTS cannot change the meaning of the level 1 text. In any event, in practice the sole purpose test seems capable of being passed.

See further “Risk retention” and “Sole purpose”.

RTS Article 3 (Fulfilment of the retention requirement through a synthetic or contingent form of retention)

1. The fulfilment of the retention requirement in a manner equivalent to one of the options set out in Article 6(3) of Regulation (EU) 2017/2402 through a synthetic or contingent form of retention shall meet all of the following conditions:

5.4 Fulfilment of the retention requirement through a synthetic form of retention or contingent form or retention

5.4.1 R

(1) The fulfilment of the retention requirement in a manner equivalent to one of the options set out in SECN 5.2.8R through a synthetic or contingent form of retention shall meet all of the following conditions:

Article 3 Fulfilment of the retention requirement through a synthetic form of retention or contingent form of retention

1. The fulfilment of the retention requirement in a manner equivalent to one of the options set out in Article 6(3) of Chapter 2 through a synthetic form of retention or contingent form of retention, shall meet all of the following conditions:

(a) the amount retained is at least equal to the amount required under the option which the synthetic or contingent form of retention corresponds to;

(a) the amount retained is at least equal to the amount required under the option which the synthetic or contingent form of retention corresponds to; and

(a) the amount retained is at least equal to the amount required under the option which the synthetic form of retention or contingent form of retention corresponds to; and

(b) the retainer has explicitly disclosed in the final offering document, prospectus, transaction summary or overview of the main features of the securitisation that it will retain a material net economic interest in the securitisation through a synthetic or contingent form on an ongoing basis.

For the purposes of point (b), the retainer shall disclose in the final offering document, prospectus, transaction summary or overview of the main features of the securitisation all the details on the applicable synthetic or contingent form of retention, including the methodology used in the determination of the material net interest retained and an explanation to which of the options set out in Article 6(3), points (a) to (e), of Regulation (EU) 2017/2402 the retention is equivalent.

(b) the retainer has explicitly disclosed in the final offering document, prospectus, transaction summary or overview of the main features of the securitisation that it will retain a material net economic interest in the securitisation through a synthetic or contingent form of retention on an ongoing basis.

(2) For the purposes of SECN 5.4.1R(1)(b) the retainer shall disclose in the final offering document, prospectus transaction summary or overview of the main features of the securitisation, all the details on the applicable synthetic form of retention or contingent form of retention, including, the methodology used in its determination of the material net interest retained and an explanation on which of the options in in SECN 5.2.8R the retention is equivalent to.

(b) the retainer has explicitly disclosed in the final offering document, prospectus, transaction summary or overview of the main features of the securitisation that it will retain a material net economic interest in the securitisation through a synthetic form of retention or contingent form of retention on an ongoing basis.

For the purposes of point (b), the retainer shall disclose in the final offering document, prospectus transaction summary or overview of the main features of the securitisation, all the details on the applicable synthetic form of retention or contingent form of retention, including the methodology used in its determination of the material net interest retained and an explanation on which of the options in Article 6(3) of Chapter 2 the retention is equivalent to.

2. Where an entity other than an institution as defined in Article 4(1), point (3), of Regulation (EU) No 575/2013 and other than an insurance or reinsurance undertaking as defined in Article 13, points (1) and (4), of Directive 2009/138/EC, retains an economic interest through a synthetic or contingent form of retention, that retained interest shall be fully collateralised in cash and be held under arrangements as referred to in Article 16(9) of Directive 2014/65/EU of the European Parliament and of the Council.

(3) Where an entity other than a CRR firm or a UK Solvency II Firm retains an economic interest through a synthetic form of retention or contingent form of retention, that interest retained on a synthetic or contingent basis must be fully collateralised in cash and held on a segregated basis as client money as referred to in CASS 7.12.1R.

2. Where an entity other than a CRR firm or a UK Solvency II Firm, retains an economic interest through a synthetic form of retention or contingent form of retention, that interest retained on a synthetic or contingent basis shall be fully collateralised in cash and held on a segregated basis as client money’ as referred to in CASS 7.12.1R of the FCA Handbook.

The UK rules extend the scope of the cash collateralisation exemption from only credit institutions to all CRR and Solvency II firms.

RTS Article 4 (Retention equivalent to not less than 5% of the nominal value of each of the tranches sold or transferred to investors)

The retention referred to in Article 6(3), point (a), of Regulation (EU) 2017/2402 (vertical slice) shall be fulfilled by any of the following methods:

5.5 Retention of not less than 5% of the nominal value of each of the tranches sold or transferred to investors

5.5.1 R

The retention of not less than 5% of the nominal value of each of the tranches sold or transferred to the investors referred to in SECN 5.2.8R(1)(a) may be complied with through any of the following methods:

Article 4 Retention of not less than 5% of the nominal value of each of the tranches sold or transferred to investors

1. The retention of not less than 5% of the nominal value of each of the tranches sold or transferred to the investors as referred to in Article 6(3)(a) of Chapter 2 may be complied with through any of the following methods:

(a) direct retention of not less than 5 % of the nominal value of each of the tranches sold or transferred to investors;

[No equivalent but covered by (3) below]

[No No equivalent but covered by (c) below

[see (c) below]

(1) the retention of not less than 5% of the nominal value of each of the securitised exposures, provided that the retained credit risk ranks pari passu with or is subordinated to the credit risk securitised in relation to the same exposures;

(a) the retention of not less than 5% of the nominal value of each of the securitised exposures, provided that the retained credit risk ranks pari passu with or is subordinated to the credit risk securitised in relation to the same exposures;

(b) the retention of an exposure which exposes its holder to the credit risk of each issued tranche of a securitisation transaction on a pro-rata basis of not less than 5 % of the total nominal value of each of the issued tranches;

[see (3) below]

[see (c) below]

(c) the retention of not less than 5 % of the nominal value of each of the securitised exposures, provided that the retained credit risk ranks pari passu with or is subordinated to the credit risk securitised in relation to the same exposures;

[see (1) above]

[see (a) above]

(d) the provision, in the context of an ABCP programme, of a liquidity facility, provided that all of the following conditions are met:

(i) the liquidity facility covers 100 % of the share of the credit risk of the securitised exposures of the securitisation transaction that is funded by the ABCP programme;

(ii) the liquidity facility covers the credit risk for as long as the retainer has to retain the material net economic interest;

(iii) the liquidity facility is provided by the originator, sponsor or original lender in the securitisation transaction;

(iv) the investors have been given access to information within the initial disclosure that enables them to verify that points (i), (ii) and (iii) are complied with.

(2) the provision, in the context of an ABCP programme, of a liquidity facility, where all the following conditions are met:

(a) the liquidity facility covers 100% of the share of the credit risk of the securitised exposures of the relevant securitisation transaction that is being funded by the respective ABCP programme;

(b) the liquidity facility covers the credit risk for as long as the retainer has to retain the material net economic interest by means of such liquidity facility for the relevant securitisation transaction;

(c) the liquidity facility is provided by the originator, sponsor or original lender in the securitisation transaction; and

(d) the investors becoming exposed to such securitisations have been given access to appropriate information with the initial disclosure to enable them to verify that (a), (b) and (c) are complied with; or

(b) the provision, in the context of an ABCP programme, of a liquidity facility, where the following conditions are met:

(i) the liquidity facility covers 100% of the share of the credit risk of the securitised exposures of the relevant securitisation transaction that is being funded by the respective ABCP programme;

(ii) the liquidity facility covers the credit risk for as long as the retainer has to retain the material net economic interest by means of such liquidity facility for the relevant securitisation transaction;

(iii) the liquidity facility is provided by the originator, sponsor or original lender in the securitisation transaction; and

(iv) the investors becoming exposed to such securitisation have been given access to appropriate information with the initial disclosure to enable them to verify that points (i), (ii) and (iii) are complied with; or

[see (b) above]

(3) the retention of an exposure which exposes its holder to the credit risk of each issued tranche of a securitisation transaction on a prorata basis (vertical tranche) of not less than 5% of the total nominal value of each of the issued tranches.

(c) the retention of an exposure which exposes its holder to the credit risk of each issued tranche of a securitisation transaction on a pro-rata basis (vertical tranche) of not less than 5% of the total nominal value of each of the issued tranches.

RTS Article 5 (Retention of the originator’s interest in a revolving securitisation or securitisation of revolving exposures)

The retention of the originator’s interest of not less than 5 % of the nominal value of each of the securitised exposures as referred to in Article 6(3), point (b), of Regulation (EU) 2017/2402 shall only be considered fulfilled where the retained credit risk of such exposures ranks pari passu with, or is subordinated to, the credit risk securitised in relation to the same exposures.

5.6 Retention of the originator’s interest in a revolving securitisation of revolving exposures

5.6.1 R

The retention of the originator’s interest of not less than 5% of the nominal value of each of the securitised exposures as referred to in SECN 5.2.8R(1)(b) shall only be considered fulfilled where the retained credit risk of such exposures ranks pari passu with or is subordinated to the credit risk securitised in relation to the same exposures.

Article 5 Retention of the originator’s interest in a revolving securitisation of revolving exposures

1. The retention of the originator’s interest of not less than 5% of the nominal value of each of the securitised exposures as referred to in point (b) of Article 6(3) of Chapter 2 shall only be considered fulfilled where the retained credit risk of such exposures ranks pari passu with or is subordinated to the credit risk securitised in relation to the same exposures.

RTS Article 6 (Retention of randomly selected exposures equivalent to no less than 5% of the nominal value of the securitised exposures)

1. The pool of at least 100 potentially securitised exposures from which retained non-securitised and securitised exposures are to be randomly selected, as referred to in Article 6(3), point (c), of Regulation (EU) 2017/2402, shall be sufficiently diverse to avoid an excessive concentration of the retained interest.

5.7 Retention of randomly selected exposures equivalent to not less than 5% of the nominal value of the securitised exposures

5.7.1 R

(1) The pool of at least 100 potentially securitised exposures from which retained non-securitised and securitised exposures are to be randomly selected, as referred to in SECN 5.2.8R(1)(c), shall be sufficiently diverse to avoid an excessive concentration of the retained interest.

Article 6 The retention of randomly selected exposures equivalent to not less than 5% of the nominal value of the securitised exposures

1. The pool of at least 100 potentially securitised exposures from which retained non-securitised and securitised exposures are to be randomly selected, as referred to in point (c) of Article 6(3) of Chapter 2, shall be sufficiently diverse to avoid an excessive concentration of the retained interest.

2. When selecting the exposures referred to in paragraph 1, retainers shall take into account quantitative and qualitative factors that are appropriate for the type of securitised exposures to ensure that the distinction between retained nonsecuritised and securitised exposures is random. For that purpose, and where relevant, retainers shall take into consideration the following factors when selecting exposures:

(a) the time of origination of the loan (vintage);

(b) the type of securitised exposures;

(c) the geographical location;

(d) the origination date;

(e) the maturity date;

(f) the loan to value ratio;

(g) the collateral type;

(h) the industry sector;

(i) the outstanding loan balance;

(j) any other factor deemed relevant by the retainer.

(2) When selecting the exposures, referred to in SECN 5.7.1R(1), retainers shall take into account quantitative and qualitative factors that are appropriate for the type of securitised exposures to ensure that the distinction between retained non securitised and securitised exposures is random. For that purpose, and where relevant, retainers shall take into consideration the following factors when selecting exposures:

(a) the time of the origination of the loan (vintage);

(b) the type of securitised exposures;

(c) the geographical location;

(d) the origination date;

(e) the maturity date;

(f) the loan to value ratio;

(g) the collateral type;

(h) the industry sector;

(i) the outstanding loan balance; and

(j) any other factor deemed relevant by the retainer.

2. When selecting the exposures referred to in paragraph 1, retainers shall take into account quantitative and qualitative factors that are appropriate for the type of securitised exposures to ensure that the distinction between retained non-securitised and securitised exposures is random. For that purpose, and where relevant, retainers shall take into consideration the following factors when selecting exposures:

(a) the time of the origination of the loan (vintage):

(b) the type of securitised exposures;

(c) the geographical location;

(d) the origination date;

(e) the maturity date;

(f) the loan to value ratio;

(g) the collateral type;

(h) the industry factor;

(i) the outstanding loan balance; and

(j) any other factor deemed relevant by the retainer.

3. Retainers shall not select different individual exposures at different points in time, except where that may be necessary to fulfil the retention requirement in relation to a securitisation in which the securitised exposures fluctuate over time, either due to new exposures being added to the securitisation or to changes in the level of the individual securitised exposures.

(3) Retainers shall not select different individual exposures at different points in time, except where that may be necessary to fulfil the retention requirement in relation to a securitisation in which the securitised exposures fluctuate over time, either due to new exposures being added to the securitisation or to changes in the level of the individual securitised exposures.

3. Retainers shall not select different individual exposures at different points in time, except where that may be necessary to fulfil the retention requirement in relation to a securitisation in which the securitised exposures fluctuate over time, either due to new exposures being added to the securitisation or to changes in the level of the individual securitised exposures.

4. Where the retainer is the securitisation’s servicer, the selection conducted in accordance with this Article shall not lead to a deterioration in the servicing standards applied by the retainer on the transferred exposures relative to the retained exposures.

(4) Where the retainer is the securitisation’s servicer, the selection conducted in accordance with SECN 5.7.1R must not lead to a deterioration in the servicing standards applied by the retainer on the transferred exposures relative to the retained exposures.

4. Where the retainer is the securitisation’s servicer, the selection conducted in accordance with this Article shall not lead to a deterioration in the servicing standards applied by the retainer on the transferred exposures relative to the retained exposures.

RTS Article 7 (Retention of the first loss tranche)

1. The retention of the first loss tranche referred to in Article 6(3), point (d), of Regulation (EU) 2017/2402 shall be fulfilled by any of the following methods:

(a) holding either on-balance sheet or off-balance sheet positions;

5.8 Retention of the first loss tranche

5.8.1 R (1)

The retention of the first loss tranche referred to in SECN 5.2.8R(1)(d) may be fulfilled by holding either on-balance sheet or off-balance sheet positions and by either of the following methods:

Article 7 Retention of the first loss tranche

1. The retention of the first loss tranche referred to in point (d) of Article 6(3) of Chapter 2 may be fulfilled by holding either on-balance sheet or off-balance sheet positions and by any of the following methods:

(b) holding an exposure by means of a provision of a contingent form of retention or of a liquidity facility in the context of an ABCP programme, which fulfils all of the following criteria:

(a) provision of a contingent form of retention or of a liquidity facility in the context of an ABCP programme, which fulfils all of the following criteria:

(a) provision of a contingent form of retention or of a liquidity facility in the context of an ABCP programme which fulfils all of the following criteria:

(i) the exposure covers at least 5 % of the nominal value of the securitised exposures;

(i) the exposure covers at least 5% of the nominal value of the securitised exposures;

(i) the exposure covers at least 5% of the nominal value of the securitised exposures;

(ii) the exposure constitutes a first loss position in relation to the securitisation;

(ii) the exposure constitutes a first loss position in relation to the securitisation;

(ii) the exposure constitutes a first loss position in relation to the securitisation;

(iii) the exposure covers the credit risk for the entire duration of the retention commitment;

(iii) the exposure covers the credit risk for the entire duration of the retention commitment;

(iii) the exposure covers the credit risk for the entire duration of the retention commitment;

(iv) the exposure is provided by the retainer;

(iv) the exposure is provided by the retainer; and

(iv) the exposure is provided by the retainer; and

(v) the investors have been given access within the initial disclosure to all information necessary to verify that points (i) to (iv) are complied with;

(v) the investors have been given access within the initial disclosure to all information necessary to verify that (i) to (iv) are complied with; or

(v) the investors have been given access within the initial disclosure to all information necessary to verify that points (i) to (iv) are complied with; or

(c) overcollateralisation, as defined in Article 242, point (9), of Regulation (EU) No 575/2013, if that overcollateralisation operates as a ‘first loss’ position of not less than 5 % of the nominal value of the securitised exposures.

(b) overcollateralisation, if it operates as a ‘first loss’ position of not less than 5% of the nominal value of the securitised exposures.

(b) overcollateralisation, as defined to [sic] in point (9) of Article 242 of CRR, if that overcollateralisation operates as a ‘first loss’ position of not less than 5% of the nominal value of the securitised exposures.

2. Where the first loss tranche exceeds 5 % of the nominal value of the securitised exposures, the retainer may choose to retain a pro-rata portion of such first loss tranche only, provided that that portion is equivalent to at least 5 % of the nominal value of the securitised exposures.

(2) Where the first loss tranche exceeds 5% of the nominal value of the securitised exposures, the retainer may choose to retain a pro-rata portion of such first loss tranche only, provided that portion is equivalent to at least 5% of the nominal value of the securitised exposures.

2. Where the first loss tranche exceeds 5% of the nominal value of the securitised exposures, the retainer may chose [sic] to retain a pro-rata portion of such first loss tranche only, provided that this portion is equivalent to at least 5% of the nominal value of the securitised exposures.

RTS Article 8 (Retention of a first loss exposure of not less than 5% of every securitised exposure)

1. The retention of a first loss exposure at the level of every securitised exposure as referred to in Article 6(3), point (e), of Regulation (EU) 2017/2402 shall only be considered to be fulfilled where the retained credit risk is subordinated to the credit risk securitised in relation to the same exposures.

5.9 Retention of a first loss exposure of not less than 5% of every securitised exposure

5.9.1 R

(1) The retention of a first loss exposure at the level of every securitised exposure as referred to in SECN 5.2.8R(1)(e) shall only be considered to be fulfilled where the retained credit risk is subordinated to the credit risk securitised in relation to the same exposures.

Article 8 Retention of a first loss exposure of not less than 5% of every securitised exposure

1. The retention of a first loss exposure at the level of every securitised exposure as referred to in point (e) of Article 6(3) of Chapter 2 shall only be considered to be fulfilled where the retained credit risk is subordinated to the credit risk securitised in relation to the same exposures.

2. By way of derogation from paragraph 1, the retention of a first loss exposure at the level of every securitised exposure as referred to in Article 6(3), point (e), of Regulation (EU) 2017/2402 may also be fulfilled through the sale by the originator or original lender of the underlying exposures at a discounted value where each of the following conditions is met:

(2) By way of derogation from (1), the retention of a first lost exposure at the level of every securitised exposure as referred to in SECN 5.2.8R(1)(e) may also be fulfilled through the sale by the originator or original lender of the underlying exposures at a discounted value where each of the following conditions is met:

2. By way of derogation from paragraph 1 of this Article, the retention of a first loss exposure at the level of every securitised exposure as referred to in point (e) of Article 6(3) of Chapter 2 may also be fulfilled through the sale by the originator or original lender of the underlying exposures at a discounted value where each of the following conditions is met:

(a) the amount of the discount is not less than 5 % of the nominal value of each exposure;

(a) the amount of the discount is not less than 5% of the nominal value of each exposure; and

(a) the amount of the discount is not less than 5% of the nominal value of each exposure; and

(b) the discounted sale amount is refundable to the originator or original lender only if that discounted sale amount is not absorbed by losses related to the credit risk associated to the securitised exposures.

(b) the discounted sale amount is refundable to the originator or original lender only if that discounted sale amount is not absorbed by losses related to the credit risk associated with the securitised exposures.

(b) the discounted sale amount is refundable to the originator or original lender only if that discounted sale amount is not absorbed by losses related to the credit risk associated to the securitised exposures.

RTS Article 9 (Application of the retention options on traditional NPE securitisations)

1. In the case of NPE securitisations as referred to in Article 6(3a) of Regulation (EU) 2017/2402, for the purpose of applying Article 4, point (a), and Articles 5 to 8 of this Regulation to the share of non-performing exposures in the pool of underlying exposures of a securitisation, any reference to the nominal value of the securitised exposures shall be construed as a reference to the net value of the non-performing exposures.

5.10 Application of the retention options on NPE securitisations

5.10.1 R

(1) In case of NPE securitisations as referred to in SECN 5.2.8(2), for the purposes of applying SECN 5.5.1R(1) and SECN 5.6R to SECN 5.9R to the share of non-performing exposures in the pool of underlying exposures of a securitisation, any reference to the nominal value of the securitised exposures shall be construed as a reference to the net value of the non-performing exposures.

Article 9 Application of the retention options on NPE securitisations

1. In the case of NPE securitisations as referred to in Article 6(3A) of Chapter 2, for the purposes of applying Article 4(1)(a) and Articles 5 to 8 of this Chapter to the share of non-performing exposures in the pool of underlying exposures of a securitisation, any reference to the nominal value of the securitised exposures shall be construed as a reference to the net value of the non-performing exposures.

2. For the purposes of Article 6 of this Regulation, the net value of the retained non-performing exposures shall be calculated using the same amount of the non-refundable purchase price discount that would have been applied had the retained non-performing exposures been securitised.

(2) For the purposes of SECN 5.7, the net value of the retained nonperforming exposures shall be calculated using the same amount of the non-refundable purchase price discount that would have been applied had the retained non-performing exposures been securitised.

2. For the purposes of Article 6 of this Chapter, the net value of the retained non-performing exposures shall be calculated using the same amount of the non-refundable purchase price discount that would be applied had the retained non-performing exposures been securitised.

3. For the purposes of Article 4, point (a), Article 5 and Article 8 of this Regulation, the net value of the retained part of the non-performing exposures shall be calculated using the same percentage of the non-refundable purchase price discount that applies to the part that is not retained.

(3) For the purposes of SECN 5.2.8R(1)(a), SECN 5.6 or SECN 5.9 the net value of the retained part of the non-performing exposures shall be computed using the same percentage of the non-refundable purchase price discount that applies to the part that is not retained.

3. For the purposes of Article 4(1)(a), Article 5 and Article 8 of this Chapter, the net value of the retained part of the non-performing exposures shall be computed using the same percentage of the non-refundable purchase price discount that applies to the part that is not retained.

4. Where the non-refundable purchase price discount as referred to in Article 6(3a), second subparagraph, of Regulation (EU) 2017/2402 has been agreed at the level of the pool of underlying non-performing exposures or at sub-pool level, the net value of individual securitised non-performing exposures included in the pool or sub-pool, as applicable, shall be calculated by applying a corresponding share of the non-refundable purchase price discount to each of the nonperforming securitised exposures in proportion to their nominal value or, where applicable, their outstanding value at the time of origination.

(4) Where the non-refundable purchase price discount as referred to in SECN 5.2.8(2)(b) has been agreed at the level of the pool of underlying non-performing exposures, the net value of individual securitised non-performing exposures included in the pool or subpool, as applicable, shall be calculated by applying a corresponding share of the non-refundable purchase price discount agreed at pool or sub-pool level to each of the securitised non-performing exposures in proportion to their nominal value or, where applicable, their outstanding value at the time of origination.

4. Where the non-refundable purchase price discount as referred to in the second subparagraph of Article 6(3A) of Chapter 2 has been agreed at the level of the pool of underlying nonperforming exposures, the net value of individual securitised non-performing exposures included in the pool or sub-pool, as applicable, shall be calculated by applying a corresponding share of the non-refundable purchase price discount agreed at pool or sub-pool level to each of the securitised non-performing exposures in proportion to their nominal value or, where applicable, their outstanding value at the time of origination.

5. Where the non-refundable purchase price discount includes the difference between the nominal amount of one tranche or several tranches of an NPE securitisation underwritten by the originator for subsequent sale and the price at which that tranche or those tranches are first sold to unrelated third parties as referred to in Article 6(3a), second subparagraph, of Regulation (EU) 2017/2402, that difference shall be taken into account in the calculation of the net value of individual securitised non-performing exposures by applying a corresponding share of the difference to each of the non-performing securitised exposures in proportion to their nominal value.

(5) Where the non-refundable purchase price discount includes the difference between the nominal amount of one tranche or several tranches of a NPE securitisation underwritten by the originator for subsequent sale and the price at which that tranche or those tranches are first sold to unrelated third parties as referred to in SECN 5.2.8R(2)(c), that difference shall be taken into account in the calculation of the net value of individual securitised non-performing exposures by applying a corresponding share of the difference to each of the securitised non-performing exposures in proportion to their nominal value.

5. Where the non-refundable purchase price discount includes the difference between the nominal amount of one tranche or several tranches of a NPE securitisation underwritten by the originator for subsequent sale and the price at which that tranche or those tranches are first sold to unrelated third parties as referred to in the second subparagraph of Article 6(3A) of Chapter 2, that difference shall be taken into account in the calculation of the net value of individual securitised non-performing exposures by applying a corresponding share of the difference to each of the securitised non-performing exposures in proportion to their nominal value.

This was one of the five reforms heralded by H.M. Treasury’s December 2022 policy note. The UK rules provide that the 5% retention should be calculated based on the value, and not the nominal amount. The EUSR has already done this, and gone further, for example (Article 6(1)) by permitting the servicer to hold the risk retention. The PRA said in CP15/23 that it “does not at this point propose any other policy change relating to NPE securitisations, but may consider this in the future”.

RTS Article 10 (Measurement of the level of retention)

1. When measuring the level of retention of the net economic interest, the following criteria shall be applied:

5.11 Measurement of the level of retention

5.11.1 R (1) When measuring the level of retention of the net economic interest, the following criteria shall be applied:

Article 10 Measurement of the level of retention

1. When measuring the level of retention of the net economic interest, the following criteria shall be applied:

(a) the origination shall be the time at which the exposures were first securitised, which shall be one of the following:

(i) the date of the issuance of securities;

(ii) the date of the signature of the credit protection agreement;

(iii) the date of the agreement on a refundable purchase price discount;

(a) the origination shall be considered as the time at which the exposures were first securitised;

(a) the origination shall be considered as the time at which the exposures were first securitised;

(b) where the calculation of the level of retention is based on nominal values, the acquisition price of assets shall not be taken into account for the purpose of that calculation;

(b) where the calculation of the level of retention is based on nominal values, it shall not take into account the acquisition price of assets;

(b) where the calculation of the level of retention is based on nominal values, it shall not take into account the acquisition price of assets;

(c) the finance charge collections and other fee income received in respect of the securitised exposures in a traditional securitisation net of costs and expenses (traditional excess spread) shall not be taken into account when measuring the retainer’s net economic interest;

(c) finance charge collections and other fee income in respect of the securitised exposures net of costs (‘excess spread’) shall not be taken into account when measuring the retainer’s net economic interest; and

(c) finance charge collections and other fee income in respect of the securitised exposures net of costs (‘excess spread’) shall not be taken into account when measuring the retainer’s net economic interest; and

(d) where the originator acts as the securitisation’s retainer and applies the retention option referred to in Article 6(3), point (d), of Regulation (EU) 2017/2402, and where the exposure value of the synthetic excess spread that provides credit enhancement to all the tranches of the synthetic securitisation and serves as a first loss protection is subject to capital requirements in accordance with the prudential regulation applicable to the originator, the originator may take the exposure value of the synthetic excess spread into account when calculating the material net economic interest in accordance with Article 7 of this Regulation by treating the exposure value of the synthetic excess spread as retention of the first loss tranche, in addition to any actual retention of the first loss tranche;

[no equivalent]

[no equivalent]

(e) the retention option and methodology used to calculate the net economic interest shall not be changed during the life of a securitisation, unless exceptional circumstances require a change and that change is not used as a means to reduce the amount of the retained interest.

(d) the retention option and methodology used to calculate the net economic interest shall not be changed during the life of a securitisation transaction, unless exceptional circumstances require a change and that change is not used as a means to reduce the amount of the retained interest.

(d) the retention option and methodology used to calculate the net economic interest shall not be changed during the life of a securitisation transaction, unless exceptional circumstances require a change and that change is not used as a means to reduce the amount of the retained interest.

2. The retainer shall not be required to constantly replenish or readjust its retained interest to at least 5 % when losses are realised on its retained exposures or allocated to its retained positions.

(2) The retainer shall not be required to replenish or readjust its retained interest to at least 5% as losses are realised on its retained exposures or allocated to its retained positions.

2. The retainer shall not be required to replenish or readjust its retained interest to at least 5% as losses are realised on its retained exposures or allocated to its retained positions.

RTS Article 11 (Measurement of the material net economic interest to be retained for exposures in the form of drawn and undrawn amounts of credit facilities)

The calculation of the net economic interest to be retained for credit facilities, including credit cards, shall be based on amounts already drawn, realised or received only and shall be adjusted in accordance with changes to those amounts.

5.11A Measurement of the material net economic interest to be retained for exposures in the form of drawn and undrawn amounts of credit facilities

5.11A.1 R

The calculation of the net economic interest to be retained for credit facilities, including credit cards, shall be based on amounts already drawn, realised or received only and shall be adjusted in accordance with changes to those amounts.

Article 11 Measurement of the material net economic interest to be retained for exposures in the form of drawn and undrawn amounts of credit facilities

1. The calculation of the net economic interest to be retained for credit facilities, including credit cards, shall be based on amounts already drawn, realised or received only and shall be adjusted in accordance with changes to those amounts.

RTS Article 12 (Prohibition of hedging or selling the retained interest)

1. The obligation laid down in Article 6(1), first subparagraph, of Regulation (EU) 2017/2402 to retain on an ongoing basis a material net economic interest in the securitisation shall be deemed to have been met only where, taking into account the economic substance of the transaction, both of the following conditions are met:

5.12 Prohibition of hedging or selling the retained interest

5.12.1 R

(1) The obligation in SECN 5.2.1R to retain on an ongoing basis a material net economic interest in the securitisation shall be deemed to have been met only where, taking into account the economic substance of the transaction, both of the following conditions are met:

Article 12 Prohibition of hedging or selling the retained interest

1. The obligation in the first subparagraph of Article 6(1) of Chapter 2 to retain on an ongoing basis a material net economic interest in the securitisation shall be deemed to have been met only where, taking into account the economic substance of the transaction, both of the following conditions are met:

(a) the retained material net economic interest is not subject to any credit risk mitigation or hedging of either the retained securitisation positions or the retained exposures,

(a) the retained material net economic interest is not subject to any credit risk mitigation or hedging of either the retained securitisation positions or the retained exposures; and

(a) the retained material net economic interest is not subject to any credit risk mitigation or hedging of either the retained securitisation positions or the retained exposures; and

(b) the retainer does not sell, transfer or otherwise surrender all or part of the rights, benefits or obligations arising from the retained net economic interest.

(b) the retainer does not sell, transfer or otherwise surrender all or part of the rights, benefits or obligations arising from the retained net economic interest.

(b) the retainer does not sell, transfer or otherwise surrender all or part of the rights, benefits or obligations arising from the retained net economic interest.

By way of derogation from point (a), the retainer may hedge the net economic interest where the hedge is not against the credit risk of either the retained securitisation positions or the retained exposures.

[Paragraph 2 appears below, after recital (7).]

(2) By way of derogation from SECN 5.12.1R(1)(a), the retainer may hedge the net economic interest where the hedge:

(a) is not against the credit risk of either the retained securitisation positions or the retained exposures; or

1A. By way of derogation of [sic] paragraph 1(a) of this Article, the retainer may hedge the net economic interest where the hedge:

(a) is not against the credit risk of either the retained securitisation positions or the retained exposures; or

Recital (7) of the risk retention RTS:

… Hedging should, however, also be allowed where it is undertaken prior to the securitisation as a legitimate and prudent element of credit granting or risk management and does not create a differentiation for the retainer’s benefit between the credit risk of the retained securitisation positions or exposures and the securitisation positions or exposures transferred to investors…

(b) is undertaken prior to the securitisation as a prudent element of credit granting or risk management and does not create a differentiation for the retainer’s benefit between the credit risk of the retained securitisation positions or exposures and the securitisation positions or exposures transferred to investors.

(b) ) is undertaken prior to the securitisation as a prudent element of credit granting or risk management and does not create a differentiation for the retainer’s benefit between the credit risk of the retained securitisation positions or exposures and the securitisation positions or exposures transferred to investors

2. The retainer may use retained exposures or securitisation positions as collateral for secured funding purposes including, where relevant, funding arrangements that involve a sale, transfer or other surrender of all or part of the rights, benefits or obligations arising from the retained net economic interest, provided that such use as collateral does not transfer the exposure to the credit risk of those retained exposures or securitisation positions to a third party.

(3) The retainer may use retained exposures or securitisation positions as collateral for secured funding purposes including, where relevant, funding arrangements that involve a sale, transfer or other surrender of all or part of the rights, benefits or obligations arising from the retained net economic interest, provided that such use as collateral does not transfer the exposure to the credit risk of those retained exposures or securitisation positions to a third party.

2. The retainer may use retained exposures or securitisation positions as collateral for secured funding purposes including, where relevant, funding arrangements that involve a sale, transfer or other surrender of all or part of the rights, benefits or obligations arising from the retained net economic interest, provided that such use as collateral does not transfer the exposure to the credit risk of those retained exposures or securitisation positions to a third party.

3. Paragraph 1, point (b), shall not apply in any of the following events:

(4) SECN 5.12.1R(1)(b) shall not apply:

3. Paragraph 1(b) of this Article shall not apply:

(a) in the event of the insolvency of the retainer;

(a) in the event of the insolvency of the retainer; or

(a) in the event of the insolvency of the retainer; or

(b) where the retainer, for legal reasons beyond its control and beyond the control of its shareholders, is unable to continue acting as a retainer;

[no equivalent]

[no equivalent]

(c) in the case of retention on a consolidated basis as referred to in Article 14.

(b) in the case of retention on a consolidated basis, in accordance with SECN 5.14.

(b) in the case of retention on a consolidated basis, in accordance with Article 14 of this Chapter.

The FCA and PRA rules permit a change of the risk retainer in the event of the retainer’s insolvency. This was one of the five reforms heralded by H.M. Treasury’s December 2022 policy note.

Article 12(3) of the Risk retention RTS goes further, also permitting a change “where the retainer, for legal reasons beyond its control and beyond the control of its shareholders, is unable to continue acting as a retainer”.

The UK rules do not go this far. Instead, the PRA (in PS7/24) directs attention to its CP3/24 consultation paper, “The Prudential Regulation Authority’s approach to rule permissions and waivers”, and in PS24/4, the FCA adopts a similar approach. Both the FCA and the PRA have two types of powers under FSMA to grant waivers: under section 138BA, which was introduced by FSMA 2023, and under section 138A. The tone of both PS7/24 and the FCA’s policy statement PS24/4 is that section 138A is the preferred approach.

It is worth noting that, in both the UK and the EU, if a risk retainer goes into insolvency, it can only transfer to another willing party which is a sponsor, an originator or the original lender, and so if the now-insolvent entity had been both the originator and the original lender, there would be no possible transferee complying with the basic risk retention requirement.

This was one of the five reforms heralded by H.M. Treasury’s December 2022 policy note.

RTS Article 13 (transactions for which the retention requirement does not apply, as referred to Article 6(6) of regulation (EU) 2017/2402)

Transactions for which the retention requirement does not apply, as referred to in Article 6(6) of Regulation (EU) 2017/2402, shall include securitisation positions in the correlation trading portfolio which are either reference instruments as referred to in Article 338(1), point (b), of Regulation (EU) No 575/2013 or which are eligible for inclusion in the correlation trading portfolio.

5.13 Transactions for which the retention requirement does not apply as referred to in SECN 5.2.11R

5.13.1 R Transactions for which the retention requirement does not apply, as referred to in SECN 5.2.11R, shall include securitisation positions in the correlation trading portfolio, which are either reference instruments satisfying the criterion in Article 338(1)(b) of the UK CRR or which are eligible for inclusion in the correlation trading portfolio.

Article 13 Transactions for which the retention requirement does not apply as referred to in Article 6(6) of Chapter 2

1. Transactions for which the retention requirement does not apply, as referred to in Article 6(6) of Chapter 2, shall include securitisation positions in the correlation trading portfolio which are either reference instruments satisfying the criterion in Article 338(1)(b) of CRR or which are eligible for inclusion in the correlation trading portfolio.

RTS Article 14 (retention on a consolidated basis)

Mixed financial holding companies as defined in Article 2, point (15), of Directive 2002/87/EC of the European Parliament and of the Council, parent institutions, or financial holding companies, that are established in the Union and that satisfy the requirements referred to in Article 6(1) of Regulation (EU) 2017/2402 on the basis of their consolidated situation in accordance with paragraph 4 of that Article shall, where the retainer is no longer included in the scope of supervision on a consolidated basis, ensure that one or more of the remaining entities included in the scope of supervision on a consolidated basis fulfils the retention requirement.

5.14 Retention on a consolidated basis

5.14.1 R A mixed financial holding company, a UK parent institution or financial holding company established in the United Kingdom satisfying, in accordance with SECN 5.2.9R, the retention requirement on the basis of its consolidated situation shall, in the case the retainer is no longer included in the scope of supervision on a consolidated basis, ensure that one or more of the remaining entities included in the scope of supervision on a consolidated basis fulfils the retention requirement.

Article 14 Retention on a consolidated basis

1. A mixed financial holding company, a UK parent institution or financial holding company established in the UK (as defined in Article 6(4) of Chapter 2) satisfying, in accordance with Article 6(4) of Chapter 2, the retention requirement on the basis of its consolidated situation shall, in the case the retainer is no longer included in the scope of supervision on a consolidated basis, ensure that one or more of the remaining entities included in the scope of supervision on a consolidated basis fulfils the retention requirement.

RTS Article 15 (Requirements on the allocation of cash flows and losses to the retained interest and on fees payable to the retainer)

1. Retainers shall not use arrangements or embedded mechanisms in the securitisation by virtue of which the retained interest at origination would decline faster than the interest transferred. In the allocation of cash flows, the retained interest shall not be prioritised to preferentially benefit from being repaid or amortised ahead of the transferred interest. The amortisation of the retained interest via cash flow allocation in accordance with the first subparagraph or through the allocation of losses that, in effect, reduces the level of retention over time, shall be allowed.

5.15 Arrangements or embedded mechanisms

5.15.1 R

Retainers shall not use arrangements or embedded mechanisms in the securitisation by virtue of which the retained interest at origination would decline faster than the interest transferred. In the allocation of the cash flows, the retained interest shall not be prioritised to preferentially benefit from being repaid or amortised ahead of the transferred interest. The amortisation of the retained interest via cash flow allocation or through the allocation of losses that, in effect, reduce the level of retention over time, shall be allowed.

Article 15 Arrangements or embedded mechanisms

1. Retainers shall not use arrangements or embedded mechanisms in the securitisation by virtue of which the retained interest at origination would decline faster than the interest transferred. In the allocation of the cash flows, the retained interest shall not be prioritised to preferentially benefit from being repaid or amortised ahead of the transferred interest.

2. The amortisation of the retained interest via cash flow allocation set out in paragraph 1 or through the allocation of losses that, in effect, reduce the level of retention over time shall be allowed.

2. For the purposes of paragraph 1, arrangements on any fees, either fixed or contingent on the volume or the performance of the securitised exposures or the evolution of relevant market benchmarks, payable to the retainer on a priority basis to remunerate that retainer for any services provided to the securitisation shall only be deemed consistent with the requirements on the retained interest laid down in that paragraph where all of the following conditions are met:

(a) the amount of the fees is set on an arm’s length basis having regard to comparable transactions in the market;

(b) the fees are structured as a consideration for the provision of the service and do not create a preferential claim in the securitisation cash flows that effectively declines the retained interest faster than the transferred interest.

For the purposes of point (a), in the absence of comparable transactions in the relevant market, the amount of the fees shall comply with the requirement that those fees are set on an arm’s length basis where those fees are set by reference to fees payable in similar transactions in other markets, or are set by using valuation metrics that appropriately take into account the type of securitisation and the service being provided.

The conditions in the first subparagraph, points (a) and (b), shall not be considered to be met when the fees are guaranteed or payable up-front in any form, in full or in part in advance of the service being provided post-closing, and the effective material net economic interest after deducting the fees is lower than the minimum net economic interest required under the retention option chosen from the options laid down in Article 6(3), points (a) to (e), of Regulation (EU) 2017/2402.

[no equivalent]

[no equivalent]

Although the UK do not have any equivalent of 15(2), it is understood that the market in practice operates on this basis in any event (for example, in relation to fee sharing arrangements in respect of CLO management fees).

RTS Article 16 (Fulfilment of the retention requirement in securitisations of own issued debt instruments)

Where an entity securitises its own issued debt instruments, including covered bonds as defined in Article 3, point (1), of Directive (EU) 2019/2162 of the European Parliament and of the Council, and the underlying exposures of the securitisation comprise exclusively those own-issued debt instruments, the retention requirement in Article 6(1) of Regulation (EU) 2017/2402 shall be considered complied with.

5.16 Fulfilment of the retention requirements in securitisations of own issued debt instruments

5.16.1 R

Where an entity securitises its own issued debt instruments, including covered bonds, and the underlying exposures of the securitisation comprise exclusively those own-issued debt instruments, the retention requirement in SECN 5.2.1R to SECN 5.2.5R shall be considered complied with.

Article 16 Fulfilment of the retention requirement in securitisations of own issued debt instruments

1. Where an entity securitises its own issued debt instruments, including covered bonds as defined in the FCA Handbook, and the underlying exposures of the securitisation comprise exclusively those own-issued debt instruments, the retention requirement in Article 6(1) of Chapter 2 shall be considered complied with.

RTS Article 17 (retention requirement in resecuritisations)

1. For resecuritisations permitted by Article 8 of Regulation (EU) 2017/2402, a retainer shall retain the material net economic interest in relation to each of the respective transaction levels.

5.17 Retention requirement on resecuritisations

5.17.1 R

(1) Subject to (2), in the context of resecuritisation as far as enabled in accordance with SECN 7.2 and SECN 7.3, a retainer must retain the material net economic interest in relation to each of the respective transaction levels.

Article 17 Retention requirement on resecuritisations

1. Subject to paragraph 2 of this Article, in the context of a resecuritisation as far as enabled in accordance with Article 8 of Chapter 2, a retainer shall retain the material net economic interest in relation to each of the respective transaction levels.

2. By way of derogation from paragraph 1, the originator of a resecuritisation shall not be obliged to retain a material net economic interest at the transaction level of the resecuritisation where all of the following conditions are met:

(2) The originator of a resecuritisation is not obliged to retain a material net economic interest at the transaction level of the resecuritisations where all of the following conditions are met:

2. The originator of a resecuritisation shall not be obliged to retain a material net economic interest at the transaction level of the resecuritisation where all of the following conditions are met:

(a) the originator of the resecuritisation is also the originator and the retainer of the underlying securitisation;

(a) the originator of the resecuritisation is also the originator and the retainer of the underlying securitisations;

(a) the originator of the resecuritisation is also the originator and the retainer of the underlying securitisation;

(b) the resecuritisation is backed by a pool of exposures comprising solely exposures or positions which were retained by the originator in the underlying securitisation in excess of the required minimum net economic interest prior to the date of origination of the resecuritisation;

(b) the resecuritisation is backed by a pool of exposures comprising solely exposures or positions which were retained by the originator in the underlying securitisation in excess of the required minimum net economic interest prior to the date of origination of the resecuritisation; and

(b) the resecuritisation is backed by a pool of exposures comprising solely exposures or positions which were retained by the originator in the underlying securitisation in excess of the required minimum net economic interest prior to the date of origination of the resecuritisation; and

(c) there is no maturity mismatch between the underlying securitisation positions or exposures and the resecuritisation.

(c) there is no maturity mismatch between the underlying securitisation positions or exposures and the resecuritisation.

(c) there is no maturity mismatch between the underlying securitisation positions or exposures and the resecuritisation.

[no equivalent]

(3) A fully supported ABCP programme, which meets the requirements of SECN 7.3 is not a resecuritisation for the purposes of SECN 5.17.

3. A fully supported ABCP programme, which meets the requirements of Article 8(4) of Chapter 2 shall not be deemed a resecuritisation for the purposes of this Article.

3. For the purposes of paragraph 1 and 2, retranching by the securitisation’s originator of an issued tranche into contiguous tranches shall not constitute a resecuritisation.

(4) The retranching by the securitisation’s originator of an issued tranche into contiguous tranches shall not constitute a resecuritisation.

4. The retranching by the securitisation’s originator of an issued tranche into contiguous tranches shall not constitute a resecuritisation for the purposes of this Article.

RTS Article 18 (Assets transferred to the SSPE)

1. For the purposes of Article 6(2) of Regulation (EU) 2017/2402, assets held on the balance sheet of the originator that according to the documentation of the securitisation meet the eligibility criteria, shall be deemed to be comparable to the assets to be transferred to the SSPE where, at the time of the selection of the assets, both of the following conditions are met:

5.18 Assets transferred to SSPE

5.18.1 R

(1) For the purposes of SECN 5.2.6R, assets held on the balance sheet of the originator that according to the documentation of the securitisation meet the eligibility criteria shall be deemed to be comparable to the assets to be transferred to the SSPE where, at the time of the selection of the assets, both of the following conditions are met:

Article 18 Assets transferred to SSPE

1. For the purposes of Article 6(2) of Chapter 2, assets held on the balance sheet of the originator that according to the documentation of the securitisation meet the eligibility criteria shall be deemed to be comparable to the assets to be transferred to the SSPE where, at the time of the selection of the assets, both of the following conditions are met:

(a) the expected performance of both the assets to be further held on the balance sheet and the assets to be transferred is determined by similar factors;

(a) the expected performance of both the assets to be further held on the balance sheet and the assets to be transferred is determined by similar factors; and

(a) the expected performance of both the assets to be further held on the balance sheet and the assets to be transferred is determined by similar factors; and

(b) on the basis of indications, including past performance and applicable models, it can be reasonably expected that the performance of the assets to be further held on the balance sheet will not be significantly better during the time period referred to in Article 6(2) of Regulation (EU) 2017/2402 than the performance of the assets to be transferred.

(b) on the basis of indications including past performance and applicable models, it can be reasonably expected that the performance of the assets to be further held on the balance sheet will not be significantly better during the time period referred to in SECN 5.2.6R than the performance of the assets to be transferred.

(b) on the basis of indications including past performance and applicable models, it can be reasonably expected that the performance of the assets to be further held on the balance sheet will not be significantly better during the time period referred to in Article 6(2) of Chapter 2 than the performance of the assets to be transferred.

2. The assessment whether the originator has complied with Article 6(2) of Regulation (EU) 2017/2402 shall take into account whether the originator has taken any actions to comply with that Article, and in particular whether the originator has put in place any internal policies, procedures and controls to prevent the systematic or intentional selection for securitisation purposes of assets of a worse average credit quality than comparable assets retained on its balance sheet.

 

2. [Note: Provision left blank]

3. An originator shall be deemed to have complied with Article 6(2) of Regulation (EU) 2017/2402 where, after the securitisation, there are no exposures left on the originator’s balance sheet that are comparable to the securitised exposures, other than the exposures which the originator is already contractually committed to securitise, and provided that that fact has been clearly communicated to investors.

(2) An originator shall be deemed to have complied with SECN 5.2.6R where, after the securitisation, there are no exposures left on the originator’s balance sheet that are comparable to the securitised exposures, other than the exposures which the originator is already contractually committed to securitise, and provided that that fact has been clearly communicated to investors.

3. An originator shall be deemed to have complied with Article 6(2) of Chapter 2 where, after the securitisation, there are no exposures left on the originator’s balance sheet that are comparable to the securitised exposures, other than the exposures which the originator is already contractually committed to securitise, and provided that that fact has been clearly communicated to investors.

[No equivalent]

5.18.2 G In assessing whether the originator has complied with SECN 5.2.6R, the FCA would expect to take into account the actions the originator has taken to comply with that rule. In particular, the FCA would expect to take account of any internal policies, procedures and controls put in place by the originator to prevent the systematic or intentional selection for securitisation purposes of assets of a higher average credit risk profile than comparable assets retained on its balance sheet.

No equivalent]

   

[There are no Articles 19-21]

[There seems to be no direct equivalent of the FCA or PRA rule]

5.19 Disclosure of the level of the commitment to maintain a net economic interest

5.19.1 R

(1) The retainer shall disclose to investors within the final offering document, prospectus, transaction summary or overview of the main features of the securitisation at least the following information regarding the level of its commitment to maintain a net economic interest in the securitisation:

Article 22 Disclosure of the level of the commitment to maintain a net economic interest

1. The retainer shall disclose to investors within the final offering document, prospectus, transaction summary or overview of the main features of the securitisation at least the following information regarding the level of its commitment to maintain a net economic interest in the securitisation:

 

(a) confirmation of the retainer’s identity, whether it retains as originator, sponsor or original lender and, where the retainer is the originator, how it meets the requirement set out in SECN 5.2.5R taking into account the principles set out in SECN 5.3.6R;

(a) confirmation of the retainer's identity, whether it retains as originator, sponsor or original lender and, where the retainer is the originator, how it meets the requirements set out in the fifth subparagraph of Article 6(1) of Chapter 2 taking into account the principles set out in Article 2(6) of this Chapter;

 

(b) which of the modalities provided for in SECN 5.2.8R(1) has been applied to retain a net economic interest; and

(b) which of the modalities provided for in points (a), (b), (c), (d) or (e) of the second subparagraph of Article 6(3) of Chapter 2 has been applied to retain a net economic interest; and

 

(c) confirmation of the level of retention at origination and of the commitment to retain on an ongoing basis, which shall relate only to the continuation of fulfilment of the original obligation and shall not require data on the current nominal or market value, or on any impairments or write-downs on the retained interest.

(c) confirmation of the level of retention at origination and of the commitment to retain on an on-going basis, which shall relate only to the continuation of fulfilment of the original obligation and shall not require data on the current nominal or market value, or on any impairments or write-downs on the retained interest.

[There seems to be no direct equivalent of the FCA or PRA rules]

(2) Where the exemptions referred to in SECN 5.2.10R and SECN 5.2.11R apply to a securitisation transaction, firms acting as originator, sponsor or original lender shall disclose within the final offering document, prospectus, transaction summary or overview of the main features of the securitisation information on the applicable exemption to investors.

2. Where the exemptions referred to in paragraph 5 or 6 of Article 6 of Chapter 2 apply to a securitisation transaction, firms acting as originator, sponsor or original lender shall disclose within the final offering document, prospectus, transaction summary or overview of the main features of the securitisation information on the applicable exemption to investors.

[There seems to be no direct equivalent of the FCA or PRA rule]

(3) The disclosure referred to in (1) and (2) shall be appropriately documented within the final offering document, prospectus, transaction summary of overview of the main features of the securitisation and made publicly available, except in bilateral or private transactions where private disclosure is considered by the parties to be sufficient. The inclusion of a statement on the retention commitment in the prospectus for the securities issued under the securitisation programme is an appropriate means of fulfilling the requirement.

3. The disclosure referred to in paragraphs 1 and 2 of this Article shall be appropriately documented within the final offering document, prospectus, transaction summary or overview of the main features of the securitisation and made publicly available, except in bilateral or private transactions where private disclosure is considered by the parties to be sufficient. The inclusion of a statement on the retention commitment in the prospectus for the securities issued under the securitisation programme shall be considered an appropriate means of fulfilling the requirement.

RTS Article 19 (Expertise requirement on the servicer of traditional NPE securitisations)

1. In the case of traditional NPE securitisations, servicers shall be deemed to have expertise in servicing exposures of a similar nature to those securitised, as referred to in Article 6(1), fourth subparagraph, of Regulation (EU) 2017/2402 where one of the following conditions is fulfilled:

(a) the members of the management body of the servicer and the senior staff, other than the members of the management body, responsible for servicing exposures of a similar nature to those securitised have adequate knowledge and skills in the servicing of such exposures;

(b) the business of the servicer, or of its consolidated group for accounting or prudential purposes, has included the servicing of exposures of a similar nature to those securitised for at least five years prior to the date of the securitisation;

(c) all of the following points are complied with:

(i) at least two of the members of the servicer’s management body have relevant professional experience in the servicing of exposures of a similar nature to those securitised, on a personal level, of at least five years;

(ii) senior staff, other than the members of the management body, who are responsible for managing the servicing by the servicer of non-performing exposures have relevant professional experience in the servicing of such exposures, on a personal level, of at least five years;

(iii) the servicing function of the servicer is backed up by a back-up servicer that complies with point (b).

2. Servicers shall substantiate and disclose their professional experience in sufficient detail to enable institutional investors to comply with their due diligence obligations laid down in Article 5 of Regulation (EU) 2017/2402, while respecting the applicable confidentiality requirements.

[No equivalent]

[No equivalent]

[EUSR Article 6(1) continued]

When measuring the material net economic interest, the retainer shall take into account any fees that may in practice be used to reduce the effective material net economic interest.

[No equivalent]

[No equivalent]

In the case of traditional NPE securitisations, the requirement of this paragraph may also be fulfilled by the servicer provided that the servicer can demonstrate that it has expertise in servicing exposures of a similar nature to those securitised and that it has well-documented and adequate policies, procedures and risk-management controls in place relating to the servicing of exposures.

[No equivalent]

[No equivalent]

2. Originators shall not select assets to be transferred to the SSPE with the aim of rendering losses on the assets transferred to the SSPE, measured over the life of the transaction, or over a maximum of 4 years where the life of the transaction is longer than four years, higher than the losses over the same period on comparable assets held on the balance sheet of the originator.

[see 5.2.6 above]

2. Subject to paragraph 2A of this Article, originators shall not select assets to be transferred to the SSPE with the aim of rendering losses on the assets transferred to the SSPE, measured over the life of the transaction, or over a maximum of four years where the life of the transaction is longer than four years, higher than the losses over the same period on comparable assets held on the balance sheet of the originator.

Where the competent authority finds evidence suggesting contravention of that prohibition, the competent authority shall investigate the performance of assets transferred to the SSPE and comparable assets held on the balance sheet of the originator. If the performance of the transferred assets is significantly lower than that of the comparable assets held on the balance sheet of the originator as a consequence of the intent of the originator, the competent authority shall impose a sanction pursuant to Articles 32 and 33.

[No equivalent]

[No equivalent]

[The PRA rule tracks EUSR Recital (11)]

[see 5.2.7 above]

2A. Originators may select assets to be transferred to the SSPE that ex ante have a higher than average credit risk profile as compared to the average credit risk profile of comparable assets, if any, that remain on the balance sheet of the originator provided that the higher credit risk profile of the assets transferred to the SSPE is clearly communicated to the investors or potential investors.

The corresponding provision in the RTS is Article 18 (Assets transferred to the SSPE) – see above)

   

The UK rules include an exception which appears in Recital (11) of the EUSR, i.e. that the rules should not restrict the ability of originators or sponsors to select assets which as a whole have a higher risk profile (e.g., non-performing corporate loans) than other asset classes on the balance sheet of the originator (e.g. corporate loans), so long as that higher risk profile is clearly communicated to the investors or potential investors.

3. Only the following shall qualify as a retention of a material net economic interest of not less than 5% within the meaning of paragraph 1:

5.2.8 R

(1) Only the following shall qualify as a retention of a material net economic interest of not less than 5% within the meaning of SECN 5.2.1R:

3. Only the following shall qualify as a retention of a material net economic interest of not less than 5% within the meaning of paragraph 1 of this Article:

(a) the retention of not less than 5 % of the nominal value of each of the tranches sold or transferred to investors;

(a) the retention of not less than 5% of the nominal value of each of the tranches sold or transferred to investors;

(a) the retention of not less than 5% of the nominal value of each of the tranches sold or transferred to investors;

(b) in the case of revolving securitisations or securitisations of revolving exposures, the retention of the originator’s interest of not less than 5 % of the nominal value of each of the securitised exposures;

(b) in the case of revolving securitisations or securitisations of revolving exposures, the retention of the originator’s interest of not less than 5% of the nominal value of each of the securitised exposures;

(b) in the case of revolving securitisations or securitisations of revolving exposures, the retention of the originator’s interest of not less than 5% of the nominal value of each of the securitised exposures;

(c) the retention of randomly selected exposures, equivalent to not less than 5 % of the nominal value of the securitised exposures, where such non-securitised exposures would otherwise have been securitised in the securitisation, provided that the number of potentially securitised exposures is not less than 100 at origination;

(c) the retention of randomly selected exposures, equivalent to not less than 5% of the nominal value of the securitised exposures, where such non-securitised exposures would otherwise have been securitised in the securitisation, provided that the number of potentially securitised exposures is not less than 100 at origination;

(c) the retention of randomly selected exposures, equivalent to not less than 5% of the nominal value of the securitised exposures, where such non-securitised exposures would otherwise have been securitised in the securitisation, provided that the number of potentially securitised exposures is not less than 100 at origination;

(d) the retention of the first loss tranche and, where such retention does not amount to 5 % of the nominal value of the securitised exposures, if necessary, other tranches having the same or a more severe risk profile than those transferred or sold to investors and not maturing any earlier than those transferred or sold to investors, so that the retention equals in total not less than 5 % of the nominal value of the securitised exposures; or

(d) the retention of the first loss tranche and, where such retention does not amount to 5% of the nominal value of the securitised exposures, if necessary, other tranches having the same or a more severe risk profile than those transferred or sold to investors and not maturing any earlier than those transferred or sold to investors, so that the retention equals in total not less than 5% of the nominal value of the securitised exposures; or

(d) the retention of the first loss tranche and, where such retention does not amount to 5% of the nominal value of the securitised exposures, if necessary, other tranches having the same or a more severe risk profile than those transferred or sold to investors and not maturing any earlier than those transferred or sold to investors, so that the retention equals in total not less than 5% of the nominal value of the securitised exposures; or

(e) the retention of a first loss exposure of not less than 5 % of every securitised exposure in the securitisation.

(e) the retention of a first loss exposure of not less than 5% of every securitised exposure in the securitisation.

(e) the retention of a first loss exposure of not less than 5% of every securitised exposure in the securitisation.

3a. By way of derogation from paragraph 3, in the case of NPE securitisations, where a non-refundable purchase price discount has been agreed, the retention of a material net economic interest for the purposes of that paragraph shall not be less than 5 % of the sum of the net value of the securitised exposures that qualify as non-performing exposures and, if applicable, the nominal value of any performing securitised exposures.

(2) (a) By way of derogation from (1), in the case of NPE securitisations, where a non-refundable purchase price discount has been agreed, the retention of a material net economic interest for the purposes of (1) shall not be less than 5% of the sum of the net value of the securitised exposures that qualify as non-performing exposures and, if applicable, the nominal value of any performing securitised exposures.

3A. By way of derogation from paragraph 3 of this Article, in the case of NPE securitisations, where a non-refundable purchase price discount has been agreed, the retention of a material net economic interest for the purposes of that paragraph shall not be less than 5% of the sum of the net value of the securitised exposures that qualify as non-performing exposures and, if applicable, the nominal value of any performing securitised exposures.

The net value of a non-performing exposure shall be calculated by deducting the non-refundable purchase price discount agreed at the level of the individual securitised exposure at the time of origination or, where applicable, a corresponding share of the non-refundable purchase price discount agreed at the level of the pool of underlying exposures at the time of origination from the exposure’s nominal value or, where applicable, its outstanding value at the time of origination. In addition, for the purpose of determining the net value of the securitised non-performing exposures, the non-refundable purchase price discount may include the difference between the nominal amount of the tranches of the NPE securitisation underwritten by the originator for subsequent sale and the price at which these tranches are first sold to unrelated third parties.

(b) The net value of a non-performing exposure shall be calculated by deducting the non-refundable purchase price discount agreed at the level of the individual securitised exposure at the time of origination or, where applicable, a corresponding share of the non-refundable purchase price discount agreed at the level of the pool of underlying exposures at the time of origination from the exposure’s nominal value or, where applicable, its outstanding value at the time of origination.

(c) In addition, for the purpose of determining the net value of the securitised non-performing exposures, the nonrefundable purchase price discount may include the difference between the nominal amount of the tranches of the NPE securitisation underwritten by the originator for subsequent sale and the price at which these tranches are first sold to unrelated third parties.

The net value of a non-performing exposure shall be calculated by deducting the non-refundable purchase price discount agreed at the level of the individual securitised exposure at the time of origination or, where applicable, a corresponding share of the non-refundable purchase price discount agreed at the level of the pool of underlying exposures at the time of origination from the exposure’s nominal value or, where applicable, its outstanding value at the time of origination. In addition, for the purpose of determining the net value of the securitised non-performing exposures, the non-refundable purchase price discount may include the difference between the nominal amount of the tranches of the NPE securitisation underwritten by the originator for subsequent sale and the price at which these tranches are first sold to unrelated third parties.

4. Where a mixed financial holding company established in the Union within the meaning of Directive 2002/87/EC of the European Parliament and of the Council, a parent institution or a financial holding company established in the Union, or one of its subsidiaries within the meaning of Regulation (EU) No 575/2013, as an originator or sponsor, securitises exposures from one or more credit institutions, investment firms or other financial institutions which are included in the scope of supervision on a consolidated basis, the requirements referred to in paragraph 1 may be satisfied on the basis of the consolidated situation of the related parent institution, financial holding company, or mixed financial holding company established in the Union.

[See 5.2.9 above]

4. Where:

(a) a mixed financial holding company;

(b) a UK parent institution;

(c) a financial holding company established in the UK; or

(d) a subsidiary of such a company or institution;

as an originator or sponsor, securitises exposures from one or more CRR firms, FCA investment firms or other financial institutions which are included in the scope of supervision on a consolidated basis, the requirements set out in paragraph 1 of this Article may be satisfied on the basis of the consolidated situation of the mixed financial holding company, UK parent institution or financial holding company concerned.

The first subparagraph shall apply only where credit institutions, investment firms or financial institutions which created the securitised exposures comply with the requirements set out in Article 79 of Directive 2013/36/EU of the European Parliament and of the Council ( 5 ) and deliver the information needed to satisfy the requirements provided for in Article 5 of this Regulation, in a timely manner, to the originator or sponsor and to the Union parent credit institution, financial holding company or mixed financial holding company established in the Union.

 

Subject to the modifications set out in the third subparagraph of SECN 5.2.9R of the FCA Handbook to the requirements set out in Article 79 of Directive 2013/36/EU of the European Parliament and of the Council in respect of FCA investment firms, the first subparagraph applies only if CRR firms, FCA investment firms or financial institutions which created the securitised exposures comply with the requirements set out in Article 79 of Directive 2013/36/EU of the European Parliament and of the Council and deliver the information needed to satisfy the requirements provided for in Article 5 of this Chapter, in a timely manner, to the originator or sponsor and, if the originator or sponsor is a subsidiary, to the mixed financial holding company, UK parent institution or financial holding company which is the parent undertaking of the subsidiary.

In this paragraph:

(a) 'CRR firm', 'financial holding company', 'financial institution', 'FCA investment firm', 'subsidiary' and 'UK parent institution' have the meaning given in Article 4 of CRR; and

(b) 'mixed financial holding company’ has the meaning given in regulation 1(2) of the Financial Conglomerates Regulations.

5. Paragraph 1 shall not apply where the securitised exposures are exposures on or exposures fully, unconditionally and irrevocably guaranteed by:

5.2.10

SECN 5.2.1R to SECN 5.2.5R shall not apply where the securitised exposures are exposures to or exposures fully, unconditionally and irrevocably guaranteed by:

5. Paragraph 1 of this Article shall not apply where the securitised exposures are exposures to or exposures fully, unconditionally and irrevocably guaranteed by:

(a) central governments or central banks;

(1) central governments or central banks;

(a) central governments or central banks;

(b) regional governments, local authorities and public sector entities within the meaning of point (8) of Article 4(1) of Regulation (EU) No 575/2013 of Member States;

(2) regional governments, local authorities and ‘public sector entities’ within the meaning of Article 4(1)(8) of UK CRR;

(b) regional governments, local authorities and public sector entities within the meaning of point (8) of Article 4(1) of CRR;

(c) institutions to which a 50 % risk weight or less is assigned under Part Three, Title II, Chapter 2 of Regulation (EU) No 575/2013;

(3) institutions to which a 50% risk weight or less is assigned under Part Three, Title II, Chapter 2 of UK CRR and articles 132a to 132c of Chapter 3 of the Standardised Approach and Internal Ratings Based Approach to Credit Risk (CRR) Part of the PRA Rulebook;

(c) institutions to which a 50% risk weight or less is assigned under Part Three, Title II, Chapter 2 of CRR and Articles 132a to 132c of Chapter 3 of the Standardised Approach and Internal Ratings Based Approach to Credit Risk (CRR) Part;

(d) national promotional banks or institutions within the meaning of point (3) of Article 2 of Regulation (EU) 2015/1017 of the European Parliament and of the Council ( 6w); or

(4) national promotional banks or institutions within the meaning of Article 2(3) of Regulation (EU) 2015/1017 of the European Parliament and of the Council; or

(d) national promotional banks or institutions within the meaning of point (3) of Article 2 of Regulation (EU) 2015/1017; or

(e) the multilateral development banks listed in Article 117 of Regulation (EU) No 575/2013.

(5) the multilateral development banks listed in Article 117 of UK CRR.

(e) the multilateral development banks listed in Article 117 of CRR.

6. Paragraph 1 shall not apply to transactions based on a clear, transparent and accessible index, where the underlying reference entities are identical to those that make up an index of entities that is widely traded, or are other tradable securities other than securitisation positions.

5.2.11 R

SECN 5.2.1R to SECN 5.2.5R shall not apply to transactions based on a clear, transparent and accessible index, where the underlying reference entities are identical to those that make up an index of entities that is widely traded, or are other tradable securities other than securitisation positions.

6. Paragraph 1 of this Article shall not apply to transactions based on a clear, transparent and accessible index, where the underlying reference entities are identical to those that make up an index of entities that is widely traded, or are other tradable securities other than securitisation positions.

7. EBA, in close cooperation with the ESMA and the European Insurance and Occupational Pensions Authority (EIOPA) which was established by Regulation (EU) No 1094/2010 of the European Parliament and of the Council ( 7 ), shall develop draft regulatory technical standards to specify in greater detail the risk-retention requirement, in particular with regard to:

(a) the modalities for retaining risk pursuant to paragraph 3, including the fulfilment through a synthetic or contingent form of retention;

(b) the measurement of the level of retention referred to in paragraph 1;

(c) the prohibition of hedging or selling the retained interest;

(d) the conditions for retention on a consolidated basis in accordance with paragraph 4;

(e) the conditions for exempting transactions based on a clear, transparent and accessible index referred to in paragraph 6;

(f) the modalities of retaining risk pursuant to paragraphs 3 and 3a in the case of NPE securitisations;

(g) the impact of fees paid to the retainer on the effective material net economic interest within the meaning of paragraph 1.

EBA shall submit those draft regulatory technical standards to the Commission by 10 October 2021.

The Commission is empowered to supplement this Regulation by adopting the regulatory technical standards referred to in this paragraph in accordance with Articles 10 to 14 of Regulation (EU) No 1093/2010.

[No equivalent]

[No equivalent]

EU level 2 links

The Risk retention RTS (CDR 2023/2175), which became law on 7th November 2023. They are substantially identical to the European Commission's July 2023 revised final draft risk retention RTS (which superseded the EBA final draft risk retention RTS (12th April 2022), which themselves superseded the EBA's June 2021 consultation draft).

The draft risk retention RTS July 2018 were never implemented.

The old RTS made in 2014 under the CRR were repealed as from 7th November 2023.

EUSR Article 7

FCA SECN 6.2

PRA Chapter 2 Article 7

Transparency requirements for originators, sponsors and SSPEs

1. The originator, sponsor and SSPE of a securitisation shall, in accordance with paragraph 2 of this Article, make at least the following information available to holders of a securitisation position, to the competent authorities referred to in Article 29 and, upon request, to potential investors:

6.2 Provision of information to holders of a securitisation position

6.2.1 R The originator, sponsor and SSPE of a securitisation shall, in accordance with SECN 11 and SECN 12 make at least the following information available to holders of a securitisation position, to the FCA and, upon request, to potential investors:

ARTICLE 7 TRANSPARENCY REQUIREMENTS FOR ORIGINATORS, SPONSORS AND SSPE

1. The originator, sponsor and SSPE of a securitisation shall, in accordance with paragraph 2 of this Article and Chapters 4 and 5, make at least the following information available to holders of a securitisation position, to the PRA and, upon request, to potential investors:

(a) information on the underlying exposures on a quarterly basis, or, in the case of ABCP, information on the underlying receivables or credit claims on a monthly basis;

(1) information on the underlying exposures on a quarterly basis, or, in the case of asset backed commercial paper, information on the underlying receivables or credit claims on a monthly basis;

(a) information on the underlying exposures on a quarterly basis, or, in the case of asset-backed commercial paper, information on the underlying receivables or credit claims on a monthly basis;

(b) all underlying documentation that is essential for the understanding of the transaction, including but not limited to, where applicable, the following documents:

(2) all underlying documentation essential for the understanding of the transaction, including but not limited to, where applicable, the following documents:

(b) all underlying documentation that is essential to understand the transaction, including but not limited to, where applicable, the following documents:

(i) the final offering document or the prospectus together with the closing transaction documents, excluding legal opinions;

(a) the final offering document or the prospectus together with the closing transaction documents, excluding legal opinions;

(i) the final offering document or the prospectus together with the closing transaction documents, excluding legal opinions;

(ii) for traditional securitisation the asset sale agreement, assignment, novation or transfer agreement and any relevant declaration of trust;

(b) for traditional securitisation, the asset sale agreement, assignment, novation or transfer agreement and any relevant declaration of trust;

(ii) for traditional securitisation the asset sale agreement, assignment, novation or transfer agreement and any relevant declaration of trust;

(iii) the derivatives and guarantee agreements, as well as any relevant documents on collateralisation arrangements where the exposures being securitised remain exposures of the originator;

(c) the derivatives and guarantee agreements, as well as any relevant documents on collateralisation arrangements where the exposures being securitised remain exposures of the originator;

(iii) the derivatives and guarantee agreements, as well as any relevant documents on collateralisation arrangements where the exposures being securitised remain exposures of the originator;

(iv) the servicing, back-up servicing, administration and cash management agreements;

(d) the servicing, back-up servicing, administration and cash management agreements;

(iv) the servicing, back-up servicing, administration and cash management agreements;

(v) the trust deed, security deed, agency agreement, account bank agreement, guaranteed investment contract, incorporated terms or master trust framework or master definitions agreement or such legal documentation with equivalent legal value;

(e) the trust deed, security deed, agency agreement, account bank agreement, guaranteed investment contract, incorporated terms or master trust framework or master definitions agreement or such legal documentation with equivalent legal value;

(v) the trust deed, security deed, agency agreement, account bank agreement, guaranteed investment contract, incorporated terms or master trust framework or master definitions agreement or such legal documentation with equivalent legal value; and

(vi) any relevant inter-creditor agreements, derivatives documentation, subordinated loan agreements, start-up loan agreements and liquidity facility agreements;

(f) any relevant inter-creditor agreements, derivatives documentation, subordinated loan agreements, start-up loan agreements and liquidity facility agreements; and

(vi) any relevant inter-creditor agreements, derivatives documentation, subordinated loan agreements, start-up loan agreements and liquidity facility agreements.

That underlying documentation shall include a detailed description of the priority of payments of the securitisation;

(g) a detailed description of the priority of payments of the securitisation;

That underlying documentation shall include a detailed description of the priority of payments of the securitisation;

(c) where a prospectus has not been drawn up in compliance with Directive 2003/71/EC of the European Parliament and of the Council ( 8 ), a transaction summary or overview of the main features of the securitisation, including, where applicable:

(3) where section 85 of the Act (Contravention of prohibition relating to public offer of securities) and rules made by the FCA for the purposes of Part 6 of the Act (Official Listing) do not require a prospectus to be drawn up, a transaction summary or overview of the main features of the securitisation, including, where applicable:

(c) where section 85 of FSMA and rules made by the FCA for the purposes of Part 6 of FSMA do not require a prospectus to be drawn up, a transaction summary or overview of the main features of the securitisation, including, where applicable:

(i) details regarding the structure of the deal, including the structure diagrams containing an overview of the transaction, the cash flows and the ownership structure;

(a) details regarding the structure of the deal, including the structure diagrams containing an overview of the transaction, the cash flows and the ownership structure;

(i) details regarding the structure of the deal, including the structure diagrams containing an overview of the transaction, the cash flows and the ownership structure;

(ii) details regarding the exposure characteristics, cash flows, loss waterfall, credit enhancement and liquidity support features;

(b) details regarding the exposure characteristics, cash flows, loss waterfall, credit enhancement and liquidity support features;

(ii) details regarding the exposure characteristics, cash flows, loss waterfall, credit enhancement and liquidity support features;

(iii) details regarding the voting rights of the holders of a securitisation position and their relationship to other secured creditors;

(c) details regarding the voting rights of the holders of a securitisation position and their relationship to other secured creditors; and

(iii) details regarding the voting rights of the holders of a securitisation position and their relationship to other secured creditors; and

(iv) a list of all triggers and events referred to in the documents provided in accordance with point (b) that could have a material impact on the performance of the securitisation position;

(d) a list of all triggers and events referred to in the documents provided in accordance with SECN 6.2.1R(2) that could have a material impact on the performance of the securitisation position;

(iv) a list of all triggers and events referred to in the documents provided in accordance with point (b) of this subparagraph that could have a material impact on the performance of the securitisation position;

(d) in the case of STS securitisations, the STS notification referred to in Article 27;

(4) in the case of STS securitisations, the STS notification referred to in SECN 2.5;

(d) in the case of STS securitisations, the STS notification referred to in [SECN 2.5 of the FCA

Handbook];

(e) quarterly investor reports, or, in the case of ABCP, monthly investor reports, containing the following:

(5) quarterly investor reports, or, in the case of asset backed commercial paper, monthly investor reports, containing at least the following:

(e) quarterly investor reports, or, in the case of asset-backed commercial paper, monthly investor reports, containing the following:

(i) all materially relevant data on the credit quality and performance of underlying exposures;

(a) all materially relevant data on the credit quality and performance of underlying exposures;

(i) all materially relevant data on the credit quality and performance of underlying exposures;

(ii) information on events which trigger changes in the priority of payments or the replacement of any counterparties, and, in the case of a securitisation which is not an ABCP transaction, data on the cash flows generated by the underlying exposures and by the liabilities of the securitisation;

(b) information on events which trigger changes in the priority of payments or the replacements of any counterparties, and, in the case of a securitisation which is not an ABCP transaction or an ABCP programme, data on the cash flows generated by the underlying exposures and by the liabilities of the securitisation; and

(ii) information on events which trigger changes in the priority of payments or the replacement of any counterparties, and, in the case of a securitisation which is not an ABCP transaction, data on the cash flows generated by the underlying exposures and by the liabilities of the securitisation; and

(iii) information about the risk retained, including information on which of the modalities provided for in Article 6(3) has been applied, in accordance with Article 6.

(c) information about the risk retained, including information on which of the modalities provided for in SECN 5.6.15R has been applied, in accordance with SECN 11 and SECN 12.

(iii) information about the risk retained, including information on which of the modalities provided for in Article 6(3) of this Chapter has been applied, in accordance with Article 6 of this Chapter and Chapters 4 and 5;

(f) any inside information relating to the securitisation that the originator, sponsor or SSPE is obliged to make public in accordance with Article 17 of Regulation (EU) No 596/2014 of the European Parliament and of the Council ( 9 ) on insider dealing and market manipulation;

(6) any inside information relating to the securitisation that the originator, sponsor or SSPE is obliged to make public in accordance with Article 17 of the Market Abuse Regulation;

(f) any inside information relating to the securitisation that the originator, sponsor or SSPE is obliged to make public in accordance with Article 17 of Regulation (EU) No 596/2014; and

(g) where point (f) does not apply, any significant event such as:

(7) where SECN 6.2.1R(6) does not apply, any significant event, such as:

(g) where point (f) of this subparagraph does not apply, any significant event such as:

(i) a material breach of the obligations provided for in the documents made available in accordance with point (b), including any remedy, waiver or consent subsequently provided in relation to such a breach;

(a) a material breach of the obligations provided for in the documents made available in accordance with SECN 6.2.1R(2), including any remedy, waiver or consent subsequently provided in relation to such a breach;

(i) a material breach of the obligations provided for in the documents made available in accordance with point (b) of this subparagraph, including any remedy, waiver or consent subsequently provided in relation to such a breach;

(ii) a change in the structural features that can materially impact the performance of the securitisation;

(b) a change in the structural features that can materially impact the performance of the securitisation;

(ii) a change in the structural features that can materially impact the performance of the securitisation;

(iii) a change in the risk characteristics of the securitisation or of the underlying exposures that can materially impact the performance of the securitisation;

(c) a change in the risk characteristics of the securitisation or of the underlying exposures that can materially impact the performance of the securitisation;

(iii) a change in the risk characteristics of the securitisation or of the underlying exposures that can materially impact the performance of the securitisation;

(iv) in the case of STS securitisations, where the securitisation ceases to meet the STS requirements or where competent authorities have taken remedial or administrative actions;

(d) in the case of STS securitisations, where the securitisation ceases to meet the STS requirements or where the FCA or PRA have taken remedial or administrative actions; and

(iv) in the case of STS securitisations, where the securitisation ceases to meet the STS requirements or where the PRA or FCA has taken remedial or administrative actions; and

(v) any material amendment to transaction documents.

(e) any material amendment to transaction documents.

(v) any material amendment to transaction documents.

The information described in points (b), (c) and (d) of the first subparagraph shall be made available before pricing.

[this appears – but the UK version is not the same as the EU - as sub-rule (2) below]

The information described in points (b), (c) and (d) of the first subparagraph shall be made available before pricing in draft or initial form and in final form no later than 15 days after closing of the transaction.

The information described in points (a) and (e) of the first subparagraph shall be made available simultaneously each quarter at the latest one month after the due date for the payment of interest or, in the case of ABCP transactions, at the latest one month after the end of the period the report covers.

6.2.2 R (1) The information described in SECN 6.2.1R(1) and SECN 6.2.1R(5) shall be made available simultaneously each quarter at the latest one month after the due date for the payment of interest or, in the case of ABCP transactions, at the latest one month after the end of the period the report covers.

The information described in points (a) and (e) of the first subparagraph shall be made available simultaneously each quarter at the latest one month after the due date for the payment of interest or, in the case of ABCP transactions, at the latest one month after the end of the period the report covers.

[covered above, but the EU version differs from the UK rules]

(2) The information described in SECN 6.2.1R(2), SECN 6.2.1R(3) and SECN 6.2.1R(4) must be made available before pricing or original commitment to invest in draft or initial form. Final versions of this information must be made available at the latest 15 days after closing of the transaction.

[covered above]

In the case of ABCP, the information described in points (a), (c)(ii) and (e)(i) of the first subparagraph shall be made available in aggregate form to holders of securitisation positions and, upon request, to potential investors. Loan-level data shall be made available to the sponsor and, upon request, to competent authorities.

6.2.3 R In the case of ABCP, the information described in SECN 6.2.1R(1), SECN 6.2.1R(3)(b) and SECN 6.2.1R(5)(a) shall be made available in aggregate form to holders of securitisation positions and, on request, to potential investors. Loan-level data must be made available to the sponsor and, on request, to the FCA.

In the case of asset-backed commercial paper, the information described in points (a), (c)(ii) and (e)(i) of the first subparagraph shall be made available in aggregate form to holders of securitisation positions and, upon request, to potential investors. Loan-level data shall be made available to the sponsor and, upon request, to the PRA.

Without prejudice to Regulation (EU) No 596/2014, the information described in points (f) and (g) of the first subparagraph shall be made available without delay.

6.2.4 R Without prejudice to the provisions of the Market Abuse Regulation, the information described in SECN 6.2.1R(6) and SECN 6.2.1R(7) shall be made available without delay.

Without prejudice to Regulation (EU) No 596/2014, the information described in points (f) and (g) of the first subparagraph shall be made available without delay.

FCA and PRA require documentation “in draft or initial form” before pricing or original commitment to invest, and in final form no later than 15 days after closing (and updated as soon as practicable following any material change). The EU currently requires disclosure “before pricing”, and does not differentiate investments by way of original subscription from those by way of secondary purchases in the market. See further the commentary on “Transparency”.

When complying with this paragraph, the originator, sponsor and SSPE of a securitisation shall comply with national and Union law governing the protection of confidentiality of information and the processing of personal data in order to avoid potential breaches of such law as well as any confidentiality obligation relating to customer, original lender or debtor information, unless such confidential information is anonymised or aggregated.

6.2.5 R When complying with SECN 6.2.1R, the originator, sponsor and SSPE of a securitisation may provide the information specified in anonymised or aggregated form or, in relation to SECN 6.2.1R(2), as a summary of the specified documentation, where and to the extent that is necessary in order to comply with the law applicable in the United Kingdom governing the protection of confidentiality of information and the processing of personal data and with any confidentiality obligation relating to customer, original lender or debtor information.

[see also Rule 6.2.7 below]

[no equivalent]

In particular, with regard to the information referred to in point (b) of the first subparagraph, the originator, sponsor and SSPE may provide a summary of the documentation concerned.

[included in 6.2.5 above]

 

Competent authorities referred to in Article 29 shall be able to request the provision of such confidential information to them in order to fulfil their duties under this Regulation.

6.2.6 G

Nothing in SECN 6.2.5R affects the FCA’s powers by and under the Act relating to the ability to request and process confidential information.

 

2. The originator, sponsor and SSPE of a securitisation shall designate amongst themselves one entity to fulfil the information requirements pursuant to points (a), (b), (d), (e), (f) and (g) of the first subparagraph of paragraph 1.

6.3 Designation relating to securitisation repository

6.3.1 R

(1) The originator, sponsor and SSPE of a securitisation must designate one of their number to be the entity responsible for fulfilling the information requirements under SECN 6.2.1R(1), SECN 6.2.1R(2), SECN 6.2.1R(4), SECN 6.2.1R(5), SECN 6.2.1R(6) and SECN 6.2.1R(7).

2. The originator, sponsor and SSPE of a securitisation shall designate one entity amongst themselves to fulfil the information requirements pursuant to points (a), (b), (d), (e), (f) and (g) of the first subparagraph of paragraph 1 of this Article, ‘the reporting entity’.

[no equivalent of the FCA Rule]

(2) Such designation does not relieve the other parties referred to in SECN 6.3.1R of their responsibilities under SECN 6.2.

[oddly there is no equivalent of the FCA Rule]

The entity designated in accordance with the first subparagraph shall make the information for a securitisation transaction available by means of a securitisation repository.

6.3.2 R

The reporting entity shall make the information for a securitisation transaction available by means of a securitisation repository registered by the FCA.

The reporting entity shall make the information for a securitisation transaction available by means of a securitisation repository.

The obligations referred to in the second and fourth subparagraphs shall not apply to securitisations where no prospectus has to be drawn up in compliance with Directive 2003/71/EC.

6.3.3 R The obligations referred to in SECN 6.3.2R and SECN 6.3.4R shall not apply to securitisations for which section 85 of the Act (Contravention of prohibition relating to public offer of securities) and rules made by the FCA for the purposes of Part 6 of the Act do not require a prospectus to be drawn up.

The obligations referred to in the second and fourth subparagraphs shall not apply to securitisations for which section 85 of FSMA and rules made by the FCA for the purposes of Part 6 of FSMA do not require a prospectus to be drawn up.

Where no securitisation repository is registered in accordance with Article 10, the entity designated to fulfil the requirements set out in paragraph 1 of this Article shall make the information available by means of a website that:

6.3.4 R (1) Where no securitisation repository is registered in accordance with regulation 14 of the Securitisation Regulations 2024, the reporting entity must make the information available by means of a website that:

Where no securitisation repository is registered in accordance with [regulation 15 of the securitisation Regulations], the reporting entity shall make the information available by means of a website that:

(a) includes a well-functioning data quality control system;

(1) includes a well-functioning data quality control system;

(a) includes a well-functioning data quality control system;

(b) is subject to appropriate governance standards and to maintenance and operation of an adequate organisational structure that ensures the continuity and orderly functioning of the website;

(2) is subject to appropriate governance standards and to maintenance and operation of an adequate organisational structure that ensures the continuity and orderly functioning of the website;

(b) is subject to appropriate governance standards and to maintenance and operation of an adequate organisational structure that ensures the continuity and orderly functioning of the website;

(c) is subject to appropriate systems, controls and procedures that identify all relevant sources of operational risk;

(3) is subject to appropriate systems, controls and procedures that identify all relevant sources of operational risk;

(c) is subject to appropriate systems, controls and procedures that identify all relevant sources of operational risk;

(d) includes systems that ensure the protection and integrity of the information received and the prompt recording of the information; and

(4) includes systems that ensure the protection and integrity of the information received and the prompt recording of the information; and

(d) includes systems that ensure the protection and integrity of the information received and the prompt recording of the information; and

(e) makes it possible to keep record of the information for at least five years after the maturity date of the securitisation.

(5) makes it possible to keep records of the information for at least 5 years after the maturity date of the securitisation.

(e) makes it possible to keep record of the information for at least five years after the maturity date of the securitisation.

The entity responsible for reporting the information, and the securitisation repository where the information is made available shall be indicated in the documentation regarding the securitisation.

6.3.5 R

In relation to SECN 6.3.2R and SECN 6.3.4R, the reporting entity and the securitisation repository where the information is made available shall be indicated in the documentation regarding the securitisation.

The reporting entity and the securitisation repository where the information is made available shall be indicated in the documentation regarding the securitisation.

3. ESMA, in close cooperation with the EBA and EIOPA, shall develop draft regulatory technical standards to specify the information that the originator, sponsor and SSPE shall provide in order to comply with their obligations under points (a) and (e) of the first subparagraph of paragraph 1 taking into account the usefulness of information for the holder of the securitisation position, whether the securitisation position is of a short-term nature and, in the case of an ABCP transaction, whether it is fully supported by a sponsor;

ESMA shall submit those draft regulatory technical standards to the Commission by 18 January 2019.

The Commission is empowered to supplement this Regulation by adopting the regulatory technical standards referred to in this paragraph in accordance with Articles 10 to 14 of Regulation (EU) No 1095/2010.

[no equivalent]

[no equivalent]

4. In order to ensure uniform conditions of application for the information to be specified in accordance with paragraph 3, ESMA, in close cooperation with the EBA and EIOPA, shall develop draft implementing technical standards specifying the format thereof by means of standardised templates. ESMA shall submit those draft implementing technical standards to the Commission by 18 January 2019.

The Commission is empowered to adopt the implementing technical standards referred to in this paragraph in accordance with Article 15 of Regulation (EU) No 1095/2010.

The FCA’s templates can be found in the FCA Rulebook SECN section (or see Policy Statement PS24/4)

[The PRA’s templates can be found as annexes to the Securitisation Rules instrument]

The Disclosure RTS and the Disclosure ITS are not covered in this table.

   

Regulation (EU) 2017/2402 of the European Parliament and of the Council

of 12 December 2017

laying down a general framework for securitisation and creating a specific framework for simple, transparent and standardised securitisation, and amending Directives 2009/65/EC [the UCITS Directive], 2009/138/EC [Solvency II] and 2011/61/EU [AIFM Directive] and Regulations (EC) No 1060/2009 [Credit Rating Agencies Regulation] and (EU) No 648/2012 [EMIR]

The European Parliament and the Council of the European Union,

Having regard to the Treaty on the Functioning of the European Union, and in particular Article 114 thereof,

Having regard to the proposal from the European Commission,

After transmission of the draft legislative act to the national parliaments,

Having regard to the opinion of the European Central Bank,

Having regard to the opinion of the European Economic and Social Committee,

Acting in accordance with the ordinary legislative procedure,

Whereas:

  1. Securitisation involves transactions that enable a lender or a creditor – typically a credit institution or a corporation – to refinance a set of loans, exposures or receivables, such as residential loans, auto loans or leases, consumer loans, credit cards or trade receivables, by transforming them into tradable securities. The lender pools and repackages a portfolio of its loans, and organises them into different risk categories for different investors, thus giving investors access to investments in loans and other exposures to which they normally would not have direct access. Returns to investors are generated from the cash flows of the underlying loans.
  1. In its communication of 26 November 2014 on an Investment Plan for Europe, the Commission announced its intention to restart high-quality securitisation markets, without repeating the mistakes made before the 2008 financial crisis. The development of a simple, transparent and standardised securitisation market constitutes a building block of the Capital Markets Union (CMU) and contributes to the Commission’s priority objective of supporting job creation and a return to sustainable growth.
  1. The Union aims to  strengthen the legislative framework implemented after the financial crisis to address the risks inherent in highly complex, opaque and risky securitisation. It is essential to ensure that rules are adopted to better differentiate simple, transparent and standardised products from complex, opaque and risky instruments and to apply a more risk-sensitive prudential framework.
  2. Securitisation is an important element of well-functioning financial markets. Soundly structured securitisation is an important channel for diversifying funding sources and allocating risk more widely within the Union financial system. It allows for a broader distribution of financial-sector risk and can help free up originators’ balance sheets to allow for further lending to the economy. Overall, it can improve efficiencies in the financial system and provide additional investment opportunities. Securitisation can create a bridge between credit institutions and capital markets with an indirect benefit for businesses and citizens (through, for example, less expensive loans and business financing, and credits for immovable property and credit cards). Nevertheless, this Regulation recognises the risks of increased interconnectedness and of excessive leverage that securitisation raises, and enhances the microprudential supervision by competent authorities of a financial institution’s participation in the securitisation market, as well as the macroprudential oversight of that market by the European Systemic Risk Board (ESRB), established by Regulation (EU) No 1092/2010 of the European Parliament and of the Council, and by the national competent and designated authorities for macroprudential instruments.
  3. Establishing a more risk-sensitive prudential framework for simple, transparent and standardised (‘STS’) securitisations requires that the Union clearly define what an STS securitisation is, since otherwise the more risk-sensitive regulatory treatment for credit institutions and insurance companies would be available for different types of securitisations in different Member States. This would lead to an unlevel playing field and to regulatory arbitrage, whereas it is important to ensure that the Union functions as a single market for STS securitisations and that it facilitates cross-border transactions.
  4. In line with the existing definitions in Union sectoral legislation, it is appropriate to provide definitions of all the key concepts of securitisation. In particular, a clear and encompassing definition of securitisation is needed to capture any transaction or scheme whereby the credit risk associated with an exposure or pool of exposures is tranched. An exposure that creates a direct payment obligation for a transaction or scheme used to finance or operate physical assets should not be considered an exposure to a securitisation, even if the transaction or scheme has payment obligations of different seniority.

    Related article: Article 2
  1. A sponsor should be able to delegate tasks to a servicer, but should remain responsible for risk management. In particular, a sponsor should not transfer the risk-retention requirement to his servicer. The servicer should be a regulated asset manager such as an undertaking for the collective investment in transferable securities (UCITS) management company, an alternative investment fund manager (AIFM) or an entity referred to in Directive 2014/65/EU [MiFID II] of the European Parliament and of the Council (MiFID entity).
  2. This Regulation introduces a ban on resecuritisation, subject to derogations for certain cases of resecuritisations that are used for legitimate purposes and to clarifications as to whether asset-backed commercial paper (ABCP) programmes are considered to be resecuritisations. Resecuritisations could hinder the level of transparency that this Regulation seeks to establish. Nevertheless, resecuritisations can, in exceptional circumstances, be useful in preserving the interests of investors. Therefore, resecuritisations should only be permitted in specific instances as established by this Regulation.  In addition, it is important for the financing of the real economy that fully supported ABCP programmes that do not introduce any re-tranching on top of the transactions funded by the programme remain outside the scope of the ban on resecuritisation.  

Related article: Article 8   

Commentary: Resecuritisations  

  1. Investments in or exposures to securitisations not only expose the investor to credit risks of the underlying loans or exposures, but the structuring process of securitisations could also lead to other risks such as agency riskmodel risk, legal and operational risk, counterparty risk, servicing risk, liquidity risk and concentration risk. Therefore, it is essential that institutional investors be subject to proportionate due-diligence requirements ensuring that they properly assess the risks arising from all types of securitisations, to the benefit of end investors. Due diligence can thus also enhance confidence in the market and between individual originators, sponsors and investors. It is necessary that investors also exercise appropriate due diligence with regard to STS securitisations. They can inform themselves with the information disclosed by the securitising parties, in particular the STS notification and the related information disclosed in this context, which should provide investors with all the relevant information on the way STS criteria are met. Institutional investors should be able to place appropriate reliance on the STS notification and the information disclosed by the originator, sponsor and securitisation special purpose entity (SSPE) on whether a securitisation meets the STS requirements. However, they should not rely solely and mechanistically on such a notification and such information.

    Related article: Article 5

 

  1. It is essential that the interests of originators, sponsors, original lenders that are involved in a securitisation and investors be aligned. To achieve this, the originator, sponsor or original lender should retain a significant interest in the underlying exposures of the securitisation. It is therefore important for the originator, sponsor or original lender to retain a material net economic exposure to the underlying risks in question. More generally, securitisation transactions should not be structured in such a way so as to avoid the application of the retention requirement. That requirement should be applicable in all situations where the economic substance of a securitisation is applicable, whatever legal structures or instruments are used. There is no need for multiple applications of the retention requirement. For any given securitisation, it suffices that only the originator, the sponsor or the original lender is subject to the requirement. Similarly, where securitisation transactions contain other securitisations positions as underlying exposures, the retention requirement should be applied only to the securitisation which is subject to the investment. The STS notification should indicate to investors that the originator, sponsor or original lender is retaining a material net economic exposure to the underlying risks. Certain exceptions should be made for cases in which securitised exposures are fully, unconditionally and irrevocably guaranteed in particular by public authorities. Where support from public resources is provided in the form of guarantees or by other means, this Regulation is without prejudice to State aid rules.

    Related article: Article 6
  1. Originators or sponsors should not take advantage of the fact that they could hold more information than investors and potential investors on the assets transferred to the SSPE, and should not transfer to the SSPE, without the knowledge of the investors or potential investors, assets whose credit-risk profile is higher than that of comparable assets held on the balance sheet of the originators. Any breach of that obligation should be subject to sanctions to be imposed by competent authorities, though only when such a breach is intentional. Negligence alone should not be subject to sanctions in that regard. However, that obligation should not prejudice in any way the right of originators or sponsors to select assets to be transferred to the SSPE that ex ante have a higher-than-average credit-risk profile compared to the average credit-risk profile of comparable assets that remain on the balance sheet of the originator, as long as the higher credit-risk profile of the assets transferred to the SSPE is clearly communicated to the investors or potential investors. Competent authorities should supervise compliance with this obligation by comparing the assets underlying a securitisation and comparable assets held on the originator’s balance sheet.

    The comparison of performance should be made between assets that are ex ante expected to have similar performances, for example between non-performing residential mortgages transferred to the SSPE and non-performing residential mortgages held on the balance sheet of the originator.

    There is no presumption that the assets underlying a securitisation should perform similarly to the average assets held on the originator’s balance sheet.

    Related article: Article 20(10)
  1. The ability of investors and potential investors to exercise due diligence and thus make an informed assessment of the creditworthiness of a given securitisation instrument depends on their access to information on those instruments. Based on the existing acquis, it is important to create a comprehensive system under which investors and potential investors will have access to all the relevant information over the entire life of the transactions, to reduce originators’, sponsors’ and SSPEs’ reporting tasks and to facilitate investors’ continuous, easy and free access to reliable information on securitisations. To enhance market transparency, a framework for securitisation repositories to collect relevant reports, primarily on underlying exposures in securitisations, should be established. Such securitisation repositories should be authorised and supervised by the European Supervisory Authority (European Securities and Markets Authority) (‘ESMA’), established by Regulation (EU) No 1095/2010 of the European Parliament and of the Council (6). In specifying the details of such reporting tasks, ESMA should ensure that the information required to be reported to such repositories reflects as closely as possible existing templates for disclosures of such information.

    Related article: Article 10
  1. The main purpose of the general obligation for the originator, sponsor and the SSPE to make available information on securitisations via the securitisation repository is to provide the investors with a single and supervised source of the data necessary for performing their due diligence. Private securitisations are often bespoke. They are important because they allow parties to enter into securitisation transactions without disclosing sensitive commercial information on the transaction (e.g. disclosing that a certain company needs funding to expand production or that an investment firm is entering a new market as part of its strategy) and/or related to the underlying assets (e.g. on the type of trade receivable generated by an industrial firm) to the market and competitors. In those cases, investors are in direct contact with the originator and/or sponsor and receive the information necessary to perform their due diligence directly from them. Therefore, it is appropriate to exempt private securitisations from the requirement to notify the transaction information to a securitisation repository.

    Related article: Article 7(2)
  1. Originators, sponsors and original lenders should apply to exposures to be securitised the same sound and well-defined criteria for credit-granting which they apply to non-securitised exposures. However, to the extent that trade receivables are not originated in the form of a loan, credit-granting criteria need not be met with respect to trade receivables.

    Related article: Article 9
  1. Securitisation instruments are generally not appropriate for retail clients within the meaning of Directive 2014/65/EU [MiFID II].

    Related article: Article 3

  1. Originators, sponsors and SSPEs should make available in the investor report all materially relevant data on the credit quality and performance of underlying exposures, including data allowing investors to clearly identify delinquency and default of underlying debtors, debt restructuring, debt forgiveness, forbearance, repurchases, payment holidays, losses, charge offs, recoveries and other asset performance remedies in the pool of underlying exposures. The investor report should include in the case of a securitisation which is not an ABCP transaction data on the cash flows generated by underlying exposures and by the liabilities of the securitisation, including separate disclosure of the securitisation position’s income and disbursements, namely scheduled principal, scheduled interest, prepaid principal, past due interest and fees and charges, and data relating to the triggering of any event implying changes in the priority of payments or replacement of any counterparties, as well as data on the amount and form of credit enhancement available to each tranche. Although securitisations that are simple, transparent and standardised have in the past performed well, the satisfaction of any STS requirements does not mean that the securitisation position is free of risks, nor does it indicate anything about the credit quality underlying the securitisation. Instead, it should be understood to indicate that a prudent and diligent investor will be able to analyse the risks involved in the securitisation.

    In order to allow for the different structural features of long-term securitisations and of short-term securitisations (namely ABCP programmes and ABCP transactions), there should be two types of STS requirements: one for long-term securitisations and one for short-term securitisations corresponding to those two differently functioning market segments. ABCP programmes rely on a number of ABCP transactions consisting of short-term exposures which need to be replaced once matured. In an ABCP transaction, securitisation could be achieved, inter alia, through agreement on a variable purchase-price discount on the pool of underlying exposures, or the issuance of senior and junior notes by an SSPE in a co-funding structure where the senior notes are then transferred to the purchasing entities of one or more ABCP programmes. However, ABCP transactions qualifying as STS should not include any resecuritisations. In addition, STS criteria should reflect the specific role of the sponsor providing liquidity support to the ABCP programme, in particular for fully supported ABCP programmes.

    Related article: Article 7(1)

  1. At both the international and Union level, much work has already been done to identify STS securitisation. In Commission Delegated Regulations (EU) 2015/35 [Solvency II Delegated Act] and (EU) 2015/61 [the LCR Delegated Act made under the CRR], criteria have already been set out for STS securitisation for specific purposes to which a more risk-sensitive prudential treatment is given.

  1. SSPEs should only be established in third countries that are not listed as high-risk and non-cooperative jurisdictions by the Financial Action Task Force (FATF). If a specific Union list of third-country jurisdictions that refuse to comply with tax good-governance standards has been adopted by the time a review of this Regulation is conducted, that Union list should be taken into account and could become the reference list for third countries where SSPEs are not allowed to be established.

    Related article: Article 4

  1. It is essential to establish a general and cross-sectorally applicable definition of STS securitisation based on the existing criteria, as well as on the criteria adopted by the Basel Committee on Banking Supervision (BCBS) and the International Organisation of Securities Commissions (IOSCO) on 23 July 2015 for identifying simple, transparent and comparable securitisations in the framework of capital sufficiency for securitisations, and in particular based on the opinion on a European framework for qualifying securitisation published on 7 July 2015, published on 7 July 2015 by the European Supervisory Authority (European Banking Authority)(EBA) established by Regulation (EU) No 1093/2010 of the European Parliament and of the Council.

  1. Implementation of the STS criteria throughout the Union should not lead to divergent approaches. Divergent approaches would create potential barriers for cross-border investors by obliging them to familiarise themselves with the details of the Member State frameworks, thereby undermining investor confidence in the STS criteria. The EBA should therefore develop guidelines to ensure a common and consistent understanding of the STS requirements throughout the Union, in order to address potential interpretation issues. Such a single source of interpretation would facilitate the adoption of the STS criteria by originators, sponsors and investors. ESMA should also play an active role in addressing potential interpretation issues.

  1. In order to prevent divergent approaches in the implementation of the STS criteria, the three European Supervisory Authorities (ESAs) should, in the framework of the Joint Committee of the European Supervisory Authorities, coordinate their work and that of the competent authorities to ensure cross-sectoral consistency and assess practical issues which could arise with regard to STS securitisations. In doing so, the views of market participants should also be requested and taken into account to the extent possible. The outcome of those discussions should be made public on the websites of the ESAs so as to help originators, sponsors, SSPEs and investors assess STS securitisations before issuing or investing in such positions. Such a coordination mechanism would be particularly important in the period leading up to the implementation of this Regulation.

  1. This Regulation only allows for ‘true-sale’ securitisations to be designated as STS. In a true-sale securitisation, the ownership of the underlying exposures is transferred or effectively assigned to an issuer entity which is a SSPE. The transfer or assignment of the underlying exposures to the SSPE should not be subject to clawback provisions in the event of the seller’s insolvency, without prejudice to provisions of national insolvency laws under which the sale of underlying exposures concluded within a certain period before the declaration of the seller’s insolvency can, under strict conditions, be invalidated.

    Related article: Article 20(1)

  1. A legal opinion provided by a qualified legal counsel could confirm the true sale or assignment or transfer with the same legal effect of the underlying exposures and the enforceability of that true sale, assignment or transfer with the same legal effect under the applicable law.

    Related article: Article 20(1)
  1. In securitisations which are not true-sale, the underlying exposures are not transferred to an issuer entity which is a SSPE, but rather the credit risk related to the underlying exposures is transferred by means of a derivative contract or guarantees. This introduces an additional counterparty credit risk and potential complexity related in particular to the content of the derivative contract. For those reasons, the STS criteria should not allow synthetic securitisation.

    The progress made by the EBA in its report of December 2015, identifying a possible set of STS criteria for synthetic securitisation and defining ‘balance-sheet synthetic securitisation’ and ‘arbitrage synthetic securitisation’, should be acknowledged. Once the EBA has clearly determined a set of STS criteria specifically applicable to balance-sheet synthetic securitisations, and with a view to promoting the financing of the real economy and in particular of SMEs, which benefit the most from such securitisations, the Commission should draft a report and, if appropriate, adopt a legislative proposal in order to extend the STS framework to such securitisations. However, no such extension should be proposed by the Commission in respect of arbitrage synthetic securitisations.

    Related article: Article 45

  1. The underlying exposures transferred from the seller to the SSPE should meet predetermined and clearly defined eligibility criteria which do not allow for active portfolio management of those exposures on a discretionary basis. Substitution of exposures that are in breach of representations and warranties should in principle not be considered active portfolio management.

    Related article: Article 20(7)

  1. Underlying exposures should not include exposures in default or exposures to obligors or guarantors that, to the best of the originator’s or original lender’s knowledge, are in specified situations of credit-impairedness (for example, obligors that have been declared insolvent).

    The ‘best knowledge’ standard should be considered to be fulfilled on the basis of information obtained from debtors on origination of the exposures, information obtained from the originator in the course of its servicing of the exposures or in the course of its risk-management procedure or information notified to the originator by a third party.

    A prudent approach should apply to exposures which have been non-performing and have subsequently been restructured. However, the inclusion of the latter in the pool of underlying exposure should not be excluded where such exposures have not presented new arrears since the date of the restructuring, which should have taken place at least one year prior to the date of transfer or assignment of the underlying exposures to the SSPE. In such cases, adequate disclosure should ensure full transparency.

    Related article: Article 20(11)

  1. To ensure that investors perform robust due diligence and to facilitate the assessment of underlying risks, it is important that securitisation transactions are backed by pools of exposures that are homogenous in asset type, such as pools of residential loans, or pools of corporate loans, business property loans, leases and credit facilities to undertakings of the same category, or pools of auto loans and leases, or pools of credit facilities to individuals for personal, family or household consumption purposes. The underlying exposures should not include transferable securities, as defined in point (44) of Article 4(1) of Directive 2014/65/EU [MiFID II] . To cater for those Member States where it is common practice for credit institutions to use bonds instead of loan agreements to provide credit to non-financial corporations, it should be possible to include such bonds, provided that they are not listed on a trading venue.

    Related article: Article 20(8)

  1. It is essential to prevent the recurrence of ‘originate to distribute’ models. In those situations lenders grant credits applying poor and weak underwriting policies as they know in advance that related risks are eventually sold to third parties. Thus, the exposures to be securitised should be originated in the ordinary course of the originator’s or original lender’s business pursuant to underwriting standards that should not be less stringent than those the originator or original lender applies at the time of origination to similar exposures which are not securitised. Material changes in underwriting standards should be fully disclosed to potential investors or, in the case of fully supported ABCP programmes, to the sponsor and other parties directly exposed to the ABCP transaction. The originator or original lender should have sufficient experience in originating exposures of a similar nature to those which have been securitised. In the case of securitisations where the underlying exposures are residential loans, the pool of loans should not include any loan that was marketed and underwritten on the premise that the loan applicant or, where applicable intermediaries, were made aware that the information provided might not be verified by the lender. The assessment of the borrower’s creditworthiness should also meet where applicable, the requirements set out in Directive 2008/48/EC [Credit Agreements Directive] or 2014/17/EU [the Mortgage Credits Directive] of the European Parliament and of the Council or equivalent requirements in third countries.

    Related article: Article 20(10)

  1. A strong reliance of the repayment of securitisation positions on the sale of assets securing the underlying assets creates vulnerabilities, as illustrated by the poor performance of parts of the market for commercial mortgage-backed securities (CMBS) during the financial crisis. Therefore, CMBS should not be considered to be STS securitisations.

    Related article: Article 20(13)

  1. Where data on the environmental impact of assets underlying securitisations are available, the originator and sponsor of such securitisations should publish them.

    Therefore, the originator, the sponsor and the SSPE of an STS securitisation where the underlying exposures are residential loans or auto loans or leases should publish the available information related to the environmental performance of the assets financed by such residential loans or auto loans or leases.

    Related article: Article 22(4)

  1. Where originators, sponsors and SSPEs would like their securitisations to use the STS designation, investors, competent authorities and ESMA should be notified that the securitisation meets the STS requirements. The notification should include an explanation on how each of the STS criteria has been complied with. ESMA should then publish it on a list of notified STS securitisations made available on its website for information purposes. The inclusion of a securitisation issuance in ESMA’s list of notified STS securitisations does not imply that ESMA or other competent authorities have certified that the securitisation meets the STS requirements. Compliance with the STS requirements remains solely the responsibility of the originators, sponsors and SSPEs. This should ensure that originators, sponsors and SSPEs take responsibility for their claim that the securitisation is STS and that there is transparency on the market.

    Related article: Article 27(1)

  1. Where a securitisation no longer meets the STS requirements, the originator and sponsor should immediately notify ESMA and the relevant competent authority. Moreover, where a competent authority has imposed administrative sanctions with regard to a securitisation notified as being STS, that competent authority should immediately notify ESMA for their inclusion on the STS notifications list allowing investors to be informed about such sanctions and about the reliability of STS notifications. It is therefore in the interest of originators and sponsors to make well-considered notifications in order to avoid reputational consequences.

    Related article: Article 27(4)

  1. Investors should perform their own due diligence on investments commensurate with the risks involved but they should be able to rely on the STS notification and on the information disclosed by the originator, sponsor and SSPE on whether a securitisation meets the STS requirements. However, they should not rely solely and mechanistically on such notifications and information.

    Related article: Article 5(3)

  1. The involvement of third parties in helping to check compliance of a securitisation with the STS requirements could be useful for investors, originators, sponsors and SSPEs and contribute to increasing confidence in the market for STS securitisations. Originators, sponsors and SSPEs could also use the services of a third party authorised in accordance with this Regulation to assess whether their securitisation complies with the STS criteria. Those third parties should be subject to authorisation by competent authorities. The notification to ESMA and the subsequent publication on ESMA’s website should mention whether STS compliance was confirmed by an authorised third party. However, it is essential that investors make their own assessment, take responsibility for their investment decisions and do not mechanistically rely on such third parties. The involvement of a third party should not in any way shift away from originators, sponsors and institutional investors the ultimate legal responsibility for notifying and treating a securitisation transaction as STS.

    Related article: Article 28

  1. Member States should designate competent authorities and provide them with the necessary supervisory, investigative and sanctioning powers. Administrative sanctions should, in principle, be published. Since investors, originators, sponsors, original lenders and SSPEs can be established in different Member States and supervised by different sectoral competent authorities, close cooperation between relevant competent authorities, including the European Central Bank (ECB) with regard to specific tasks conferred on it by Council Regulation (EU) No 1024/2013 (12), and with the ESAs should be ensured by the mutual exchange of information and assistance in supervisory activities. Competent authorities should apply sanctions only in the case of intentional or negligent infringements. The application of remedial measures should not depend on evidence of intention or negligence. In determining the appropriate type and level of sanction or remedial measure, when taking into account the financial strength of the responsible natural or legal person, competent authorities should in particular take into consideration the total turnover of the responsible legal person or the annual income and net assets of the responsible natural person.

    Related article: Article 29

  1. Competent authorities should closely coordinate their supervision and ensure consistent decisions, especially in the event of infringements of this Regulation. Where such an infringement concerns an incorrect or misleading notification, the competent authority identifying that infringement should also inform the ESAs and the relevant competent authorities of the Member States concerned. In the event of disagreement between the competent authorities, ESMA, and, where appropriate, the Joint-Committee of the European Supervisory Authorities, should exercise their binding mediation powers.

    Related article: Article 36

  1. The requirements for using the designation ‘simple, transparent and standardised’ (STS) securitisation are new and will be further specified by EBA guidelines and supervisory practice over time. In order to avoid discouraging market participants from using that designation, competent authorities should have the ability to grant the originator, sponsor and SSPE a grace period of three months to rectify any erroneous use of the designation that they have used in good faith. Good faith should be presumed where the originator, sponsor and SSPE could not know that a securitisation did not meet all the STS criteria to be designated as STS. During that grace period, the securitisation in question should continue to be considered STS-compliant and should not be deleted from the list drawn up by ESMA in accordance with this Regulation.

    Related article: Article 36(6)

  1. This Regulation promotes the harmonisation of a number of key elements in the securitisation market without prejudice to further complementary market-led harmonisation of processes and practices in securitisation markets. For that reason, it is essential that market participants and their professional associations continue working on further standardising market practices, and in particular the standardisation of documentation of securitisations. The Commission should carefully monitor and report on the standardisation efforts made by market participants.

    Related article: Article 44

  1. Directives 2009/65/EC [UCITS Directive], 2009/138/EC [Solvency II] and 2011/61/EU [AIFM Directive] of the European Parliament and of the Council and Regulations (EC) No 1060/2009 [Credit Rating Agencies Regulation] and (EU) No 648/2012 [EMIR] of the European Parliament and of the Council are amended accordingly to ensure consistency of the Union legal framework with this Regulation on provisions related to securitisation the main object of which is the establishment and functioning of the internal market, in particular by ensuring a level playing field in the internal market for  all institutional investors.

    Related article: Article 38

  1. As regards the amendments to Regulation (EU) No 648/2012 [EMIR], over-the-counter (‘OTC’) derivative contracts entered into by SSPEs should not be subject to the clearing obligation provided that certain conditions are met. This is because counterparties to OTC derivative contracts entered into with SSPEs are secured creditors under the securitisation arrangements and adequate protection against counterparty credit risk is usually provided for. With respect to non-centrally cleared derivatives, the levels of collateral required should also take into account the specific structure of securitisation arrangements and the protections already provided for therein.

    Related article: Article 42

  1. There is a degree of substitutability between covered bonds and securitisations. Therefore, in order to prevent the possibility of distortion or arbitrage between the use of securitisations and covered bonds because of the different treatment of OTC derivative contracts entered into by covered bond entities or by SSPEs, Regulation (EU) No 648/2012 [EMIR] should be amended to ensure consistency of treatment between derivatives associated with covered bonds and derivatives associated with securitisations, with regard to the clearing obligation and to the margin requirements on non-centrally cleared OTC derivatives.

    Related article: Article 42

  1. In order to harmonise the supervisory fees that are to be charged by ESMA, the power to adopt acts in accordance with Article 290 of the Treaty on the Functioning of the European Union (TFEU) should be delegated to the Commission in respect of further specifying the type of fees, the matters for which fees are due, the amount of the fees and the manner in which they are to be paid. It is of particular importance that the Commission carry out appropriate consultations during its preparatory work, including at expert level, and that those consultations be conducted in accordance with the principles laid down in the Interinstitutional Agreement of 13 April 2016 on Better Law-Making. In particular, to ensure equal participation in the preparation of delegated acts, the European Parliament and the Council receive all documents at the same time as Member States’ experts, and their experts systematically have access to meetings of Commission expert groups dealing with the preparation of delegated acts.

    Related article: Article 16

  1. In order to specify the risk-retention requirement, as well as to further clarify the homogeneity criteria and the exposures to be deemed homogenous under the requirements on simplicity, while ensuring that the securitisation of SME loans is not negatively affected, the Commission should be empowered to adopt regulatory technical standards developed by the EBA with regard to the modalities for retaining risk, the measurement of the level of retention, certain prohibitions concerning the retained risk, the retention on a consolidated basis and the exemption for certain transactions, and the specification of homogeneity criteria and of which underlying exposures are deemed to be homogeneous. The Commission should adopt those regulatory technical standards by means of delegated acts pursuant to Article 290 TFEU and in accordance with Articles 10 to 14 of Regulation (EU) No 1093/2010. The EBA should consult closely with the other two ESAs.

    Related article: Article 6(7)

  1. In order to facilitate investors' continuous, easy and free access to reliable information on securitisations, as well as to specify the terms of the cooperation and exchange of information obligation of competent authorities, the Commission should be empowered to adopt regulatory technical standards developed by ESMA with regard to: comparable information on underlying exposures and regular investor reports; the list of legitimate purposes under which resecuritisations are permitted; the procedures enabling securitisation repositories to verify the completeness and consistency of the details reported, the application for registration and simplified application for an extension of registration; the details of the securitisation to be provided for transparency reasons, the operational standards required for the collection, aggregation and comparison of data across securitisation repositories, the information to which designated entities have access and the terms and conditions for direct access; the information to be provided in the case of STS notification; the information to be provided to the competent authorities in the application for the authorisation of a third-party verifier; and the information to be exchanged and the content and scope of the notification obligations. The Commission should adopt those regulatory technical standards by means of delegated acts pursuant to Article 290 TFEU and in accordance with Articles 10 to 14 of Regulation (EU) No 1095/2010. ESMA should consult closely with the other two ESAs.

    Related article: Article 7(3)

  1. In order to facilitate the process for investors, originators, sponsors and SSPEs, the Commission should also be empowered to adopt implementing technical standards developed by ESMA, with regard to: the templates to be used when making information available to holders of a securitisation position; the format of the application for registration and of the application for an extension of registration of securitisation repositories; template for the provision of information; the templates to be used to provide information to the securitisation repository, taking into account solutions developed by existing securitisation data collectors; and the template for STS notifications that will provide investors and competent authorities with sufficient information for their assessment of compliance with the STS requirements. The Commission should adopt those implementing technical standards by means of implementing acts pursuant to Article 291 TFEU and in accordance with Article 15 of Regulation (EU) No 1095/2010. ESMA should consult closely with the other two ESAs.

    Related article: Article 7(4)

  1. Since the objectives of this Regulation, namely laying down a general framework for securitisation and creating a specific framework for STS securitisation, cannot be sufficiently achieved by the Member States given that securitisation markets operate globally and that a level playing field in the internal market for all institutional investors and entities involved in securitisation should be ensured but can rather, by reason of their scale and effects, be better achieved at Union level, the Union may adopt measures, in accordance with the principle of subsidiarity as set out in Article 5 of the Treaty on European Union. In accordance with the principle of proportionality, as set out in that Article, this Regulation does not go beyond what is necessary in order to achieve those objectives.

  1. This Regulation should apply to securitisations the securities of which are issued on or after 1 January 2019.

    Related article: Article 43(1)

  1. For securitisation positions outstanding as of 1 January 2019, originators, sponsors and SSPEs should be able to use the designation ‘STS’ provided that the securitisation complies with the STS requirements, for certain requirements at the time of notification and for other requirements at the time of origination. Therefore, originators, sponsors and SSPEs should be able to submit an STS notification to ESMA pursuant to this Regulation. Any subsequent modification to the securitisation should be accepted provided that the securitisation continues to meet all of the applicable STS requirements.

    Related article: Article 43(2)

  1. The due-diligence requirements that are applied in accordance with existing Union law before the date of application of this Regulation should continue to apply to securitisations issued on or after 1 January 2011, and to securitisations issued before 1 January 2011 where new underlying exposures have been added or substituted after 31 December 2014. The relevant provisions of Commission Delegated Regulation (EU) No 625/2014 [RTS relating to risk retention made under CRR] that specify the risk-retention requirements for credit institutions and investments firms within the meaning of Regulation (EU) No 575/2013 [CRR] of the European Parliament and of the Council should remain applicable until the moment that the regulatory technical standards on risk retention pursuant to this Regulation apply. For reasons of legal certainty, credit institutions or investment firms, insurance undertakings, reinsurance undertakings and alternative investment fund managers should, for securitisation positions outstanding as of the date of application of this Regulation, continue to be subject to Article 405 of Regulation  (EU) No 575/2013 [CRR] and to Chapters I, II and III and Article 22 of Delegated Regulation (EU) No 625/2014 [RTS relating to risk retention made under CRR] , Articles 254 and 255 of Delegated Regulation Commission Delegated Regulations (EU) 2015/35 [Solvency II Delegated Act] and Article 51 of Commission Delegated Regulation (EU) No  231/2013 [supplementing the AIFM Directive] respectively.

In order to ensure that originators, sponsors and SSPEs comply with their transparency obligations, until the regulatory technical standards to be adopted by the Commission pursuant to this Regulation apply, the information referred to in Annexes I to VIII of Commission Delegated Regulation Commission Delegated Regulations (EU) 2015/35 [Solvency II Delegated Act] should be made publicly available,

Related article: Article 43(5)

  1. HAVE ADOPTED THIS REGULATION:

Chapter 1

General Provisions

Article 1

Subject matter and scope

1.  This Regulation lays down a general framework for securitisation. It defines securitisation and establishes due-diligence, risk-retention and transparency requirements for parties involved in securitisations, criteria for credit granting, requirements for selling securitisations to retail clients, a ban on re-securitisation, requirements for SSPEs as well as conditions and procedures for securitisation repositories. It also creates a specific framework for simple, transparent and standardised (‘STS’) securitisation.

2.  This Regulation applies to institutional investors and to originators, sponsors, original lenders and securitisation special purpose entities.

Article 2

For the purposes of this Regulation, the following definitions apply:

7. ‘asset-backed commercial paper programme’ or ‘ABCP programme’ means a programme of securitisations the securities issued by which predominantly take the form of asset-backed commercial paper with an original maturity of one year or less;

8. ‘asset-backed commercial paper transaction’ or ‘ABCP transaction’ means a securitisation within an ABCP programme;

[UK version only:  (A4). ‘competent authority’ means an authority designated or required to be designated for the purpose of supervising compliance by an entity with obligations set out in this Regulation; and in relation to an entity, means the authority designated for the purpose of supervising compliance with such obligations by that entity;]

[EU version only: 

(26)  “credit protection agreement” means an agreement concluded between the originator and the investor to transfer the credit risk of securitised exposures from the originator to the investor by means of credit derivatives or guarantees, whereby the originator commits to pay an amount, known as a credit protection premium, to the investor and the investor commits to pay an amount, known as a credit protection payment, to the originator in the event that one of the contractually defined credit events occurs;

(28)  “credit protection payment” means the amount the investor has committed to pay to the originator under the credit protection agreement in the event that a credit event defined in the credit protection agreement occurs;

(27)  “credit protection premium” means the amount the originator has committed to pay to the investor under the credit protection agreement for the credit protection promised by the investor;]

17. ‘early amortisation provision’ means a contractual clause in a securitisation of revolving exposures or a revolving securitisation which requires, on the occurrence of defined events, investors’ securitisation positions to be redeemed before the originally stated maturity of those positions;

18. ‘first loss tranche’ means the most subordinated tranche in a securitisation that is the first tranche to bear losses incurred on the securitised exposures and thereby provides protection to the second loss and, where relevant, higher ranking tranches.

21. ‘fully-supported ABCP programme’ means an ABCP programme that its sponsor directly and fully supports by providing to the SSPE(s) one or more liquidity facilities covering at least all of the following:

(a)  all liquidity and credit risks of the ABCP programme;

(b)  any material dilution risks of the exposures being securitised;

(c)  any other ABCP transaction-level and ABCP programme-level costs if necessary to guarantee to the investor the full payment of any amount under the ABCP;

22. ‘fully supported ABCP transaction’ means an ABCP transaction supported by a liquidity facility, at transaction level or at ABCP programme level, that covers at least all of the following:

(a)  all liquidity and credit risks of the ABCP transaction;

(b)  any material dilution risks of the exposures being securitised in the ABCP transaction;

(c)  any other ABCP transaction-level and ABCP programme-level costs if necessary to guarantee to the investor the full payment of any amount under the ABCP;

12. ‘institutional investor’ means an investor which is one of the following

(a)  an insurance undertaking as defined in point (1) of Article 13 of  [EU version: Directive 2009/138/EC [Solvency II]] [UK version: section 417(1) of the 2000 Act];

(b)  a reinsurance undertaking as defined in point (4) of Article 13 of [EU version:  Directive 2009/138/EC [Solvency II]] [UK version: section 417(1) of the 2000 Act];

[EU version:

(c)  an institution for occupational retirement provision falling within the scope of Directive (EU) 2016/2341[IORPs Directive (recast)] of the European Parliament and of the Council in accordance with Article 2 thereof, unless a Member States has chosen not to apply that Directive in whole or in parts to that institution in accordance with Article 5 of that Directive; or an investment manager or an authorised entity appointed by an institution for occupational retirement provision pursuant to Article 32 of Directive (EU) 2016/2341 [IORPs Directive (recast)] ;

(d)  an alternative investment fund manager (AIFM) as defined in point (b) of Article 4(1) of Directive 2011/61/EU[AIFM Directive] that manages and/or markets alternative investment funds in the Union;

(e)  an undertaking for the collective investment in transferable securities (UCITS) management company, as defined in point (b) of Article 2(1) of Directive 2009/65/EC [UCITS Directive];

(f)  an internally managed UCITS, which is an investment company authorised in accordance with Directive 2009/65/EC [UCITS Directive] and which has not designated a management company authorised under that Directive for its management; 

(g)  a credit institution as defined in point (1) of Article 4(1) of Regulation (EU) No 575/2013 [CRR] for the purposes of that Regulation or an investment firm as defined in point (2) of Article 4(1) of that Regulation];

[UK version:

(c)  an occupational pension scheme as defined in section 1(1) of the Pension Schemes Act 1993 that has its main administration in the United Kingdom, or a fund manager of such a scheme appointed under section 34(2) of the Pensions Act 1995 that, in respect of activity undertaken pursuant to that appointment, is authorised for the purposes of section 31 of the 2000 Act; 

(d)  an AIFM (as defined in regulation 4(1) of the Alternative Investment Fund Managers Regulations 2013) which markets or manages AIFs (as defined in regulation 3 of those Regulations) in the United Kingdom;

(e)  a management company as defined in section 237(2) of the 2000 Act;

(f)  a UCITS as defined by section 236A of the 2000 Act, which is an authorised open ended investment company as defined in section 237(3) of that Act;

(g)  a CRR firm as defined by Article 4(1)(2A) of Regulation (EU) No 575/2013;

(h) an FCA investment firm as defined by Article 4(1)(2AB) of Regulation (EU) No
575/2013;]

11. ‘investor’ means a natural or legal person holding a securitisation position;

14. ‘liquidity facility’ means the securitisation position arising from a contractual agreement to provide funding to ensure timeliness of cash flows to investors;

[EU version only:

‘(24)  “non-performing exposure” or “NPE” means an exposure that meets any of the conditions set out in Article 47a(3) of Regulation (EU) No 575/2013 [CRR];

(31)  “non-refundable purchase price discount” means the difference between the outstanding balance of the exposures in the underlying pool and the price at which those exposures are sold by the originator to the SSPE, where neither the originator nor the original lender are reimbursed for that difference.

(25)  “NPE securitisation” means a securitisation backed by a pool of non-performing exposures the nominal value of which makes up not less than 90 % of the entire pool’s nominal value at the time of origination and at any later time where assets are added to or removed from the underlying pool due to replenishment, restructuring or any other relevant reason;]

20. ‘original lender’ means an entity which, itself or through related entities, directly or indirectly, concluded the original agreement which created the obligations or potential obligations of the debtor or potential debtor giving rise to the exposures being securitised;

3. ‘originator’ means an entity which:

(a)  itself or through related entities, directly or indirectly, was involved in the original agreement which created the obligations or potential obligations of the debtor or potential debtor giving rise to the exposures being securitised; or

(b)  purchases a third party’s exposures on its own account and then securitises them;

[UK version only:

[(A1). ‘Regulation (EU) No 575/2013’ means Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 648/2012;

(A2). ‘Regulation (EU) No 648/2012’ means Regulation (EU) No 648/2012 of the European Parliament and of the Council of 4 July 2012 on OTC derivatives, central counterparties and trade repositories;]

4. ‘resecuritisation’ means securitisation where at least one of the underlying exposures is a securitisation position;

15. ‘revolving exposure’ means an exposure whereby borrowers’ outstanding balances are permitted to fluctuate based on their decisions to borrow and repay, up to an agreed limit;

16. ‘revolving securitisation’ means a securitisation where the securitisation structure itself revolves by exposures being added to or removed from the pool of exposures irrespective of whether the exposures revolve or not;

1. ‘securitisation’ means a transaction or scheme, whereby the credit risk associated with an exposure or a pool of exposures is tranched, having all of the following characteristics:

(a)  payments in the transaction or scheme are dependent upon the performance of the exposure or of the pool of exposures;

(b)  the subordination of tranches determines the distribution of losses during the ongoing life of the transaction or scheme;

(c)  the transaction or scheme does not create exposures which possess all of the characteristics listed in Article 147(8) of Regulation (EU) No 575/2013 [CRR].

Commentaries: The definition of "securitisation"; Specialised lending exposures

Related recital: Recital (6)

19. ‘securitisation position’ means an exposure to a securitisation;

23. ‘securitisation repository’ means a legal person that centrally collects and maintains the records of securitisations.

[EU version only: For the purpose of Article 10 of this Regulation, references in Articles 61, 64, 65, 66, 73, 78, 79 and 80 of Regulation (EU) No 648/2012 [EMIR] to ‘trade repository’ shall be construed as references to ‘securitisation repository’.]

2. ‘securitisation special purpose entity’ or ‘SSPE’ means a corporation, trust or other entity, other than an originator or sponsor, established for the purpose of carrying out one or more securitisations, the activities of which are limited to those appropriate to accomplishing that objective, the structure of which is intended to isolate the obligations of the SSPE from those of the originator;

13. ‘servicer’ means an entity that manages a pool of purchased receivables or the underlying credit exposures on a day-to-day basis;

5. [EU version:  sponsor means a credit institution, whether located in the Union or not, as defined in point (1) of Article 4(1) of Regulation (EU) No 575/2013 [CRR], or an investment firm as defined in point (1) of Article 4(1) of Directive 2014/65/EU [MiFID II] other than an originator, that:

(a)  establishes and manages an asset-backed commercial paper programme or other securitisation that purchases exposures from third-party entities, or

(b)  establishes an asset-backed commercial paper programme or other securitisation that purchases exposures from third-party entities and delegates the day-to-day active portfolio management involved in that securitisation to an entity authorised to perform such activity in accordance with Directive 2009/65/EC [UCITS Directive], Directive 2011/61/EU [AIFM Directive] or Directive 2014/65/EU [MiFID II];]

[UK version:  ‘sponsor’ means a credit institution as defined in point (1) of Article 4(1) of Regulation (EU) No 575/2013 or an investment firm as defined in paragraph 1A of Article 2 of Regulation 600/2014/EU [onshored MIFIR], whether located in the United Kingdom or in a country or territory outside the United Kingdom, which -

(a) is not an originator; and

(b) either - 

(i) establishes and manages an asset-backed commercial paper programme or other securitisation that purchases exposures from third party entities; or

(ii) establishes an asset-backed commercial paper programme or other securitisation that purchases exposures from third party entities and delegates the day-to-day active portfolio management involved in that securitisation to an entity which is authorised to manage assets belonging to another person in accordance with the law of the country in which the entity is established.]

Commentary: Who can be a sponsor?

[UK version only:  (A9) ‘STS equivalent non-UK securitisation’ means a securitisation of a description in  relation to which a country or territory outside the United Kingdom is designated by regulations under Article 28A;]

[EU version only:

(30)  “sustainability factors” mean sustainability factors as defined in point (24) of Article 2 of Regulation (EU) 2019/2088 of the European Parliament and of the Council [Sustainable Finance Disclosure Regulation];

(29)  “synthetic excess spread” means the amount that, according to the documentation of a synthetic securitisation, is contractually designated by the originator to absorb losses of the securitised exposures that might occur before the maturity date of the transaction;]

10. ‘synthetic securitisation’ means a securitisation where the transfer of risk is achieved by the use of credit derivatives or guarantees, and the exposures being securitised remain exposures of the originator;

[UK version only:

(A10) ‘territory’ includes the European Union and any other international organisation or authority comprising countries or territories;

(A3) ‘the 2000 Act’ means the Financial Services and Markets Act 2000;

(A5) ‘the FCA’ means the Financial Conduct Authority;

(A6) ‘the FCA Handbook’ means the Handbook of Rules and Guidance published by the
FCA containing rules made by the FCA under the 2000 Act (as that Handbook has effect on exit day);

(A7) ‘the PRA’ means the Prudential Regulation Authority;

(A8) [this was omitted by FSMA 2023 but the two new fillowing definitions are nevertheless numbered A( and A10];]

9. ‘traditional securitisation’ means a securitisation involving the transfer of the economic interest in the exposures being securitised through the transfer of ownership of those exposures from the originator to an SSPE or through sub-participation by an SSPE, where the securities issued do not represent payment obligations of the originator;

6. ‘tranche’ means a contractually established segment of the credit risk associated with an exposure or a pool of exposures, where a position in the segment entails a risk of credit loss greater than or less than a position of the same amount in another segment, without taking account of credit protection provided by third parties directly to the holders of positions in the segment or in other segments;

Commentary: The definition of "securitisation"

Article 2

For the purposes of this Regulation, the following definitions apply:

[UK version only:

(A1). ‘Regulation (EU) No 575/2013’ means Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 648/2012;

(A2). ‘Regulation (EU) No 648/2012’ means Regulation (EU) No 648/2012 of the European Parliament and of the Council of 4 July 2012 on OTC derivatives, central counterparties and trade repositories;

(A3). ‘the 2000 Act’ means the Financial Services and Markets Act 2000;

(A4). ‘competent authority’ means an authority designated or required to be designated for the purpose of supervising compliance by an entity with obligations set out in this Regulation; and in relation to an entity, means the authority designated for the purpose of supervising compliance with such obligations by that entity;

(A5). ‘the FCA’ means the Financial Conduct Authority;

(A6). ‘the FCA Handbook’ means the Handbook of Rules and Guidance published by the
FCA containing rules made by the FCA under the 2000 Act (as that Handbook has effect on exit day);

(A7). ‘the PRA’ means the Prudential Regulation Authority;

(A8) [this was omitted by FSMA 2023 but the two new fillowing definitions are nevertheless numbered A( and A10];

(A9) ‘STS equivalent non-UK securitisation’ means a securitisation of a description in  relation to which a country or territory outside the United Kingdom is designated by regulations under Article 28A;

(A10) ‘territory’ includes the European Union and any other international organisation or authority comprising countries or territories;]

(1)  ‘securitisation’ means a transaction or scheme, whereby the credit risk associated with an exposure or a pool of exposures is tranched, having all of the following characteristics:

(a)  payments in the transaction or scheme are dependent upon the performance of the exposure or of the pool of exposures;

(b)  the subordination of tranches determines the distribution of losses during the ongoing life of the transaction or scheme;

(c)  the transaction or scheme does not create exposures which possess all of the characteristics listed in Article 147(8) of Regulation (EU) No 575/2013 [CRR].

Commentaries: The definition of "securitisation"; Specialised lending exposures

Related recital: Recital (6)

(2)  ‘securitisation special purpose entity’ or ‘SSPE’ means a corporation, trust or other entity, other than an originator or sponsor, established for the purpose of carrying out one or more securitisations, the activities of which are limited to those appropriate to accomplishing that objective, the structure of which is intended to isolate the obligations of the SSPE from those of the originator;

(3)  ‘originator’ means an entity which:

(a)  itself or through related entities, directly or indirectly, was involved in the original agreement which created the obligations or potential obligations of the debtor or potential debtor giving rise to the exposures being securitised; or

(b)  purchases a third party’s exposures on its own account and then securitises them;

(4)  'resecuritisation’ means securitisation where at least one of the underlying exposures is a securitisation position;

[EU version:

(5)  ‘sponsor means a credit institution, whether located in the Union or not, as defined in point (1) of Article 4(1) of Regulation (EU) No 575/2013 [CRR], or an investment firm as defined in point (1) of Article 4(1) of Directive 2014/65/EU [MiFID II] other than an originator, that:

(a)  establishes and manages an asset-backed commercial paper programme or other securitisation that purchases exposures from third-party entities, or

(b)  establishes an asset-backed commercial paper programme or other securitisation that purchases exposures from third-party entities and delegates the day-to-day active portfolio management involved in that securitisation to an entity authorised to perform such activity in accordance with Directive 2009/65/EC [UCITS Directive], Directive 2011/61/EU [AIFM Directive] or Directive 2014/65/EU [MiFID II];]

[UK version: 

(5)  ‘sponsor’ means a credit institution as defined in point (1) of Article 4(1) of Regulation (EU) No 575/2013 or an investment firm as defined in paragraph 1A of Article 2 of Regulation 600/2014/EU [onshored MIFIR], whether located in the United Kingdom or in a country or territory outside the United Kingdom, which -

(a) is not an originator; and

(b) either - 

(i) establishes and manages an asset-backed commercial paper programme or other securitisation that purchases exposures from third party entities; or

(ii) establishes an asset-backed commercial paper programme or other securitisation that purchases exposures from third party entities and delegates the day-to-day active portfolio management involved in that securitisation to an entity which is authorised to manage assets belonging to another person in accordance with the law of the country in which the entity is established.]

Commentary: Who can be a sponsor?

(6)  ‘tranche’ means a contractually established segment of the credit risk associated with an exposure or a pool of exposures, where a position in the segment entails a risk of credit loss greater than or less than a position of the same amount in another segment, without taking account of credit protection provided by third parties directly to the holders of positions in the segment or in other segments;

Commentary: The definition of "securitisation"

(7)  ‘asset-backed commercial paper programme’ or ‘ABCP programme’ means a programme of securitisations the securities issued by which predominantly take the form of asset-backed commercial paper with an original maturity of one year or less;

(8)  ‘asset-backed commercial paper transaction’ or ‘ABCP transaction’ means a securitisation within an ABCP programme;

(9)  ‘traditional securitisation’ means a securitisation involving the transfer of the economic interest in the exposures being securitised through the transfer of ownership of those exposures from the originator to an SSPE or through sub-participation by an SSPE, where the securities issued do not represent payment obligations of the originator;

(10)  ‘synthetic securitisation’ means a securitisation where the transfer of risk is achieved by the use of credit derivatives or guarantees, and the exposures being securitised remain exposures of the originator;

(11)  ‘investor’ means a natural or legal person holding a securitisation position;

(12)  ‘institutional investor’ means an investor which is one of the following:

(a)  an insurance undertaking as defined in point (1) of Article 13 of [EU version: Directive 2009/138/EC [Solvency II]] [UK version: section 417(1) of the 2000 Act];

(b)  a reinsurance undertaking as defined in point (4) of Article 13 of [EU version: Directive 2009/138/EC [Solvency II]] [UK version: section 417(1) of the 2000 Act];

[EU version:

(c)  an institution for occupational retirement provision falling within the scope of Directive (EU) 2016/2341[IORPs Directive (recast)] of the European Parliament and of the Council in accordance with Article 2 thereof, unless a Member States has chosen not to apply that Directive in whole or in parts to that institution in accordance with Article 5 of that Directive; or an investment manager or an authorised entity appointed by an institution for occupational retirement provision pursuant to Article 32 of Directive (EU) 2016/2341 [IORPs Directive (recast)] ;

(d)  an alternative investment fund manager (AIFM) as defined in point (b) of Article 4(1) of Directive 2011/61/EU[AIFM Directive] that manages and/or markets alternative investment funds in the Union;

(e)  an undertaking for the collective investment in transferable securities (UCITS) management company, as defined in point (b) of Article 2(1) of Directive 2009/65/EC [UCITS Directive];

(f)  an internally managed UCITS, which is an investment company authorised in accordance with Directive 2009/65/EC [UCITS Directive] and which has not designated a management company authorised under that Directive for its management;

(g)  a credit institution as defined in point (1) of Article 4(1) of Regulation (EU) No 575/2013 [CRR] for the purposes of that Regulation or an investment firm as defined in point (2) of Article 4(1) of that Regulation];

[UK version:

(c)  an occupational pension scheme as defined in section 1(1) of the Pension Schemes Act 1993 that has its main administration in the United Kingdom, or a fund manager of such a scheme appointed under section 34(2) of the Pensions Act 1995 that, in respect of activity undertaken pursuant to that appointment, is authorised for the purposes of section 31 of the 2000 Act;

(d)  an AIFM (as defined in regulation 4(1) of the Alternative Investment Fund Managers Regulations 2013) which markets or manages AIFs (as defined in regulation 3 of those Regulations) in the United Kingdom;

(e)  a management company as defined in section 237(2) of the 2000 Act;

(f)  a UCITS as defined by section 236A of the 2000 Act, which is an authorised open
ended investment company as defined in section 237(3) of that Act;

(g)  a CRR firm as defined by Article 4(1)(2A) of Regulation (EU) No 575/2013;

(h) an FCA investment firm as defined by Article 4(1)(2AB) of Regulation (EU) No
575/2013;]

(13)  ‘servicer’ means an entity that manages a pool of purchased receivables or the underlying credit exposures on a day-to-day basis;

(14)  ‘liquidity facility’ means the securitisation position arising from a contractual agreement to provide funding to ensure timeliness of cash flows to investors;

(15)  ‘revolving exposure’ means an exposure whereby borrowers’ outstanding balances are permitted to fluctuate based on their decisions to borrow and repay, up to an agreed limit;

(16)  ‘revolving securitisation’ means a securitisation where the securitisation structure itself revolves by exposures being added to or removed from the pool of exposures irrespective of whether the exposures revolve or not;

(17)  ‘early amortisation provision’ means a contractual clause in a securitisation of revolving exposures or a revolving securitisation which requires, on the occurrence of defined events, investors’ securitisation positions to be redeemed before the originally stated maturity of those positions;

(18)  ‘first loss tranche’ means the most subordinated tranche in a securitisation that is the first tranche to bear losses incurred on the securitised exposures and thereby provides protection to the second loss and, where relevant, higher ranking tranches.

(19)  ‘securitisation position’ means an exposure to a securitisation;

(20)  original lender’ means an entity which, itself or through related entities, directly or indirectly, concluded the original agreement which created the obligations or potential obligations of the debtor or potential debtor giving rise to the exposures being securitised;

(21)  ‘fully-supported ABCP programme’ means an ABCP programme that its sponsor directly and fully supports by providing to the SSPE(s) one or more liquidity facilities covering at least all of the following:

(a)  all liquidity and credit risks of the ABCP programme;

(b)  any material dilution risks of the exposures being securitised;

(c)  any other ABCP transaction-level and ABCP programme-level costs if necessary to guarantee to the investor the full payment of any amount under the ABCP;

(22)  ‘fully supported ABCP transaction’ means an ABCP transaction supported by a liquidity facility, at transaction level or at ABCP programme level, that covers at least all of the following:

(a)  all liquidity and credit risks of the ABCP transaction;

(b)  any material dilution risks of the exposures being securitised in the ABCP transaction;

(c)  any other ABCP transaction-level and ABCP programme-level costs if necessary to guarantee to the investor the full payment of any amount under the ABCP;

(23)  ‘securitisation repository’ means a legal person that centrally collects and maintains the records of securitisations.

[EU version only, not in UK version: For the purpose of Article 10 of this Regulation, references in Articles 61, 64, 65, 66, 73, 78, 79 and 80 of Regulation (EU) No 648/2012 [EMIR] to ‘trade repository’ shall be construed as references to ‘securitisation repository’.]

[EU version only, not in UK version:

(24)  “non-performing exposure” or “NPE” means an exposure that meets any of the conditions set out in Article 47a(3) of Regulation (EU) No 575/2013 [CRR];

(25)  “NPE securitisation” means a securitisation backed by a pool of non-performing exposures the nominal value of which makes up not less than 90 % of the entire pool’s nominal value at the time of origination and at any later time where assets are added to or removed from the underlying pool due to replenishment, restructuring or any other relevant reason;

(26)  “credit protection agreement” means an agreement concluded between the originator and the investor to transfer the credit risk of securitised exposures from the originator to the investor by means of credit derivatives or guarantees, whereby the originator commits to pay an amount, known as a credit protection premium, to the investor and the investor commits to pay an amount, known as a credit protection payment, to the originator in the event that one of the contractually defined credit events occurs;

(27)  “credit protection premium” means the amount the originator has committed to pay to the investor under the credit protection agreement for the credit protection promised by the investor;

(28)  “credit protection payment” means the amount the investor has committed to pay to the originator under the credit protection agreement in the event that a credit event defined in the credit protection agreement occurs;

(29)  “synthetic excess spread” means the amount that, according to the documentation of a synthetic securitisation, is contractually designated by the originator to absorb losses of the securitised exposures that might occur before the maturity date of the transaction;

(30)  “sustainability factors” mean sustainability factors as defined in point (24) of Article 2 of Regulation (EU) 2019/2088 of the European Parliament and of the Council [the Sustainable Finance Disclosure Regulation];

(31)  “non-refundable purchase price discount” means the difference between the outstanding balance of the exposures in the underlying pool and the price at which those exposures are sold by the originator to the SSPE, where neither the originator nor the original lender are reimbursed for that difference.]

Article 3

Selling of securitisations to retail clients

1.  The seller of a securitisation position shall not sell such a position to a retail client, as defined in [EU version: point 11 of Article 4(1) of Directive 2014/65/EU [MiFID II]][UK version: rule 3.4.1 of the Conduct of Business sourcebook of the FCA Handbook (retail clients)] unless all of the following conditions are fulfilled:

(a)  the seller of the securitisation position has performed a suitability test in accordance with [EU version: Article 25(2) of Directive 2014/65/EU [MiFID II]] [UK version: rules 9A.2.1 and 9A.2.16 of the Conduct of Business sourcebook of the FCA Handbook (assessing suitability to buy and hold an investment);

(b)  the seller of the securitisation position is satisfied, on the basis of the test referred to in point (a), that the securitisation position is suitable for that retail client;

(c)  the seller of the securitisation position immediately communicates in a report to the retail client the outcome of the suitability test.

2.  Where the conditions set out in paragraph 1 are fulfilled and the financial instrument portfolio of that retail client does not exceed EUR 500 000, the seller shall ensure, on the basis of the information provided by the retail client in accordance with paragraph 3, that the retail client does not invest an aggregate amount exceeding 10 % of that client’s financial instrument portfolio in securitisation positions, and that the initial minimum amount invested in one or more securitisation positions is EUR 10 000.

3.  The retail client shall provide the seller with accurate information on the retail client’s financial instrument portfolio, including any investments in securitisation positions.

4.  For the purposes of paragraphs 2 and 3, the retail client’s financial instrument portfolio shall include cash deposits and financial instruments, but shall exclude any financial instruments that have been given as collateral.

Related recital: Recital (15)

Article 4

Requirements for SSPEs

SSPEs shall not be established in a third country [UK version: or territory outside the United Kingdom] to which any of the following applies:

[UK version(a)  the third country or territory is listed as a high-risk and non-cooperative jurisdiction by the FATF;]

[EU version:  (a)  the third country is listed as a high-risk third country that has strategic deficiencies in its regime on anti-money laundering and counter terrorist financing, in accordance with Article 9 of Directive (EU) 2015/849 [Money Laundering Directive] of the European Parliament and of the Council;]

[EU version only: (aa)      the third country is listed in Annex I of the EU list of non-cooperative jurisdictions for tax purposes;]

(b)  the third country [UK version: or territory] has not signed an agreement with [EU version: a Member State] [UK version: the United Kingdom] to ensure that that third country [UK version: or territory] fully complies with the standards provided for in Article 26 of the Organisation for Economic Cooperation and Development (OECD) Model Tax Convention on Income and on Capital or in the OECD Model Agreement on the Exchange of Information on Tax Matters, and ensures an effective exchange of information on tax matters, including any multilateral tax agreements.

[EU version only:  For an SSPE established, after 9 April 2021, in a jurisdiction mentioned in Annex II for the reason of operating a harmful tax regime, the investor shall notify the investment in securities issued by that SSPE to the competent tax authorities of the Member State in which the investor is resident for tax purposes.]

Related recital: Recital (18)

Commentary: The meaning of "established" and of "the Union"

Chapter 2

Provisions applicable to all Securitisations

Article 5

Due-diligence requirements for institutional investors

1.  Prior to holding a securitisation position, an institutional investor, other than the originator, sponsor or original lender, shall verify that:

(a)  where the originator or original lender established in the [EU version: Union] [UK version: United Kingdom] is not a credit institution or an investment firm as defined in points (1) and (2) of Article 4(1) of Regulation (EU) No 575/2013 [CRR], the originator or original lender grants all the credits giving rise to the underlying exposures on the basis of sound and well-defined criteria and clearly established processes for approving, amending, renewing and financing those credits and has effective systems in place to apply those criteria and processes in accordance with Article 9(1) of this Regulation;

(b)  where the originator or original lender is established in a third country [UK version: or territory outside the United Kingdom], the originator or original lender grants all the credits giving rise to the underlying exposures on the basis of sound and well-defined criteria and clearly established processes for approving, amending, renewing and financing those credits and has effective systems in place to apply those criteria and processes to ensure that credit-granting is based on a thorough assessment of the obligor’s creditworthiness;

(c)  if established in the [EU version: Union] [UK version: United Kingdom], the originator, sponsor or original lender retains on an ongoing basis a material net economic interest in accordance with Article 6 and the risk retention is disclosed to the institutional investor in accordance with Article 7;

(d)  if established in a third country [UK version: or territory outside the United Kingdom], the originator, sponsor or original lender retains on an ongoing basis a material net economic interest which, in any event, shall not be less than 5 %, determined in accordance with Article 6, and discloses the risk retention to institutional investors;

(e)  [UK version: if established in the United Kingdom,] the originator, sponsor or SSPE has, where applicable, made available the information required by Article 7 in accordance with the frequency and modalities provided for in that Article.

[UK version only: (f)  if established in a third country or territory outside the United Kingdom, the originator, sponsor or SSPE has, where applicable - 

(i)  made available information which is substantially the same as that which it would have made available in accordance with point (e) if it had been established in the United Kingdom; and

(ii)  has done so with such frequency and modalities as are substantially the same as those with which it would have made information available in accordance with point (e) if it had been so established.]

[EU version only(f)  in the case of non-performing exposures, sound standards are applied in the selection and pricing of the exposures.]

2.  By derogation from paragraph 1, as regards fully supported ABCP transactions, the requirement specified in point (a) of paragraph 1 shall apply to the sponsor. In such cases, the sponsor shall verify that the originator or original lender which is not a credit institution or an investment firm grants all the credits giving rise to the underlying exposures on the basis of sound and well-defined criteria and clearly established processes for approving, amending, renewing and financing those credits and has effective systems in place to apply those criteria and processes in accordance with Article 9(1).

3.  Prior to holding a securitisation position, an institutional investor, other than the originator, sponsor or original lender, shall carry out a due-diligence assessment which enables it to assess the risks involved. That assessment shall consider at least all of the following:

(a)  the risk characteristics of the individual securitisation position and of the underlying exposures;

(b)  all the structural features of the securitisation that can materially impact the performance of the securitisation position, including the contractual priorities of payment and priority of payment-related triggers, credit enhancements, liquidity enhancements, market value triggers, and transaction-specific definitions of default;

(c)  with regard to a securitisation notified as STS in accordance with Article 27, the compliance of that securitisation with the requirements provided for in Articles 19 to 22 or in Articles 23 to 26, and Article 27. Institutional investors may rely to an appropriate extent on the STS notification pursuant to Article 27(1) and on the information disclosed by the originator, sponsor and SSPE on the compliance with the STS requirements, without solely or mechanistically relying on that notification or information;

[UK version:  

(d)  in point (c) - 

(i)  the reference to a securitisation notified as STS in accordance with Article 27 includes a reference to a securitisation notified in accordance with that Article before IP completion day, or before the expiry of a period of four* years beginning with IP completion day, where the person responsible for the notification (the originator and sponsor or, in the case of an ABCP programme, the sponsor) is established in an EEA State;

(ii)  in relation to any securitisation so notified, the reference to the STS notification is a reference to the notification of that securitisation as STS, and a reference to a numbered Article is a reference to the Article so numbered of this Regulation as it had or has effect in relation to an EEA State at any time on and after the date of the notification and before the end of the period referred to in paragraph (i).]

Notwithstanding points (a) and (b) of the first subparagraph, in the case of a fully supported ABCP programme, institutional investors in the commercial paper issued by that ABCP programme shall consider the features of the ABCP programme and the full liquidity support.

*Substituted by reg. 4 of the Financial Services (Miscellaneous Amendments) Regulations 2022/1223

(da)  with regard to an STS equivalent non-UK securitisation, such matters as may be specified in regulations under Article 28A (and may rely on such matters to such extent as may be specified).

4.  An institutional investor, other than the originator, sponsor or original lender, holding a securitisation position, shall at least:

(a)  establish appropriate written procedures that are proportionate to the risk profile of the securitisation position and, where relevant, to the institutional investor’s trading and non-trading book, in order to monitor, on an ongoing basis, compliance with paragraphs 1 and 3 and the performance of the securitisation position and of the underlying exposures.

Where relevant with respect to the securitisation and the underlying exposures, those written procedures shall include monitoring of the exposure type, the percentage of loans more than 30, 60 and 90 days past due, default rates, prepayment rates, loans in foreclosure, recovery rates, repurchases, loan modifications, payment holidays, collateral type and occupancy, and frequency distribution of credit scores or other measures of credit worthiness across underlying exposures, industry and geographical diversification, frequency distribution of loan to value ratios with band widths that facilitate adequate sensitivity analysis. Where the underlying exposures are themselves securitisation positions, as permitted under Article 8, institutional investors shall also monitor the exposures underlying those positions;

(b)  in the case of a securitisation other than a fully supported ABCP programme, regularly perform stress tests on the cash flows and collateral values supporting the underlying exposures or, in the absence of sufficient data on cash flows and collateral values, stress tests on loss assumptions, having regard to the nature, scale and complexity of the risk of the securitisation position;

(c)  in the case of fully supported ABCP programme, regularly perform stress tests on the solvency and liquidity of the sponsor;

(d)  ensure internal reporting to its management body so that the management body is aware of the material risks arising from the securitisation position and so that those risks are adequately managed;

(e)  be able to demonstrate to its competent [EU version: authorities] [UK version: authority], upon request, that it has a comprehensive and thorough understanding of the securitisation position and its underlying exposures and that it has implemented written policies and procedures for the risk management of the securitisation position and for maintaining records of the verifications and due diligence in accordance with paragraphs 1 and 2 and of any other relevant information; and

(f)  in the case of exposures to a fully supported ABCP programme, be able to demonstrate to its competent authorities, upon request, that it has a comprehensive and thorough understanding of the credit quality of the sponsor and of the terms of the liquidity facility provided.

5.  Without prejudice to paragraphs 1 to 4 of this Article, where an institutional investor has given another institutional investor authority to make investment management decisions that might expose it to a securitisation, the institutional investor may instruct that managing party to fulfil its obligations under this Article in respect of any exposure to a securitisation arising from those decisions. [EU version only: Member States shall ensure that,] where an institutional investor is instructed under this paragraph to fulfil the obligations of another institutional investor and fails to do so, any sanction [EU version: under Articles 32 and 33] [UK version: imposed as a result of the failure] may be imposed on the managing party and not on the institutional investor who is exposed to the securitisation.

Related recitals: Recital (9), Recital (33)

Commentaries: Investor due diligence; Do EU investors need loan level data to invest in non-EU issues?; Due diligence, risk retention and transparency - extra-territorial?

 

Article 6

Risk retention

1.  The originator, sponsor or original lender of a securitisation shall retain on an ongoing basis a material net economic interest in the securitisation of not less than 5%. That interest shall be measured at the origination and shall be determined by the notional value for off-balance-sheet items. Where the originator, sponsor or original lender have not agreed between them who will retain the material net economic interest, the originator shall retain the material net economic interest. There shall be no multiple applications of the retention requirements for any given securitisation. The material net economic interest shall not be split amongst different types of retainers and not be subject to any credit-risk mitigation or hedging.

For the purposes of this Article, an entity shall not be considered to be an originator where the entity has been established or operates for the sole purpose of securitising exposures.

[EU version onlyWhen measuring the material net economic interest, the retainer shall take into account any fees that may in practice be used to reduce the effective material net economic interest.

In the case of traditional NPE securitisations, the requirement of this paragraph may also be fulfilled by the servicer provided that the servicer can demonstrate that it has expertise in servicing exposures of a similar nature to those securitised and that it has well-documented and adequate policies, procedures and risk-management controls in place relating to the servicing of exposures.]

2.  Originators shall not select assets to be transferred to the SSPE with the aim of rendering losses on the assets transferred to the SSPE, measured over the life of the transaction, or over a maximum of 4 years where the life of the transaction is longer than four years, higher than the losses over the same period on comparable assets held on the balance sheet of the originator. Where the competent authority finds evidence suggesting contravention of that prohibition, the competent authority shall investigate the performance of assets transferred to the SSPE and comparable assets held on the balance sheet of the originator. If the performance of the transferred assets is significantly lower than that of the comparable assets held on the balance sheet of the originator as a consequence of the intent of the originator, the competent authority shall impose a sanction [EU version: pursuant to Articles 32 and 33] [UK version: for the contravention].

3.  Only the following shall qualify as a retention of a material net economic interest of not less than 5% within the meaning of paragraph 1:

(a)  the retention of not less than 5% of the nominal value of each of the tranches sold or transferred to investors;

(b)  in the case of revolving securitisations or securitisations of revolving exposures, the retention of the originator’s interest of not less than 5% of the nominal value of each of the securitised exposures;

(c)  the retention of randomly selected exposures, equivalent to not less than 5 % of the nominal value of the securitised exposures, where such non-securitised exposures would otherwise have been securitised in the securitisation, provided that the number of potentially securitised exposures is not less than 100 at origination;

(d)  the retention of the first loss tranche and, where such retention does not amount to 5% of the nominal value of the securitised exposures, if necessary, other tranches having the same or a more severe risk profile than those transferred or sold to investors and not maturing any earlier than those transferred or sold to investors, so that the retention equals in total not less than 5% of the nominal value of the securitised exposures; or

(e)  the retention of a first loss exposure of not less than 5% of every securitised exposure in the securitisation.

[EU version only

3a.   By way of derogation from paragraph 3, in the case of NPE securitisations, where a non-refundable purchase price discount has been agreed, the retention of a material net economic interest for the purposes of that paragraph shall not be less than 5 % of the sum of the net value of the securitised exposures that qualify as non-performing exposures and, if applicable, the nominal value of any performing securitised exposures.

The net value of a non-performing exposure shall be calculated by deducting the non-refundable purchase price discount agreed at the level of the individual securitised exposure at the time of origination or, where applicable, a corresponding share of the non-refundable purchase price discount agreed at the level of the pool of underlying exposures at the time of origination from the exposure’s nominal value or, where applicable, its outstanding value at the time of origination. In addition, for the purpose of determining the net value of the securitised non-performing exposures, the non-refundable purchase price discount may include the difference between the nominal amount of the tranches of the NPE securitisation underwritten by the originator for subsequent sale and the price at which these tranches are first sold to unrelated third parties.]

[EU version:

4.  Where a mixed financial holding company established in the Union within the meaning of Directive 2002/87/EC [Financial Conglomerates Directive] of the European Parliament and of the Council, a parent institution or a financial holding company established in the Union, or one of its subsidiaries within the meaning of Regulation (EU) No 575/2013 [CRR], as an originator or sponsor, securitises exposures from one or more credit institutions, investment firms or other financial institutions which are included in the scope of supervision on a consolidated basis, the requirements referred to in paragraph 1 may be satisfied on the basis of the consolidated situation of the related parent institution, financial holding company, or mixed financial holding company established in the Union.]

[UK version:

4.  Where - 

(a) a mixed financial holding company,

(b) a UK parent institution,

(c) a financial holding company established in the United Kingdom, or

(d) a subsidiary of such a company or institution,

as an originator or sponsor, securitises exposures from one or more credit institutions, investment firms or other financial institutions which are included in the scope of supervision on a consolidated basis, the requirements set out in paragraph 1 may be satisfied on the basis of the consolidated situation of the mixed financial holding company, UK parent institution or financial holding company concerned.]

[EU version: The first subparagraph shall apply] [UK version: Subject to the modifications for FCA investment firms in the third subparagraph, the first subparagraph applies] only where credit institutions, investment firms or financial institutions which created the securitised exposures comply with the requirements set out in Article 79 of Directive 2013/36/EU[CRD IV] of the European Parliament and of the Council and deliver the information needed to satisfy the requirements provided for in Article 5 of this Regulation, in a timely manner, to the originator or sponsor [EU version: and to the Union parent credit institution, financial holding company or mixed financial holding company established in the Union.] [UK version: and, if the originator or sponsor is a subsidiary, to the mixed financial holding company, UK parent institution or financial holding company which is the parent undertaking of the subsidiary].

[UK version only: In the case of FCA investment firms, compliance with the requirements set out in Article 79(b) of Directive 2013/36/EU of the European Parliament and of the Council are modified in accordance with this subparagraph—

(a) FCA investment firms must have internal methodologies that enable them to assess the credit risk of exposures to individual obligors, securities or securitisation positions and credit risk at the portfolio level;

(b) the internal methodologies must not rely solely or mechanistically on external credit ratings; and

(c) where an FCA investment firm determines the amount of own funds that it should hold by reference to a rating by an external credit assessment institution or by reference to the fact that an exposure is unrated, this does not exempt the FCA investment firm from additionally considering other relevant information for assessing its allocation of internal capital.]

[UK version only

In this paragraph - 

(a) ‘credit institution’, [UK version only: ‘FCA investment firm] ‘financial holding company’, ‘financial institution’, ‘investment firm’, ‘subsidiary’ and ‘UK parent institution’ have the meaning given in Article 4(1) of Regulation (EU) No 575/2013; and

(b) ‘mixed financial holding company” has the meaning given in regulation 1(2) of the Financial Conglomerates and Other Financial Groups Regulations 2004.]

[UK only transitional provision (1):  This provision appears in paragraph 35 of The Financial Services Act 2021 (Prudential Regulation of Credit Institutions and Investment Firms) (Consequential Amendments and Miscellaneous Provisions) Regulations 2021, and is included here for convenience.  Pursuant to paragraph 38 of those Regulations, this transitional provision applied from the beginning of 1 January 2022 and ceased to have effect on 1 January 2023:

"(1)  This regulation applies to securitisations the securities of which were issued or the initial securitisation positions of which were created before 1 January 2022.

(2)  If the requirements set out in Article 6(1) of Regulation (EU) 2017/2402(b) were met in the manner specified in Article 6(4) of that Regulation before 1 January 2022, and were it not for the prudential regulation changes, the requirements set out in Article 6(1) of Regulation (EU) 2017/2402 would continue to be met in the manner specified in Article 6(4) of that Regulation in respect of such a securitisation after 1 January 2022, then the requirements set out in Article 6(1) of that Regulation are deemed to be met in respect of that securitisation."]

[UK only transitional provision (2):  This provision appears in paragraph 25 of the Financial Services Act 2021 (Prudential Regulation of Credit Institutions and Investment Firms) (Consequential Amendments and Miscellaneous Provisions) Regulations 2022, and is included here for convenience.  Pursuant to paragraph 25, this transitional provision will apply from 17th August 2022:

"(1)  This regulation applies in relation to a relevant securitisation where —

(a)  prior to the prudential regulation changes, the requirements set out in Article 6(1) of the Securitisation Regulation were met by the originator or sponsor in the manner specified in Article 6(4)(b) of that Regulation; and

(b)  further to the prudential regulation changes, Article 6(4) of the Securitisation Regulation no longer applies.

(2)  The originator, sponsor or original lender of the securitisation must either take a net economic interest in the securitisation so that the requirements set out in Article 6(1) of the Securitisation Regulation are satisfied or must increase any existing net economic interest in the securitisation so that those requirements are satisfied (and the provisions made by  Articles 12 and 14 of the risk retention delegated regulation do not prevent any transfer of a  net economic interest to the originator, sponsor or original lender for this purpose).

(3) The originator, sponsor or original lender which is to take or increase the net economic interest referred to in paragraph (2) must do so before 1st January 2023.

(4) Paragraphs (2) and (3) apply to multiple originators, multiple sponsors or multiple original lenders in accordance with Article 3 of the risk retention delegated regulation.

(5) In this regulation—

(a)  “relevant securitisation” means a securitisation the securities of which were issued or  the initial securitisation positions of which were created before 1st January 2022;

(b)  a reference to the risk retention delegated regulation is a reference to that Regulation as applied to a securitisation by Article 43(7) of the Securitisation Regulation."

Paragraph 26 of the Regulations contains related definitions:

“prudential regulation changes” has the meaning given in regulation 38(2)(b) of the Financial Services Act 2021 (Prudential Regulation of Credit Institutions and Investment Firms) (Consequential Amendments and Miscellaneous Provisions) Regulations 2021;

“the risk retention delegated regulation” means Commission Delegated Regulation (EU) No 625/2014 of 13 March 2014 supplementing Regulation (EU) No 575/2013 of the European Parliament and of the Council by way of regulatory technical standards specifying the requirements for investor, sponsor, original lender and originator institutions relating to exposures to transferred credit risk; and 

and “original lender”, “originator”, “securitisation” and “sponsor” have the meanings given in  Article 2(5) of the UK Securitisation Regulation.

5.  Paragraph 1 shall not apply where the securitised exposures are exposures on or exposures fully, unconditionally and irrevocably guaranteed by:

(a)  central governments or central banks;

(b)  regional governments, local authorities and public sector entities within the meaning of point (8) of Article 4(1) of Regulation (EU) No 575/2013 [CRR] [EU version only: of Member States];

(c)  institutions to which a 50 % risk weight or less is assigned under Part Three, Title II, Chapter 2 of Regulation (EU) No 575/2013 [CRR] [UK version only:  and Articles 132a to 132c of Chapter 3 of the Standardised Approach and Internal Ratings Based Approach to Credit Risk (CRR) Part of the PRA Rulebook];

(d)  national promotional banks or institutions within the meaning of point (3) of Article 2 of Regulation (EU) 2015/1017 of the European Parliament and of the Council; or

(e)  the multilateral development banks listed in Article 117 of Regulation (EU) No 575/2013 [CRR].

[UK version only:  In this paragraph ‘PRA Rulebook’ means the rulebook published by the PRA containing rules made by that Authority under the 2000 Act as that rulebook has effect on 1 January 2022.]

6.  Paragraph 1 shall not apply to transactions based on a clear, transparent and accessible index, where the underlying reference entities are identical to those that make up an index of entities that is widely traded, or are other tradable securities other than securitisation positions.

7.  [EU Version: EBA, in close cooperation with the ESMA and the European Insurance and Occupational Pensions Authority (EIOPA) which was established by Regulation (EU) No 1094/2010 of the European Parliament and of the Council, shall develop draft regulatory] [UK version: The FCA and the PRA, acting jointly, may make] technical standards to specify in greater detail the risk-retention requirement, in particular with regard to:

(a)  the modalities for retaining risk pursuant to paragraph 3, including the fulfilment through a synthetic or contingent form of retention;

(b)  the measurement of the level of retention referred to in paragraph 1;

(c)  the prohibition of hedging or selling the retained interest;

(d)  the conditions for retention on a consolidated basis in accordance with paragraph 4;

(e)  the conditions for exempting transactions based on a clear, transparent and accessible index referred to in paragraph 6;

[EU version only(f)        the modalities of retaining risk pursuant to paragraphs 3 and 3a in the case of NPE securitisations;]

[EU version only(g)          the impact of fees paid to the retainer on the effective material net economic interest within the meaning of paragraph 1.]

[EU version only:

The EBA shall submit those draft regulatory technical standards to the Commission by 10 October 2021.]

The Commission is empowered to supplement this Regulation by adopting the regulatory technical standards referred to in this paragraph in accordance with Articles 10 to 14 of Regulation (EU) No 1093/2010.]

Related recitals: Recital (10), Recital (43)

Commentaries: Sole purpose; Risk retention; Synthetics; Non-performing loans.

Risk retention RTS (in force 8th November 2023, replacing the 2014 CRR RTS).

Article 7

Transparency requirements for originators, sponsors and SSPEs

1.  The originator, sponsor and SSPE of a securitisation shall, in accordance with paragraph 2 of this Article, make at least the following information available to holders of a securitisation position, to the competent [EU version: authorities] [UK version: authority]  referred to in Article 29 and, upon request, to potential investors:

(a)  information on the underlying exposures on a quarterly basis, or, in the case of ABCP, information on the underlying receivables or credit claims on a monthly basis;

(b)  all underlying documentation that is essential for the understanding of the transaction, including but not limited to, where applicable, the following documents:

(i)  the final offering document or the prospectus together with the closing transaction documents, excluding legal opinions;

(ii)  for traditional securitisation the asset sale agreement, assignment, novation or transfer agreement and any relevant declaration of trust;

(iii)  the derivatives and guarantee agreements, as well as any relevant documents on collateralisation arrangements where the exposures being securitised remain exposures of the originator;

(iv)  the servicing, back-up servicing, administration and cash management agreements;

(v)  the trust deed, security deed, agency agreement, account bank agreement, guaranteed investment contract, incorporated terms or master trust framework or master definitions agreement or such legal documentation with equivalent legal value;

(vi)  any relevant inter-creditor agreements, derivatives documentation, subordinated loan agreements, start-up loan agreements and liquidity facility agreements;

That underlying documentation shall include a detailed description of the priority of payments of the securitisation;

(c)  [EU version: where a prospectus has not been drawn up in compliance with Directive 2003/71/EC [Prospectus Directive – note: replaced by the Prospectus Regulation  with effect, mainly, from 21 July 2019)] of the European Parliament and of the Council] [UK version: where section 85 of the 2000 Act (prohibition of dealing etc in transferable securities without approved prospectus) and rules made by the FCA for the purposes of Part 6 of the 2000 Act (official listing)(b) do not require a prospectus to be drawn up], a transaction summary or overview of the main features of the securitisation, including, where applicable:

(i)  details regarding the structure of the deal, including the structure diagrams containing an overview of the transaction, the cash flows and the ownership structure;

(ii)  details regarding the exposure characteristics, cash flows, loss waterfall, credit enhancement and liquidity support features;

(iii)  details regarding the voting rights of the holders of a securitisation position and their relationship to other secured creditors;

(iv)  a list of all triggers and events referred to in the documents provided in accordance with point (b) that could have a material impact on the performance of the securitisation position;

(d)  in the case of STS securitisations, the STS notification referred to in Article 27;

(e)  quarterly investor reports, or, in the case of ABCP, monthly investor reports, containing the following:

(i)  all materially relevant data on the credit quality and performance of underlying exposures;

(ii)  information on events which trigger changes in the priority of payments or the replacement of any counterparties, and, in the case of a securitisation which is not an ABCP transaction, data on the cash flows generated by the underlying exposures and by the liabilities of the securitisation;

(iii)  information about the risk retained, including information on which of the modalities provided for in Article 6(3) has been applied, in accordance with Article 6.

(f)  any inside information relating to the securitisation that the originator, sponsor or SSPE is obliged to make public in accordance with Article 17 of Regulation (EU) No 596/2014 [Market Abuse Regulation] of the European Parliament and of the Council on insider dealing and market manipulation;

(g)  where point (f) does not apply, any significant event such as:

(i)  a material breach of the obligations provided for in the documents made available in accordance with point (b), including any remedy, waiver or consent subsequently provided in relation to such a breach;

(ii)  a change in the structural features that can materially impact the performance of the securitisation;

(iii)  a change in the risk characteristics of the securitisation or of the underlying exposures that can materially impact the performance of the securitisation;

(iv)  in the case of STS securitisations, where the securitisation ceases to meet the STS requirements or where [EU version: competent authorities have] [UK version: the competent authority has] taken remedial or administrative actions;

(v)  any material amendment to transaction documents.

The information described in points (b), (c) and (d) of the first subparagraph shall be made available before pricing.

The information described in points (a) and (e) of the first subparagraph shall be made available simultaneously each quarter at the latest one month after the due date for the payment of interest or, in the case of ABCP transactions, at the latest one month after the end of the period the report covers.

In the case of ABCP, the information described in points (a), (c)(ii) and (e)(i) of the first  subparagraph shall be made available in aggregate form to holders of securitisation positions and, upon request, to potential investors. Loan-level data shall be made  available to the sponsor and, upon request, to [EU version: competent authorities] [UK version: the competent authority].

Without prejudice to Regulation (EU) No 596/2014 [Market Abuse Regulation], the information described in points (f) and (g) of the first subparagraph shall be made available without delay.

When complying with this paragraph, the originator, sponsor and SSPE of a securitisation shall comply with [EU version: national and Union law] [UK version: the law applicable in the United Kingdom] governing the protection of confidentiality of information and the processing of personal data in order to avoid potential breaches of such law as well as any confidentiality obligation relating to customer, original lender or debtor information, unless such confidential information is anonymised or aggregated.

In particular, with regard to the information referred to in point (b) of the first subparagraph, the originator, sponsor and SSPE may provide a summary of the  documentation concerned.

[EU version: Competent authorities] [UK version:  The competent authority] referred to in Article 29 shall be able to request the provision of such confidential information to them in order to fulfil their duties under this Regulation.

2.  The originator, sponsor and SSPE of a securitisation shall designate amongst themselves one entity to fulfil the information requirements pursuant to points (a), (b), (d), (e), (f) and (g) of the first subparagraph of paragraph 1.

The entity designated in accordance with the first subparagraph shall make the information for a securitisation transaction available by means of a securitisation repository.

The obligations referred to in the second and fourth subparagraphs shall not apply to securitisations [EU version: where no prospectus has to be drawn up in compliance with Directive 2003/71/EC [Prospectus Directive – note: replaced by the Prospectus Regulation with effect, mainly, from 21 July 2019)]] [UK version: for which section 85 of the 2000 Act and rules made by the FCA for the purposes of Part 6 of the 2000 Act do not require a prospectus to be drawn up].

Where no securitisation repository is registered in accordance with Article 10, the entity designated to fulfil the requirements set out in paragraph 1 of this Article shall make the information available by means of a website that:

(a)  includes a well-functioning data quality control system;

(b)  is subject to appropriate governance standards and to maintenance and operation of an adequate organisational structure that ensures the continuity and orderly functioning of the website;

(c)  is subject to appropriate systems, controls and procedures that identify all relevant sources of operational risk;

(d)  includes systems that ensure the protection and integrity of the information received and the prompt recording of the information; and

(e)  makes it possible to keep record of the information for at least five years after the maturity date of the securitisation.

The entity responsible for reporting the information, and the securitisation repository where the information is made available shall be indicated in the documentation regarding the securitisation.

3.  [EU version: ESMA, in close cooperation with the EBA and EIOPA, shall develop draft regulatory] [UK version: The FCA and the PRA, acting jointly, may make] technical standards to specify the information that the originator, sponsor and SSPE shall provide in order to comply with their obligations under points (a) and (e) of the first subparagraph of paragraph 1 taking into account the usefulness of information for the holder of the securitisation position, whether the securitisation position is of a short-term nature and, in the case of an ABCP transaction, whether it is fully supported by a sponsor.

[EU version only: 

ESMA shall submit those draft regulatory technical standards to the Commission by 18 January 2019.

The Commission is empowered to supplement this Regulation by adopting the regulatory technical standards referred to in this paragraph in accordance with Articles 10 to 14 of Regulation (EU) No 1095/2010.]

RTS specifying the information and the details of a securitisation to be made available by the originator, sponsor and SSPE [in force 23rd September 2020]

4.  In order to ensure uniform conditions of application for the information to be specified in accordance with paragraph 3, [EU version: ESMA, in close cooperation with the EBA and EIOPA, shall develop draft] [UK version: the FCA and the PRA, acting jointly, may make] implementing technical standards specifying the format thereof by means of standardised templates.

[EU version only: 

ESMA shall submit those draft implementing technical standards to the Commission by 18 January 2019.

The Commission is empowered to adopt the implementing technical standards referred to in this paragraph in accordance with Article 15 of Regulation (EU) No 1095/2010.]

Disclosure RTSrelated ITS (templates)

Related recitals: Recital (13), Recital (16), Recital (44), Recital (45)

Commentary: Transparency

Article 8

Ban on resecuritisation

1.  The underlying exposures used in a securitisation shall not include securitisation positions.

By way of derogation, the first subparagraph shall not apply to:

(a)  any securitisation the securities of which were issued before 1 January 2019; and

(b)  any securitisation, to be used for legitimate purposes as set out in paragraph 3, the securities of which were issued on or following 1 January 2019.

2.  A competent authority [EU version only: designated pursuant to Article 29(2), (3) or (4), as applicable,] may grant permission to an entity under its supervision to include securitisation positions as underlying exposures in a securitisation where that competent authority deems the use of a resecuritisation to be for legitimate purposes as set out in paragraph 3 of this Article.

Where such supervised entity is a credit institution or an investment firm as defined in points (1) and (2) of Article 4(1) of Regulation (EU) No 575/2013 [CRR], the competent authority [EU version only: referred to in the first subparagraph of this paragraph] shall consult with the [EU version: resolution authority] [UK version: Bank of England] and any other authority relevant for that entity before granting permission for the inclusion of securitisation positions as underlying exposures in a securitisation. Such consultation shall last no longer than 60 days from the date on which the competent authority notifies the [EU version: resolution authority] [UK version: Bank of England], and any other authority relevant for that entity, of the need for consultation.

[EU version only: Where the consultation results in a decision to grant permission for the use of securitisation positions as underlying exposures in a securitisation, the competent authority shall notify ESMA thereof.]

3.  For the purposes of this Article, the following shall be deemed to be legitimate purposes:

(a)  the facilitation of the winding-up of a credit institution, an investment firm or a financial institution;

(b)  ensuring the viability as a going concern of a credit institution, an investment firm or a financial institution in order to avoid its winding-up; or

(c)  where the underlying exposures are non-performing, the preservation of the interests of investors.

4.  A fully supported ABCP programme shall not be considered to be a resecuritisation for the purposes of this Article, provided that none of the ABCP transactions within that programme is a resecuritisation and that the credit enhancement does not establish a second layer of tranching at the programme level.

5.  In order to reflect market developments of other resecuritisations undertaken for legitimate purposes, and taking into account the overarching objectives of financial stability and preservation of the best interests of the investors, [EU version:  ESMA, in close cooperation with the EBA, may develop draft regulatory] [UK version: the FCA and the PRA, acting jointly, may make] technical standards to supplement the list of legitimate purposes set out in paragraph 3.

[EU version only: ESMA shall submit any such draft regulatory technical standards to the Commission. The Commission is empowered to supplement this Regulation by adopting the regulatory technical standards referred to in this paragraph in accordance with Articles 10 to 14 of Regulation (EU) No 1095/2010.]

Related recital: Recital (8)

Commentary: Resecuritisations

Article 9

Criteria for credit-granting

1.  Originators, sponsors and original lenders shall apply to exposures to be securitised the same sound and well-defined criteria for credit-granting which they apply to non-securitised exposures. To that end, the same clearly established processes for approving and, where relevant, amending, renewing and refinancing credits shall be applied. Originators, sponsors and original lenders shall have effective systems in place to apply those criteria and processes in order to ensure that credit-granting is based on a thorough assessment of the obligor’s creditworthiness taking appropriate account of factors relevant to verifying the prospect of the obligor meeting his obligations under the credit agreement.

[EU version onlyBy way of derogation from the first subparagraph, with regard to underlying exposures that were non-performing exposures at the time the originator purchased them from the relevant third party, sound standards shall apply in the selection and pricing of the exposures.]

2.  Where the underlying exposures of securitisations are residential loans made [EU version: after the entry into force of 2014/17/EU [the Mortgage Credits Directive]] [UK version: on or after 20th March 2014], the pool of those loans shall not include any loan that is marketed and underwritten on the premise that the loan applicant or, where applicable, intermediaries were made aware that the information provided by the loan applicant might not be verified by the lender.

3.  Where an originator purchases a third party’s exposures for its own account and then securitises them, that originator shall verify that the entity which was, directly or indirectly, involved in the original agreement which created the obligations or potential obligations to be securitised fulfils the requirements referred to in paragraph 1.

4.  Paragraph 3 does not apply if:

(a)  the original agreement, which created the obligations or potential obligations of the debtor or potential debtor, was entered into before [EU version:  the entry into force of 2014/17/EU [the Mortgage Credits Directive]] [UK version: 20th March 2014]; and

(b)  the originator that purchases a third party’s exposures for its own account and then securitises them meets the obligations that originator institutions were required to meet under Article 21(2) of Delegated Regulation (EU) No 625/2014 [RTS relating to risk retention made under CRR] before 1 January 2019.

Related recital: Recital (14)

Commentary: Acquired portfolios

Chapter 3

Conditions and Procedures for Registration of a Securitisation Repository

Article 10

Registration of a securitisation repository

1.  A securitisation repository shall register with [EU version: ESMA] [ UK version: the FCA] for the purposes of Article 5 under the conditions and the procedure set out in this Article.

2.  To be eligible to be registered under this Article, a securitisation repository shall be a legal person established in [EU version: the Union] [UK version: the United Kingdom], apply procedures to verify the completeness and consistency of the information made available to it under Article 7(1) of this Regulation, and meet the requirements provided for in Articles 78, 79 and 80(1) to (3), (5) and (6) of Regulation (EU) No 648/2012 [EMIR]. For the purposes of this Article, references in Articles 78 and 80 of Regulation (EU) No 648/2012 [EMIR] to Article 9 thereof shall be construed as references to Article 5 of this Regulation.

[EU version only: 3.  The registration of a securitisation repository shall be effective for the entire territory of the Union.]

4.  A registered securitisation repository shall comply at all times with the conditions for registration. A securitisation repository shall, without undue delay, notify [EU version: ESMA] [ UK version: the FCA] of any material changes to the conditions for registration.

5.  A securitisation repository shall submit to [EU version: ESMA] [ UK version: the FCA] either of the following:

(a)  an application for registration;

(b)  an application for an extension of registration for the purposes of Article 7 of this Regulation in the case of a trade repository already registered under Chapter 1 of Title VI of Regulation (EU) No 648/2012 [EMIR] or under Chapter III of Regulation (EU) 2015/2365 [Securities Financing Transactions Regulation] of the European Parliament and of the Council (30).

[UK version only: 5A.  For the purposes of this Article, Articles 78, 79 and 80 of Regulation (EU) No 648/2012 have effect in relation to a securitisation repository as they have effect in relation to a trade repository, but with the following modifications - 

(a) a reference to a trade repository is a reference to a securitisation repository within the meaning given by point (23) of Article 2 of this Regulation; and

(b) a reference to Regulation (EU) No 648/2012 is a reference to this Regulation.]

6.  [EU version: ESMA] [ UK version: The FCA] shall assess whether the application is complete within 20 working days of receipt of the application.

Where the application is not complete, [EU version: ESMA] [ UK version: the FCA] shall set a deadline by which the securitisation repository is to provide additional information.

After having assessed an application as complete, [EU version: ESMA] [ UK version: the FCA] shall notify the securitisation repository accordingly.

7.  In order to ensure consistent application of this Article, [EU version: ESMA shall develop draft regulatory] [UK version: the FCA may make] technical standards specifying the details of all of the following:

(a)  the procedures referred to in paragraph 2 of this Article which are to be applied by securitisation repositories in order to verify the completeness and consistency of the information made available to them under Article 7(1);

(b)  the application for registration referred to in point (a) of paragraph 5;

(c)  a simplified application for an extension of registration referred to in point (b) of paragraph 5.

[EU version only:

ESMA shall submit those draft regulatory technical standards to the Commission by 18 January 2019.

The Commission is empowered to supplement this Regulation by adopting the regulatory technical standards referred to in this paragraph in accordance with Articles 10 to 14 of Regulation (EU) No 1095/2010.]

8.  In order to ensure uniform conditions of application of paragraphs 1 and 2, [EU version: ESMA shall develop draft implementing] [UK version: the FCA may make] technical standards specifying the format of both of the following:

(a)  the application for registration referred to in point (a) of paragraph 5;

(b)  the application for an extension of registration referred to in point (b) of paragraph 5.

[EU version only:

With regard to point (b) of the first subparagraph, ESMA shall develop a simplified format avoiding duplicate procedures.

ESMA shall submit those draft implementing technical standards to the Commission by 18 January 2019.

The Commission is empowered to adopt the implementing technical standards referred to in this paragraph in accordance with Article 15 of Regulation (EU) No 1095/2010.]

Related recital: Recital (12)

Article 11

[EU version only: Notification and consultation with competent authorities prior to registration or extension of registration

1.  Where a securitisation repository applies for registration or for an extension of its registration as trade repository and is an entity authorised or registered by a competent authority in the Member State where it is established, ESMA shall, without undue delay, notify and consult that competent authority prior to the registration or extension of the registration of the securitisation repository.

2.  ESMA and the relevant competent authority shall exchange all information that is necessary for the registration, or the extension of registration, of the securitisation repository as well as for the supervision of the compliance of the entity with the conditions of its registration or authorisation in the Member State where it is established.]

Article 12

Examination of the application

1.  [EU version: ESMA] [UK version: The FCA] shall, within 40 working days of the notification referred to in Article 10(6), examine the application for registration, or for an extension of registration, based on the compliance of the securitisation repository with this Chapter and shall adopt a fully reasoned decision accepting or refusing registration or an extension of registration.

[EU version only: 2.  A decision issued by ESMA pursuant to paragraph 1 shall take effect on the fifth working day following that of its adoption.]

Related recital: Recital (12)

Article 13

[EU version: Notification of ESMA decisions relating to registration or extension of registration

1.  Where ESMA adopts a decision as referred to in Article 12 or withdraws the registration as referred to in Article 15(1), it shall notify the securitisation repository within five working days with a fully reasoned explanation for its decision.

ESMA shall, without undue delay, notify the competent authority as referred to in Article 11(1) of its decision.

2.  ESMA shall communicate, without undue delay, any decision taken in accordance with paragraph 1 to the Commission.

3.  ESMA shall publish on its website a list of securitisation repositories registered in accordance with this Regulation. That list shall be updated within five working days of the adoption of a decision under paragraph 1.]

[UK version: Publication and notification of decisions 

1.  The FCA must publish on its website a list of securitisation repositories registered in accordance with Article 12 (‘the Register’).

2.  On the adoption of a decision under Article 12 or 13a, the FCA must notify its decision to the securitisation repository concerned. 

3.  A refusal of an application to register under Article 12 comes into effect on the  fifth working day following its adoption.

4.  A withdrawal of registration under Article 13a takes effect:

(a) immediately upon the adoption of the decision if the notice states that is the case;

(b) on such date as may be specified in that notice; or

(c) if no date is specified in the notice, when the matter to which the notice relates is no
longer open to review.

5.  A decision to withdraw registration on the FCA’s own initiative under paragraph 1 or 2 of Article 13a may be expressed to take effect immediately (or on a specified date) only if the FCA, having regard to the ground on which it is exercising its power reasonably considers that it is necessary for the withdrawal or direction to take effect immediately (or on that date).

6.  If the decision referred to in paragraph 2 is -

(a)  to refuse the application for registration made under Article 12,

(b)  to exercise the FCA’s power under paragraph 1 or 2 of Article 13a to withdraw the registration of the securitisation repository on the FCA’s own initiative, or

(c)  to refuse an application made by a securitisation repository under paragraph 3 of Article 13a to withdraw the registration of the securitisation repository, the FCA must give the securitisation repository a written notice. 

7.  A written notice under paragraph 6 must:

(a)  give details of the decision made by the FCA;

(b)  state the FCA’s reasons for the decision;

(c)  state when the decision takes effect;

(d)  inform the securitisation repository that it may either:

(i)  request a review of the decision by the FCA, and make written representations for the purpose of the review, within such period as may be specified in the notice; or 

(ii)  refer the matter to the Upper Tribunal (‘the Tribunal’) within such period as may be specified in the notice; and 

(e)  indicate the procedure on a reference to the Tribunal.

8.  If the securitisation repository requests a review of the decision made by the FCA (‘the original decision’) the FCA must consider any written representations made by the securitisation repository and review the original decision. 

9.  On a review under paragraph 8, the FCA may make any decision (‘the new decision’) it could have made on the application.

10.  The FCA must give the securitisation repository written notice of its decision on the review. 

11.  This paragraph applies to a decision - 

(a)  to maintain a decision to refuse an application for registration, made under Article 12;

(b)  to refuse to revoke a decision made under paragraph 1 or 2 of Article 13a to withdraw the registration of the securitisation repository on the FCA’s own initiative; or

(c)  to maintain a decision to refuse an application from a securitisation repository under paragraph 3 of Article 13a to withdraw the registration of the securitisation repository.

12.  A written notice in relation to a decision to which paragraph 11 applies must:

(a)  give details of the new decision made by the FCA;

(b)  state the FCA’s reasons for the new decision;

(c)  state whether the decision takes effect immediately or on such date as may be specified in the notice;

(d)  inform the securitisation repository that it may, within such period as may be specified in the notice, refer the new decision to the Tribunal; and

(e)  indicate the procedure on a reference to the Tribunal.

[UK version only:  Article 13a
Withdrawal of registration

1.  The FCA may, on its own initiative, withdraw the registration of a securitisation  repository where the securitisation repository:

(a)  expressly renounces the registration or has provided no services for the preceding 6 months;

(b)  obtained the registration by making false statements or by any other irregular means; or

(c)  no longer meets the conditions for registration.

2.  The FCA may also, on its own initiative, withdraw the registration of a securitisation repository where it is desirable to do so to advance one or more of its operational objectives set out in section 1B(3) of the 2000 Act.

3.  The FCA may, on an application by a securitisation repository, withdraw the registration of the securitisation repository.

4.  The decision to withdraw the registration of a securitisation repository under paragraph 1, 2 or 3 must be reflected in the Register.]

Related recital: Recital (12)

Article 14

[EU version: Powers of ESMA

1.  The powers conferred on ESMA in accordance with Articles 61 to 68, 73 and 74 of Regulation (EU) No 648/2012 [EMIR], in conjunction with Annexes I and II thereto, shall also be exercised with respect to this Regulation. References to Article 81(1) and (2) of Regulation (EU) No 648/2012 [EMIR] in Annex I to that Regulation shall be construed as references to Article 17(1) of this Regulation.

2.  The powers conferred on ESMA or on any official of or other person authorised by ESMA in accordance with Articles 61 to 63 of Regulation (EU) No 648/2012 [EMIR] shall not be used to require the disclosure of information or documents which are subject to legal privilege.]

[UK version:  Tribunal

1.  A securitisation repository may, subject to paragraph 2, refer to the Tribunal the FCA’s decision to:

(a)  refuse to register the securitisation repository under Article 12;

(b)  exercise its power under paragraph 1 or 2 of Article 13a to withdraw the  registration of a securitisation repository; or

(c)  refuse the securitisation repository’s application under paragraph 3 of Article 13a to withdraw its registration.

2.  Where there is a review under paragraph 8 of Article 13, paragraph 1 applies only in relation to the FCA’s decision in response to that review.]

Related recital: Recital (12)

Article 15

[EU version:  Withdrawal of registration

1.  Without prejudice to Article 73 of Regulation (EU) No 648/2012 [EMIR], ESMA shall withdraw the registration of a securitisation repository where the securitisation repository:

(a) expressly renounces the registration or has provided no services for the preceding six months;

(b) obtained the registration by making false statements or by other irregular means; or

(c)  no longer meets the conditions under which it was registered.

2.  ESMA shall, without undue delay, notify the relevant competent authority referred to in Article 11(1) of a decision to withdraw the registration of a securitisation repository.

3.  The competent authority of a Member State in which a securitisation repository performs its services and activities and which considers that one of the conditions referred to in paragraph 1 has been met, may request ESMA to examine whether the conditions for the withdrawal of registration of the securitisation repository concerned are met. Where ESMA decides not to withdraw the registration of the securitisation repository concerned, it shall provide detailed reasons for its decision.

4.  The competent authority referred to in paragraph 3 of this Article shall be the authority designated under Article 29 of this Regulation.]

[UK version:  Enforcement provisions relating to securitisation repositories

1.  In this Article ‘the 2019 Regulations’ means the Over the Counter Derivatives, Central Counterparties and Trade Repositories (Amendment, etc., and Transitional Provision) (EU Exit) Regulations 2019.

2.  Part 4 of the 2019 Regulations (specific provision for trade repositories) has effect in relation to a securitisation repository as it has effect in relation to a trade repository.

3.  For the purposes of paragraph 2, Part 4 of the 2019 Regulations has effect in relation to a securitisation repository with the following modifications:

(a)  ignore Chapter 1 (preliminary);

(b)  in Chapter 2 and Chapter 3 (application of the 2000 Act for the purposes of this Part), including any modification of the 2000 Act which is made by that Chapter:

(i)  a reference to Part 4 of the 2019 Regulations is a reference to that Part as applied by this Article;

(ii)  a reference to the 2019 Regulations (other than in a reference to Part 4) is a reference to those Regulations as applied by this Article;

(iii)  a reference to the EMIR regulation is a reference to this Regulation and a  reference to a provision of that Regulation is a reference to the provision of this Regulation which has equivalent effect; 

(iv)  a reference to the registration or recognition of a trade repository under a provision of the EMIR regulation is a reference to the registration of a securitisation repository under this Regulation;

(v)  a reference to a trade repository is a reference to a securitisation repository within the meaning given by point (23) of Article 2 of this Regulation;

(vi)  a reference to trade repository activities is a reference to the activities of centrally collecting and maintaining records of securitisations;

(vii)  ignore any reference to the TRATP Regulations; and

(c)  in Chapter 3, including any modification of the 2000 Act which is made by that Chapter:

(i)  a reference to a provision of the 2019 Regulations is a reference to the equivalent provision of the Securitisation (Amendment) (EU Exit) Regulations 2019;

(ii)  in regulation 73 (application of Part 9 of the 2000 Act (hearings and appeals),  ignore paragraph (2);

(iii)  in regulation 78 (application of Part 11 of the 2000 Act (information gathering and investigations)), ignore paragraph (2)(f);

(iv)  in regulation 79 (application of Part 26 of the 2000 Act (notices)), ignore  paragraph (8)(h) and any reference to a supervisory notice.]

Related recital: Recital (12)

Article 16

[EU version only:  Supervisory fees

1. ESMA shall charge the securitisation repositories fees in accordance with this Regulation and in accordance with the delegated acts adopted pursuant to paragraph 2 of this Article.

Those fees shall be proportionate to the turnover of the securitisation repository concerned and shall fully cover ESMA’s necessary expenditure relating to the registration and supervision of securitisation repositories as well as the reimbursement of any costs that the competent authorities incur as a result of any delegation of tasks pursuant to Article 14(1) of this Regulation. Insofar as Article 14(1) of this Regulation refers to Article 74 of Regulation (EU) No 648/2012 [EMIR], references to Article 72(3) of that Regulation shall be construed as references to paragraph 2 of this Article.

Where a trade repository has already been registered under Chapter 1 of Title VI of Regulation (EU) No 648/2012[EMIR] or under Chapter III of Regulation (EU) 2015/2365 [Securities Financing Transactions Regulation], the fees referred to in the first subparagraph of this paragraph shall only be adjusted to reflect additional necessary expenditure and costs relating to the registration and supervision of securitisation repositories pursuant to this Regulation.

2.  The Commission is empowered to adopt a delegated act in accordance with Article 47 to supplement this Regulation by further specifying the type of fees, the matters for which fees are due, the amount of the fees and the manner in which they are to be paid.]

Related recitals: Recital (12); Recital (42)

Article 17

Availability of data held in a securitisation repository

1.  Without prejudice to Article 7(2), a securitisation repository shall collect and maintain details of the securitisation. It shall provide direct and immediate access free of charge to all of the following entities to enable them to fulfil their respective responsibilities, mandates and obligations:

[EU version only: 

(a)  ESMA;

(b)  the EBA;

(c)  EIOPA;

(d)  the ESRB;

(e)  the relevant members of the European System of Central Banks (ESCB), including the European Central Bank (ECB) in carrying out its tasks within a single supervisory mechanism under Regulation (EU) No 1024/2013;]

(f)  the relevant authorities whose respective supervisory responsibilities and mandates over transactions, markets, participants and assets which fall within the scope of this Regulation;

(g)  [EU version:  the resolution authorities designated under Article 3 of Directive 2014/59/EU of the  European Parliament and the Council] [UK version:  the Bank of England;]

[EU version only:  (h)  the Single Resolution Board established by Regulation (EU) No 806/2014 of the European Parliament and of the Council;]

(i)  the authorities referred to in Article 29;

(j)  investors and potential investors.

2.  [EU version:  ESMA shall, in close cooperation with the EBA and EIOPA and taking into account the needs of the entities referred to in paragraph 1, develop draft regulatory] [UK version:  The FCA, taking into account the needs of the entities referred to in paragraph 1, may make] technical standards specifying:

(a)  the details of the securitisation referred to in paragraph 1 that the originator, sponsor or SSPE shall provide in order to comply with their obligations under Article 7(1);

(b)  the operational standards required, to allow the timely, structured and comprehensive:

(i)  collection of data by securitisation repositories; and

(ii)  aggregation and comparison of data across securitisation repositories;

(c)  the details of the information to which the entities referred to in paragraph 1 are to have access, taking into account their mandate and their specific needs;

(d)  the terms and conditions under which the entities referred to in paragraph 1 are to have direct and immediate access to data held in securitisation repositories.

[EU version only:  ESMA shall submit those draft regulatory technical standards to the Commission by 18 January 2019.]

[EU version only:  The Commission is empowered to supplement this Regulation by adopting the regulatory technical standards referred to in this paragraph in accordance with Articles 10 to 14 of Regulation (EU) No 1095/2010.]

3.  In order to ensure uniform conditions of application for paragraph 2, [EU version:  ESMA, in close cooperation with the EBA and EIOPA shall develop draft implementing] [UK version:  the FCA may make] technical standards specifying the standardised templates by which the originator, sponsor or SSPE shall provide the information to the securitisation repository, taking into account solutions developed by existing securitisation data collectors.

[EU version only:  ESMA shall submit those draft implementing technical standards to the Commission by 18 January 2019.]

[EU version only:  The Commission is empowered to adopt the implementing technical standards referred to in this paragraph in accordance with Article 15 of Regulation (EU) No 1095/2010.]

Related RTS

Chapter 4

Simple, Transparent and Standardised Securitisations

Article 18

Use of the designation ‘simple, transparent and standardised securitisation’

[UK version is numbered "1"]:  Originators, sponsors and SSPEs may use the designation ‘STS’ or ‘simple, transparent and standardised’, or a designation that refers directly or indirectly to those terms for their securitisation, only where:

[UK version:  (a)  the securitisation meets all the requirements of Section 1 or Section 2 of this Chapter, and the FCA has been notified pursuant to Article 27(1); and]

[EU version(a) the securitisation meets all the requirements set out in Section 1, 2 or 2a of this Chapter, and ESMA has been notified pursuant to Article 27(1); and]

(b)  the securitisation is included in the list referred to in Article 27(5).

[EU version only:  The originator, sponsor and SSPE involved in a securitisation considered STS shall be established in the Union.]

[UK version only:

2.  The originator and sponsor involved in a securitisation which is not an ABCP programme or an ABCP transaction and is considered STS must be established in the United Kingdom.

The sponsor involved in an ABCP programme considered STS must be established in the United Kingdom. 

The sponsor involved in an ABCP programme which is not considered STS must be established in the United Kingdom if an ABCP transaction within that programme is considered STS.

3.  This Article has effect in relation to a relevant securitisation without the amendments made by regulation 18 of the Securitisation (Amendment) (EU Exit)  Regulations 2019.

A ‘relevant securitisation’ is a securitisation - 

(a)  which meets all the requirements of Section 1 or Section 2 of this Chapter, and of which ESMA was notified pursuant to Article 27(1) before IP completion day, or is notified pursuant to Article 27(1) after IP completion day but before the expiry of a period of four* years beginning with IP completion day; and 

(b)  which is included in the list referred to in Article 27(5).

In this paragraph a reference to Section 1 or Section 2 of this Chapter or to Article 27 is a reference to that Section or Article as it had or has effect in relation to an EEA State at any time on and after the date of the notification and before the end of the period referred to in the second subparagraph.]

*"Four" inserted by the Financial Services (Miscellaneous Amendments) (EU Exit) Regulations 2022.

Commentaries: Brexit - impacts and changes for securitisations in the UK and EuropeThe meaning of "established" and of "the Union".

Article 19

Section 1

Requirements for simple, transparent and standardised non-ABCP [EU version only: traditional] securitisation

Simple, transparent and standardised non-ABCP [EU version only: traditional] securitisation

[UK version:  1.  Securitisations, except for ABCP programmes and ABCP transactions, that meet the requirements set out in Articles 20, 21 and 22 shall be considered STS.]

[EU version:  1.   Traditional securitisations, except for ABCP programmes and ABCP transactions, that meet the requirements set out in Articles 20, 21 and 22, shall be considered to be STS.]

[EU version only:  2.  By 18 October 2018, the EBA, in close cooperation with ESMA and EIOPA, shall adopt, in accordance with Article 16 of Regulation (EU) No 1093/2010, guidelines and recommendations on the harmonised interpretation and application of the requirements set out in Articles 20, 21 and 22.]

Article 20

Requirements relating to simplicity

1.  The title to the underlying exposures shall be acquired by the SSPE by means of a true sale or assignment or transfer with the same legal effect in a manner that is enforceable against the seller or any other third party. The transfer of the title to the SSPE shall not be subject to severe clawback provisions in the event of the seller’s insolvency.

Related recitals: Recital (22), Recital (23).

Commentaries: Synthetics; Severe clawback

EBA Guidelines
Background and rationale para. 16
Guidelines para. 10-12
Q&A 1-2

2.  For the purpose of paragraph 1, any of the following shall constitute severe clawback provisions:

(a)  provisions which allow the liquidator of the seller to invalidate the sale of the underlying exposures solely on the basis that it was concluded within a certain period before the declaration of the seller’s insolvency;

(b)  provisions where the SSPE can only prevent the invalidation referred to in point (a) if it can prove that it was not aware of the insolvency of the seller at the time of sale.

EBA Guidelines
Background and rationale para. 18-19
Q&A 2

3.  For the purpose of paragraph 1, clawback provisions in national insolvency laws that allow the liquidator or a court to invalidate the sale of underlying exposures in the case of fraudulent transfers, unfair prejudice to creditors or transfers intended to improperly favour particular creditors over others shall not constitute severe clawback provisions.

4.  Where the seller is not the original lender, the true sale or assignment or transfer with the same legal effect of the underlying exposures to that seller, whether that true sale or assignment or transfer with the same legal effect is direct or through one or more intermediate steps, shall meet the requirements set out in paragraphs 1 to 3.

EBA Guidelines
Background and rationale para. 19

5.  Where the transfer of the underlying exposures is performed by means of an assignment and perfected at a later stage than at the closing of the transaction, the triggers to effect such perfection shall include at least the following events:

(a)  severe deterioration in the seller credit quality standing;

(b)  insolvency of the seller; and

(c)  unremedied breaches of contractual obligations by the seller, including the seller’s default.

EBA Guidelines
Background and rationale para. 20
Guidelines para. 13-14
Q&A 4

Commentary: Minimum perfection triggers

6.  The seller shall provide representations and warranties that, to the best of its knowledge, the underlying exposures included in the securitisation are not encumbered or otherwise in a condition that can be foreseen to adversely affect the enforceability of the true sale or assignment or transfer with the same legal effect.

EBA Guidelines
Background and rationale para. 21
Q&A 5

Commentary: Underlying exposures unencumbered and enforceable

7.  The underlying exposures transferred from, or assigned by, the seller to the SSPE shall meet predetermined, clear and documented eligibility criteria which do not allow for active portfolio management of those exposures on a discretionary basis. For the purpose of this paragraph, substitution of exposures that are in breach of representations and warranties shall not be considered active portfolio management. Exposures transferred to the SSPE after the closing of the transaction shall meet the eligibility criteria applied to the initial underlying exposures.

Related recital: Recital (25)

EBA Guidelines
Background and rationale para. 23-26
Guidelines para. 15-19
Q&A 6-7

8.  The securitisation shall be backed by a pool of underlying exposures that are homogeneous in terms of asset type, taking into account the specific characteristics relating to the cash flows of the asset type including their contractual, credit-risk and prepayment characteristics. A pool of underlying exposures shall comprise only one asset type. The underlying exposures shall contain obligations that are contractually binding and enforceable, with full recourse to debtors and, where applicable, guarantors.

The underlying exposures shall have defined periodic payment streams, the instalments of which may differ in their amounts, relating to rental, principal, or interest payments, or to any other right to receive income from assets supporting such payments. The underlying exposures may also generate proceeds from the sale of any financed or leased assets.

The underlying exposures shall not include transferable securities, as defined in point [EU version:  (44) of Article 4(1) of Directive 2014/65/EU [MiFID II]] [UK version:  (24) of Article 2(1) of Regulation (EU) No 600/2014 of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Regulation (EU) No 648/2012 [EMIR]], other than corporate bonds that are not listed on a trading venue.

EBA Guidelines
Background and rationale para. 27-30
Guidelines para. 20-21
Q&A 8-9

Related recital: Recital (27)

Related RTS: RTS on homogeneity

Commentaries: What is homogeneity and how do we know it when we see it?A brief history of homogeneity

9.  The underlying exposures shall not include any securitisation position.

EBA Guidelines
Background and rationale para. 31-32

Commentary: Resecuritisations

10.  The underlying exposures shall be originated in the ordinary course of the originator’s or original lender’s business pursuant to underwriting standards that are no less stringent than those that the originator or original lender applied at the time of origination to similar exposures that are not securitised. The underwriting standards pursuant to which the underlying exposures are originated and any material changes from prior underwriting standards shall be fully disclosed to potential investors without undue delay.

In the case of securitisations where the underlying exposures are residential loans, the pool of loans shall not include any loan that was marketed and underwritten on the premise that the loan applicant or, where applicable, intermediaries were made aware that the information provided might not be verified by the lender.

The assessment of the borrower’s creditworthiness shall meet the requirements set out in Article 8 of Directive 2008/48/EC or paragraphs 1 to 4, point (a) of paragraph 5, and paragraph 6 of Article 18 of 2014/17/EU [Mortgage Credits Directive] or, where applicable, equivalent requirements in third countries.

The originator or original lender shall have expertise in originating exposures of a similar nature to those securitised.

Related recitals: Recital (11); Recital (28)

11.  The underlying exposures shall be transferred to the SSPE after selection without undue delay and shall not include, at the time of selection, exposures in default within the meaning of Article 178(1) of Regulation (EU) No 575/2013 [CRR] or exposures to a credit-impaired debtor or guarantor, who, to the best of the originator’s or original lender’s knowledge:

(a)  has been declared insolvent or had a court grant his creditors a final non-appealable right of enforcement or material damages as a result of a missed payment within three years prior to the date of origination or has undergone a debt-restructuring process with regard to his non-performing exposures within three years prior to the date of transfer or assignment of the underlying exposures to the SSPE, except if:

(i)  a restructured underlying exposure has not presented new arrears since the date of the restructuring, which must have taken place at least one year prior to the date of transfer or assignment of the underlying exposures to the SSPE; and

(ii)  the information provided by the originator, sponsor and SSPE in accordance with points (a) and (e)(i) of the first subparagraph of Article 7(1) explicitly sets out the proportion of restructured underlying exposures, the time and details of the restructuring as well as their performance since the date of the restructuring;

(b)  was, at the time of origination, where applicable, on a public credit registry of persons with adverse credit history or, where there is no such public credit registry, another credit registry that is available to the originator or original lender; or

(c)  has a credit assessment or a credit score indicating that the risk of contractually agreed payments not being made is significantly higher than for comparable exposures held by the originator which are not securitised.

Related recital: Recital (26)

EBA Guidelines
Background and rationale para. 39-40
Guidelines para. 37-45
Q&A 13-15

12.  The debtors shall, at the time of transfer of the exposures, have made at least one payment, except in the case of revolving securitisations backed by exposures payable in a single instalment or having a maturity of less than one year, including without limitation monthly payments on revolving credits.

EBA Guidelines
Background and rationale para. 41-42
Guidelines para. 46-47
Q&A 16

13.  The repayment of the holders of the securitisation positions shall not have been structured to depend predominantly on the sale of assets securing the underlying exposures. This shall not prevent such assets from being subsequently rolled-over or refinanced.

The repayment of the holders of the securitisation positions whose underlying exposures are secured by assets the value of which is guaranteed or fully mitigated by a repurchase obligation by the seller of the assets securing the underlying exposures or by another third party shall not be considered to depend on the sale of assets securing those underlying exposures.

Related recitals: Recital (29)

Commentaries: Reliance on asset sales; CMBS - a cinderella asset class?

EBA Guidelines
Background and rationale para. 43-46
Guidelines para. 48-50

14.  The [EU version:  EBA, in close cooperation with ESMA and EIOPA, shall develop draft regulatory] [UK version: FCA may make] technical standards further specifying which underlying exposures referred to in paragraph 8 are deemed to be homogeneous.

[EU version only: 

The EBA shall submit those draft regulatory technical standards to the Commission by 18 July 2018.]

[EU version only: 

The Commission is empowered to supplement this Regulation by adopting the regulatory technical standards referred to in this paragraph in accordance with Articles 10 to 14 of Regulation (EU) No 1093/2010.]

Article 21

Requirements relating to standardisation

1.  The originator, sponsor or original lender shall satisfy the risk-retention requirement in accordance with Article 6.

EBA Guidelines
Background and rationale para. 47-48

2.  The interest-rate and currency risks arising from the securitisation shall be appropriately mitigated and any measures taken to that effect shall be disclosed. Except for the purpose of hedging interest-rate or currency risk, the SSPE shall not enter into derivative contracts and shall ensure that the pool of underlying exposures does not include derivatives. Those derivatives shall be underwritten and documented according to common standards in international finance.

Commentary: Standard reference rates

EBA Guidelines
Background and rationale para. 49-52
Guidelines para. 51-56
Q&A 19

3.  Any referenced interest payments under the securitisation assets and liabilities shall be based on generally used market interest rates, or generally used sectoral rates reflective of the cost of funds, and shall not reference complex formulae or derivatives.

EBA Guidelines
Background and rationale para. 53-54
Guidelines para. 57-58
Q&A 20

4.  Where an enforcement or an acceleration notice has been delivered:

(a)  no amount of cash shall be trapped in the SSPE beyond what is necessary to ensure the operational functioning of the SSPE or the orderly repayment of investors in accordance with the contractual terms of the securitisation, unless exceptional circumstances require that an amount be trapped to be used, in the best interests of investors, for expenses in order to avoid the deterioration in the credit quality of the underlying exposures;

(b)  principal receipts from the underlying exposures shall be passed to investors via sequential amortisation of the securitisation positions, as determined by the seniority of the securitisation position;

(c)  repayment of the securitisation positions shall not be reversed with regard to their seniority; and

(d)  no provisions shall require automatic liquidation of the underlying exposures at market value.

EBA Guidelines
Background and rationale para. 55-58
Guidelines para. 59-65
Q&A 21

5.  Transactions which feature non-sequential priority of payments shall include triggers relating to the performance of the underlying exposures resulting in the priority of payments reverting to sequential payments in order of seniority. Such performance-related triggers shall include at least the deterioration in the credit quality of the underlying exposures below a predetermined threshold.

EBA Guidelines
Background and rationale para. 59-60
Guidelines para. 66
Q&A 22

6.  The transaction documentation shall include appropriate early amortisation provisions or triggers for termination of the revolving period where the securitisation is a revolving securitisation, including at least the following:

(a)  a deterioration in the credit quality of the underlying exposures to or below a predetermined threshold;

(b)  the occurrence of an insolvency-related event with regard to the originator or the servicer;

(c)  the value of the underlying exposures held by the SSPE falls below a predetermined threshold (early amortisation event); and

(d)  a failure to generate sufficient new underlying exposures that meet the predetermined credit quality (trigger for termination of the revolving period).

EBA Guidelines
Background and rationale para. 61-62
Guidelines para. 67
Q&A 23

7.  The transaction documentation shall clearly specify:

(a)  the contractual obligations, duties and responsibilities of the servicer and the trustee, if any, and other ancillary service providers;

(b)  the processes and responsibilities necessary to ensure that a default by or an insolvency of the servicer does not result in a termination of servicing, such as a contractual provision which enables the replacement of the servicer in such cases; and

(c)  provisions that ensure the replacement of derivative counterparties, liquidity providers and the account bank in the case of their default, insolvency, and other specified events, where applicable.

Related recital: Recital (25)

EBA Guidelines
Background and rationale para. 63-64
Q&A 24

8.  The servicer shall have expertise in servicing exposures of a similar nature to those securitised and shall have well-documented and adequate policies, procedures and risk-management controls relating to the servicing of exposures.

EBA Guidelines
Background and rationale para. 65-67
Guidelines para. 68-72
Q&A 25-26

9.  The transaction documentation shall set out in clear and consistent terms definitions, remedies and actions relating to delinquency and default of debtors, debt restructuring, debt forgiveness, forbearance, payment holidays, losses, charge offs, recoveries and other asset performance remedies. The transaction documentation shall clearly specify the priorities of payment, events which trigger changes in such priorities of payment as well as the obligation to report such events. Any change in the priorities of payments which will materially adversely affect the repayment of the securitisation position shall be reported to investors without undue delay.

Related recital: Recital (26)

EBA Guidelines
Background and rationale para. 70-71
Guidelines para. 73
Q&A 27

10.  The transaction documentation shall include clear provisions that facilitate the timely resolution of conflicts between different classes of investors, voting rights shall be clearly defined and allocated to bondholders and the responsibilities of the trustee and other entities with fiduciary duties to investors shall be clearly identified.

EBA Guidelines
Background and rationale para. 70-71
Guidelines para. 74
Q&A 28
Article 22

Requirements relating to transparency

1.  The originator and the sponsor shall make available data on static and dynamic historical default and loss performance, such as delinquency and default data, for substantially similar exposures to those being securitised, and the sources of those data and the basis for claiming similarity, to potential investors before pricing. Those data shall cover a period of at least five years.

EBA Guidelines
Background and rationale para. 72-73
Guidelines para. 75-77
Q&A 29

2.  A sample of the underlying exposures shall be subject to external verification prior to issuance of the securities resulting from the securitisation by an appropriate and independent party, including verification that the data disclosed in respect of the underlying exposures is accurate.

EBA Guidelines
Background and rationale para. 74-75
Guidelines para. 78-81
Q&A 30

3.  The originator or the sponsor shall, before the pricing of the securitisation, make available to potential investors a liability cash flow model which precisely represents the contractual relationship between the underlying exposures and the payments flowing between the originator, sponsor, investors, other third parties and the SSPE, and shall, after pricing, make that model available to investors on an ongoing basis and to potential investors upon request.

EBA Guidelines
Background and rationale para. 76-77
Guidelines para. 82-83
Q&A 31

4.  In the case of a securitisation where the underlying exposures are residential loans or auto loans or leases, the originator and sponsor shall publish the available information related to the environmental performance of the assets financed by such residential loans or auto loans or leases, as part of the information disclosed pursuant to point (a) of the first subparagraph of Article 7(1).

[EU version onlyBy way of derogation from the first subparagraph, originators may, from 1 June 2021, decide to publish the available information related to the principal adverse impacts of the assets financed by underlying exposures on sustainability factors.]

Related recital: Recital (30)

Commentary: Environmental disclosures

EBA Guidelines
Background and rationale para. 78-79
Guidelines para. 84
Q&A 32-33

5.  The originator and the sponsor shall be responsible for compliance with Article 7. The information required by point (a) of the first subparagraph of Article 7(1) shall be made available to potential investors before pricing upon request. The information required by points (b) to (d) of the first subparagraph of Article 7(1) shall be made available before pricing at least in draft or initial form. The final documentation shall be made available to investors at the latest 15 days after closing of the transaction.

[EU version only6.   By 10 July 2021, the ESAs shall develop, through the Joint Committee of the European Supervisory Authorities, draft regulatory technical standards in accordance with Articles 10 to 14 of Regulations (EU) No 1093/2010, (EU) No 1094/2010 and (EU) No 1095/2010 on the content, methodologies and presentation of information referred to in the second subparagraph of paragraph 4 of this Article, in respect of the sustainability indicators in relation to adverse impacts on the climate and other environmental, social and governance-related adverse impacts.

Where relevant, the draft regulatory technical standards referred to in the first subparagraph shall mirror or draw upon the regulatory technical standards developed pursuant to the mandate given to the ESAs in Regulation (EU) 2019/2088 [Sustainable Finance Disclosure Regulation], in particular in Article 2a and Article 4(6) and (7) thereof.

The Commission is empowered to supplement this Regulation by adopting the regulatory technical standards referred to in the first subparagraph in accordance with Articles 10 to 14 of Regulations (EU) No 1093/2010, (EU) No 1094/2010 and (EU) No 1095/2010.]

References

EBA Guidelines
Background and rationale para. 80-81
Q&A 34
Article 23

Section 2

Requirements for simple, transparent and standardised ABCP securitisation

Simple, transparent and standardised ABCP securitisation

1.  An ABCP transaction shall be considered STS where it complies with the transaction-level requirements provided for in Article 24.

2.  An ABCP programme shall be considered STS where it complies with the requirements provided for in Article 26 and the sponsor of the ABCP programme complies with the requirements provided for in Article 25.

For the purpose of this Section, a ‘seller’ means ‘originator’ or ‘original lender’.

[EU version only:  3.  By 18 October 2018, the EBA, in close cooperation with ESMA and EIOPA, shall adopt, in accordance with Article 16 of Regulation (EU) No 1093/2010, guidelines and recommendations on the harmonised interpretation and application of the requirements set out in Articles 24 and 26 of this Regulation.]

Article 24

Transaction-level requirements

1.  The title to the underlying exposures shall be acquired by the SSPE by means of a true sale or assignment or transfer with the same legal effect in a manner that is enforceable against the seller or any other third party. The transfer of the title to the SSPE shall not be subject to severe clawback provisions in the event of the seller’s insolvency.

Related recitals: Recital (22), Recital (23)

Commentaries: Severe clawback; Synthetics

2.  For the purpose of paragraph 1, any of the following shall constitute severe clawback provisions:

(a)  provisions which allow the liquidator of the seller to invalidate the sale of the underlying exposures solely on the basis that it was concluded within a certain period before the declaration of the seller’s insolvency;

(b)  provisions where the SSPE can only prevent the invalidation referred to in point (a) if it can prove that it was not aware of the insolvency of the seller at the time of sale.

3.  For the purpose of paragraph 1, clawback provisions in national insolvency laws that allow the liquidator or a court to invalidate the sale of underlying exposures in the case of fraudulent transfers, unfair prejudice to creditors or transfers intended to improperly favour particular creditors over others shall not constitute severe clawback provisions.

4.  Where the seller is not the original lender, the true sale or assignment or transfer with the same legal effect of the underlying exposures to the seller, whether that true sale or assignment or transfer with the same legal effect is direct or through one or more intermediate steps, shall meet the requirements set out in paragraphs 1 to 3.

5.  Where the transfer of the underlying exposures is performed by means of an assignment and perfected at a later stage than at the closing of the transaction, the triggers to effect such perfection shall include at least the following events:

(a)  severe deterioration in the seller credit quality standing;

(b)  insolvency of the seller; and

(c)  unremedied breaches of contractual obligations by the seller, including the seller’s default.

6.  The seller shall provide representations and warranties that, to the best of its knowledge, the underlying exposures included in the securitisation are not encumbered or otherwise in a condition that can be foreseen to adversely affect the enforceability of the true sale or assignment or transfer with the same legal effect.

7.  The underlying exposures transferred from, or assigned by, the seller to the SSPE shall meet predetermined, clear and documented eligibility criteria which do not allow for active portfolio management of those exposures on a discretionary basis. For the purpose of this paragraph, substitution of exposures that are in breach of representations and warranties shall not be considered active portfolio management. Exposures transferred to the SSPE after the closing of the transaction shall meet the eligibility criteria applied to the initial underlying exposures.

8.  The underlying exposures shall not include any securitisation position.

Commentary: Resecuritisations

9.  The underlying exposures shall be transferred to the SSPE after selection without undue delay and shall not include, at the time of selection, exposures in default within the meaning of Article 178(1) of Regulation (EU) No 575/2013 [CRR] or exposures to a credit-impaired debtor or guarantor, who, to the best of the originator’s or original lender’s knowledge:

(a)  has been declared insolvent or had a court grant his creditors a final non-appealable right of enforcement or material damages as a result of a missed payment within three years prior to the date of origination or has undergone a debt restructuring process with regard to his non-performing exposures within three years prior to the date of transfer or assignment of the underlying exposures to the SSPE, except if:

(i)  a restructured underlying exposure has not presented new arrears since the date of the restructuring, which must have taken place at least one year prior to the date of transfer or assignment of the underlying exposures to the SSPE; and

(ii)  the information provided by the originator, sponsor and SSPE in accordance with points (a) and (e)(i) of the first subparagraph of Article 7(1) explicitly sets out the proportion of restructured underlying exposures, the time and details of the restructuring as well as their performance since the date of the restructuring;

(b)  was, at the time of origination, where applicable, on a public credit registry of persons with adverse credit history or, where there is no such public credit registry, another credit registry that is available to the originator or original lender; or

(c)  has a credit assessment or a credit score indicating that the risk of contractually agreed payments not being made is significantly higher than for comparable exposures held by the originator which are not securitised.

10.  The debtors shall, at the time of transfer of the exposures, have made at least one payment, except in the case of revolving securitisations backed by exposures payable in a single instalment or having a maturity of less than one year, including without limitation monthly payments on revolving credits.

11.  The repayment of the holders of the securitisation positions shall not have been structured to depend predominantly on the sale of assets securing the underlying exposures. This shall not prevent such assets from being subsequently rolled over or refinanced.

The repayment of the holders of the securitisation positions whose underlying exposures are secured by assets the value of which is guaranteed or fully mitigated by a repurchase obligation by the seller of the assets securing the underlying exposures or by another third party shall not be considered to depend on the sale of assets securing those underlying exposures.

Related recital: Recital (29)

Commentary: Reliance on asset sales


12.  The interest-rate and currency risks arising from the securitisation shall be appropriately mitigated and any measures taken to that effect shall be disclosed. Except for the purpose of hedging interest-rate or currency risk, the SSPE shall not enter into derivative contracts and shall ensure that the pool of underlying exposures does not include derivatives. Those derivatives shall be underwritten and documented according to common standards in international finance.

13.  The transaction documentation shall set out, in clear and consistent terms, definitions, remedies and actions relating to delinquency and default of debtors, debt restructuring, debt forgiveness, forbearance, payment holidays, losses, charge-offs, recoveries and other asset-performance remedies. The transaction documentation shall clearly specify the priorities of payment, events which trigger changes in such priorities of payment as well as the obligation to report such events. Any change in the priorities of payments which will materially adversely affect the repayment of the securitisation position shall be reported to investors without undue delay.

14.  The originator and the sponsor shall make available data on static and dynamic historical default and loss performance, such as delinquency and default data, for substantially similar exposures to those being securitised, and the sources of those data and the basis for claiming similarity, to potential investors before pricing. Where the sponsor does not have access to such data, it shall obtain from the seller access to data, on a static or dynamic basis, on the historical performance, such as delinquency and default data, for exposures substantially similar to those being securitised. All such data shall cover a period no shorter than five years, except for data relating to trade receivables and other short-term receivables, for which the historical period shall be no shorter than three years.

15.  ABCP transactions shall be backed by a pool of underlying exposures that are homogeneous in terms of asset type, taking into account the characteristics relating to the cash flows of different asset types including their contractual, credit-risk and prepayment characteristics. A pool of underlying exposures shall only comprise one asset type.

The pool of underlying exposures shall have a remaining weighted average life of not more than one year, and none of the underlying exposures shall have a residual maturity of more than three years.

By way of derogation from the second subparagraph, pools of auto loans, auto leases and equipment lease transactions shall have a remaining weighted average life of not more than three and a half years, and none of the underlying exposures shall have a residual maturity of more than six years.

The underlying exposures shall not include loans secured by residential or commercial mortgages or fully guaranteed residential loans, as referred to in point (e) of the first subparagraph of Article 129(1) of Regulation (EU) No 575/2013 [CRR]. The underlying exposures shall contain obligations that are contractually binding and enforceable, with full recourse to debtors with defined payment streams relating to rental, principal, interest, or related to any other right to receive income from assets warranting such payments. The underlying exposures may also generate proceeds from the sale of any financed or leased assets. The underlying exposures shall not include transferable securities as defined in point [EU version:  (44) of Article 4(1) of Directive 2014/65/EU [MiFID II] other than corporate bonds] [UK version:  (24) of Article 2(1) of Regulation (EU) No 600/2014 of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Regulation (EU) No 648/2012 [EMIR], other than corporate bonds], that are not listed on a trading venue.

[UK version only:  In the fourth subparagraph the reference to Regulation (EU) No 575/2013 is a reference to Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 648/2012 [CRR], as it had effect immediately before exit day.]

Related recital: Recital (27)

Commentary: What is homogeneity and how do we know it when we see it?

Related RTS: RTS on homogeneity

16.  Any referenced interest payments under the ABCP transaction’s assets and liabilities shall be based on generally used market interest rates, or generally used sectoral rates reflective of the cost of funds, but shall not reference complex formulae or derivatives. Referenced interest payments under the ABCP transaction’s liabilities may be based on interest rates reflective of an ABCP programme’s cost of funds.

Commentary: Standard reference rates

17.  Following the seller’s default or an acceleration event:

(a)  no amount of cash shall be trapped in the SSPE beyond what is necessary to ensure the operational functioning of the SSPE or the orderly repayment of investors in accordance with the contractual terms of the securitisation unless exceptional circumstances require that an amount be trapped to be used, in the best interests of investors, for expenses in order to avoid the deterioration in the credit quality of the underlying exposures;

(b)  principal receipts from the underlying exposures shall be passed to investors holding a securitisation position via sequential payment of the securitisation positions, as determined by the seniority of the securitisation position; and

(c)  no provisions shall require automatic liquidation of the underlying exposures at market value.

18.  The underlying exposures shall be originated in the ordinary course of the seller’s business pursuant to underwriting standards that are no less stringent than those that the seller applies at the time of origination to similar exposures that are not securitised. The underwriting standards pursuant to which the underlying exposures are originated and any material changes from prior underwriting standards shall be fully disclosed to the sponsor and other parties directly exposed to the ABCP transaction without undue delay. The seller shall have expertise in originating exposures of a similar nature to those securitised.

Related recitals: Recital (11); Recital (28)

19.  Where an ABCP transaction is a revolving securitisation, the transaction documentation shall include triggers for termination of the revolving period, including at least the following:

(a)  a deterioration in the credit quality of the underlying exposures to or below a predetermined threshold; and

(b)  the occurrence of an insolvency-related event with regard to the seller or the servicer.

20.  The transaction documentation shall clearly specify:

(a)  the contractual obligations, duties and responsibilities of the sponsor, the servicer and the trustee, if any, and other ancillary service providers;

(b)  the processes and responsibilities necessary to ensure that a default or insolvency of the servicer does not result in a termination of servicing;

(c)  provisions that ensure the replacement of derivative counterparties and the account bank upon their default, insolvency and other specified events, where applicable; and

(d)  how the sponsor meets the requirements of Article 25(3).

21.  [EU version:  The EBA, in close cooperation with ESMA and EIOPA, shall develop draft regulatory] [UK version:  The FCA may make] technical standards further specifying which underlying exposures referred to in paragraph 15 are deemed to be homogeneous.

[EU version only:  The EBA shall submit those draft regulatory technical standards to the Commission by 18 July 2018.]

[EU version only:  The Commission is empowered to supplement this Regulation by adopting the regulatory technical standards referred to in this paragraph in accordance with Articles 10 to 14 of Regulation (EU) No 1093/2010.]

Article 25

Sponsor of an ABCP programme

1.  The sponsor of the ABCP programme shall be a [EU version:  credit institution supervised under Directive 2013/36/EU [CRD IV]] [UK version:  person who is a CRR firm as defined by Article 4(1)(2A) of the Capital Requirements Regulation, but is not an investment firm as defined by Article 4(1)(2) of that Regulation].

2.  The sponsor of an ABCP programme shall be a liquidity facility provider and shall support all securitisation positions on an ABCP programme level by covering all liquidity and credit risks and any material dilution risks of the securitised exposures as well as any other transaction- and programme-level costs if necessary to guarantee to the investor the full payment of any amount under the ABCP with such support. The sponsor shall disclose a description of the support provided at transaction level to the investors including a description of the liquidity facilities provided.

3.  Before being able to sponsor an STS ABCP programme, the credit institution shall demonstrate to [EU version: its competent authority] [UK version: the PRA] that its role under paragraph 2 does not endanger its solvency and liquidity, even in an extreme stress situation in the market.

The requirement referred to in the first subparagraph of this paragraph shall be considered to be fulfilled where [EU version: the competent authority] [UK version: the PRA] has determined on the basis of the review and evaluation referred to Article 97(3) of Directive 2013/36/EU [CRD IV] that the arrangements, strategies, processes and mechanisms implemented by that credit institution and the own funds and liquidity held by it ensure the sound management and coverage of its risks.

4.  The sponsor shall perform its own due diligence and shall verify compliance with the requirements set out in Article 5(1) and (3) of this Regulation, as applicable. It shall also verify that the seller has in place servicing capabilities and collection processes that meet the requirements specified in points (h) to (p) of Article 265(2) of Regulation (EU) No 575/2013 [CRR] or equivalent requirements in third countries.

5.  The seller, at the level of a transaction, or the sponsor, at the level of the ABCP programme, shall satisfy the risk-retention requirement referred to in Article 6.

6.  The sponsor shall be responsible for compliance with Article 7 at ABCP programme level and for making available to potential investors before pricing upon their request:

(a)  the aggregate information required by point (a) of the first subparagraph of Article 7(1); and

(b)  the information required by points (b) to (e) of the first subparagraph of Article 7(1), at least in draft or initial form.

7.  In the event that the sponsor does not renew the funding commitment of the liquidity facility before its expiry, the liquidity facility shall be drawn down and the maturing securities shall be repaid.

Article 26

Programme-level requirements

1.  All ABCP transactions within an ABCP programme shall fulfil the requirements of Article 24(1) to (8) and (12) to (20).

A maximum of 5 % of the aggregate amount of the exposures underlying the ABCP transactions and which are funded by the ABCP programme may temporarily be non-compliant with the requirements of Article 24(9), (10) and (11) without affecting the STS status of the ABCP programme.

For the purpose of the second subparagraph of this paragraph, a sample of the underlying exposures shall regularly be subject to external verification of compliance by an appropriate and independent party.

2.  The remaining weighted average life of the underlying exposures of an ABCP programme shall not be more than two years.

3.  The ABCP programme shall be fully supported by a sponsor in accordance with Article 25(2).

4.  The ABCP programme shall not contain any resecuritisation and the credit enhancement shall not establish a second layer of tranching at the programme level.

5.  The securities issued by an ABCP programme shall not include call options, extension clauses or other clauses that have an effect on their final maturity, where such options or clauses may be exercised at the discretion of the seller, sponsor or SSPE.

6.  The interest-rate and currency risks arising at ABCP programme level shall be appropriately mitigated and any measures taken to that effect shall be disclosed. Except for the purpose of hedging interest-rate or currency risk, the SSPE shall not enter into derivative contracts and shall ensure that the pool of underlying exposures does not include derivatives. Those derivatives shall be underwritten and documented according to common standards in international finance.

7.  The documentation relating to the ABCP programme shall clearly specify:

(a)  the responsibilities of the trustee and other entities with fiduciary duties, if any, to investors;

(b)  the contractual obligations, duties and responsibilities of the sponsor, who shall have expertise in credit underwriting, the trustee, if any, and other ancillary service providers;

(c)  the processes and responsibilities necessary to ensure that a default or insolvency of the servicer does not result in a termination of servicing;

(d)  the provisions for replacement of derivative counterparties, and the account bank at ABCP programme level upon their default, insolvency and other specified events, where the liquidity facility does not cover such events;

(e)  that, upon specified events, default or insolvency of the sponsor, remedial steps shall be provided for to achieve, as appropriate, collateralisation of the funding commitment or replacement of the liquidity facility provider; and

(f)  that the liquidity facility shall be drawn down and the maturing securities shall be repaid in the event that the sponsor does not renew the funding commitment of the liquidity facility before its expiry.

8.  The servicer shall have expertise in servicing exposures of a similar nature to those securitised and shall have well-documented policies, procedures and risk-management controls relating to the servicing of exposures.

Article 26a

[EU version only:  SECTION 2a

Requirements for simple, transparent and standardised on-balance-sheet securitisations

Simple, transparent and standardised on-balance-sheet securitisations

1.   Synthetic securitisations that meet the requirements set out in Articles 26b to 26e shall be considered to be STS on-balance-sheet securitisations.

2.   EBA, in close cooperation with ESMA and EIOPA, may adopt, in accordance with Article 16 of Regulation (EU) No 1093/2010, guidelines and recommendations on the harmonised interpretation and application of the requirements set out in Articles 26b to 26e of this Regulation.

Article 26b

[EU version only:  Requirements relating to simplicity

1.   An originator shall be an entity that is authorised or licenced in the Union.

An originator that purchases a third party’s exposures on its own account and then securitises them shall apply policies with regard to credit, collection, debt workout and servicing applied to those exposures that are no less stringent than those that the originator applies to comparable exposures that have not been purchased.

2.   Underlying exposures shall be originated as part of the core business activity of the originator.

3.   At the closing of a transaction, the underlying exposures shall be held on the balance sheet of the originator or of an entity that belongs to the same group as the originator.

For the purposes of this paragraph, a group shall be either of the following:

(a)  a group of legal entities that is subject to prudential consolidation in accordance with Chapter 2 of Title II of Part One of Regulation (EU) No 575/2013 [CRR];

(b) a group as defined in point (c) of Article 212(1) of Directive 2009/138/EC [Solvency II].

4.   The originator shall not hedge its exposure to the credit risk of the underlying exposures of the securitisation beyond the protection obtained through the credit protection agreement.

5.   The credit protection agreement shall comply with the credit risk mitigation rules laid down in Article 249 of Regulation  (EU) No 575/2013 [CRR], or where that Article is not applicable, with requirements that are no less stringent than the requirements set out in that Article.

6.   The originator shall provide representations and warranties that the following requirements have been met:

(a)  the originator or an entity of the group to which the originator belongs has full legal and valid title to the underlying exposures and their associated ancillary rights;

(b)  where the originator is a credit institution as defined in point (1) of Article 4(1) of Regulation  (EU) No 575/2013 [CRR], or an insurance undertaking as defined in point (1) of Article 13 of Directive 2009/138/EC [Solvency II], the originator or an entity which is included in the scope of supervision on a consolidated basis keeps the credit risk of the underlying exposures on its balance sheet;

(c)  each underlying exposure complies, at the date it is included in the securitised portfolio, with the eligibility criteria and with all conditions, other than the occurrence of a credit event as referred to in Article 26e(1), for a credit protection payment in accordance with the credit protection agreement contained within the securitisation documentation;

(d) to the best of the originator’s knowledge, the contract for each underlying exposure contains a legal, valid, binding and enforceable obligation on the obligor to pay the sums of money specified in that contract;

(e) the underlying exposures comply with underwriting criteria that are no less stringent than the standard underwriting criteria that the originator applies to similar exposures that are not securitised;

(f) to the best of the originator’s knowledge, none of the obligors are in material breach or default of any of their obligations in respect of an underlying exposure on the date on which that underlying exposure is included in the securitised portfolio;

(g) to the best of the originator’s knowledge, the transaction documentation does not contain any false information on the details of the underlying exposures;

(h) at the closing of the transaction or when an underlying exposure is included in the securitised portfolio, the contract between the obligor and the original lender in relation to that underlying exposure has not been amended in such a way that the enforceability or collectability of that underlying exposure has been affected.

7.   Underlying exposures shall meet predetermined, clear and documented eligibility criteria that do not allow for active portfolio management of those exposures on a discretionary basis.

For the purposes of this paragraph, the substitution of exposures that are in breach of representations or warranties or, where the securitisation includes a replenishment period, the addition of exposures that meet the defined replenishment conditions, shall not be considered active portfolio management.

Any exposure added after the closing date of the transaction shall meet eligibility criteria that are no less stringent than those applied in the initial selection of the underlying exposures.

An underlying exposure may be removed from the transaction where that underlying exposure:

(a) has been fully repaid or matured otherwise;

(b) has been disposed of during the ordinary course of the business of the originator, provided that such disposal does not constitute implicit support as referred to in Article 250 of Regulation (EU) No 575/2013 [CRR];

(c) is subject to an amendment that is not credit driven, such as refinancing or restructuring of debt, and which occurs during the ordinary course of servicing of that underlying exposure; or

(d) did not meet the eligibility criteria at the time it was included in the transaction.

8.   The securitisation shall be backed by a pool of underlying exposures that are homogeneous in terms of asset type, taking into account the specific characteristics relating to the cash flows of the asset type including their contractual, credit-risk and prepayment characteristics. A pool of underlying exposures shall comprise only one asset type.

The underlying exposures referred to in the first subparagraph shall contain obligations that are contractually binding and enforceable, with full recourse to debtors and, where applicable, guarantors.

The underlying exposures referred to in the first subparagraph shall have defined periodic payment streams, the instalments of which may differ in their amounts, relating to rental, principal or interest payments, or to any other right to receive income from assets supporting such payments. The underlying exposures may also generate proceeds from the sale of any financed or leased assets.

The underlying exposures referred to in the first subparagaph of this paragraph shall not include transferable securities as defined in point (44) of Article 4(1) of Directive 2014/65/EU [MIFID II], other than corporate bonds that are not listed on a trading venue.

9.   Underlying exposures shall not include any securitisation positions.

10.   The underwriting standards pursuant to which underlying exposures are originated and any material changes from prior underwriting standards shall be fully disclosed to potential investors without undue delay. The underlying exposures shall be underwritten with full recourse to an obligor that is not an SSPE. No third parties shall be involved in the credit or underwriting decisions concerning the underlying exposures.

In the case of securitisations where the underlying exposures are residential loans, the pool of loans shall not include any loan that was marketed and underwritten on the premise that the loan applicant or, where applicable, intermediaries were made aware that the information provided might not be verified by the lender.

The assessment of the borrower’s creditworthiness shall meet the requirements set out in Article 8 of Directive 2008/48/EC [Consumer Credit Directive] or Article 18(1) to (4), point (a) of Article 18(5) and Article 18(6), of Directive 2014/17/EU [Mortgage Credit Directive], or where applicable, equivalent requirements in third countries.

The originator or original lender shall have expertise in originating exposures of a similar nature to those securitised.

11.   Underlying exposures shall not include, at the time of selection, exposures in default within the meaning of Article 178(1) of Regulation  (EU) No 575/2013 [CRR], or exposures to a credit-impaired debtor or guarantor who to the best of the originator’s or original lender’s knowledge:

(a)  has been declared insolvent or had a court grant his creditors a final non-appealable right of enforcement or material damages as a result of a missed payment within three years prior to the date of the origination or has undergone a debt-restructuring process with regard to his non-performing exposures within three years prior to the date of the selection of the underlying exposures, except where:

(i)  a restructured underlying exposure has not presented new arrears since the date of the restructuring, which must have taken place at least one year prior to the date of the selection of the underlying exposures; and

(ii) the information provided by the originator in accordance with point (a) and point (e)(i) of the first subparagraph of Article 7(1) explicitly sets out the proportion of restructured underlying exposures, the time and details of the restructuring and their performance since the date of the restructuring;

(b)  was at the time of origination of the underlying exposure, where applicable, on a public credit registry of persons with adverse credit history or, where there is no such public credit registry, another credit registry that is available to the originator or the original lender; or

(c) has a credit assessment or a credit score indicating that the risk of contractually agreed payments not being made is significantly higher than for comparable exposures held by the originator which are not securitised.

12.   Debtors shall, at the time of the inclusion of the underlying exposures, have made at least one payment, except where:

(a)  the securitisation is a revolving securitisation, backed by exposures payable in a single instalment or having a maturity of less than one year, including without limitation monthly payments on revolving credits; or

(b) the exposure represents the refinancing of an exposure that is already included in the transaction.

13.   EBA, in close cooperation with ESMA and EIOPA, shall develop draft regulatory technical standards further specifying which underlying exposures referred to in paragraph 8 are deemed to be homogeneous.

EBA shall submit those draft regulatory technical standards to the Commission by 10 October 2021.

The Commission is empowered to supplement this Regulation by adopting the regulatory technical standards referred to in the first subparagraph in accordance with Articles 10 to 14 of Regulation (EU) No 1093/2010.

Article 26c

[EU version only:] Requirements relating to standardisation

1.   The originator or original lender shall satisfy the risk-retention requirement in accordance with Article 6.

2.   The interest rate and currency risks arising from a securitisation and their possible effects on the payments to the originator and the investors shall be described in the transaction documentation. Those risks shall be appropriately mitigated and any measures taken to that effect shall be disclosed. Any collateral securing the obligations of the investor under the credit protection agreement shall be denominated in the same currency in which the credit protection payment is denominated.

In the case of a securitisation using a SSPE, the amount of liabilities of the SSPE concerning the interest payments to the investors shall, at each payment date, be equal to or be less than the amount of the SSPE’s income from the originator and any collateral arrangements.

Except for the purpose of hedging interest rate or currency risks of the underlying exposures, the pool of underlying exposures shall not include derivatives. Those derivatives shall be underwritten and documented according to common standards in international finance.

3.   Any referenced interest rate payments in relation to the transaction shall be based on either of the following:

(a) generally used market interest rates, or generally used sectoral rates that are reflective of the costs of funds, and do not reference complex formulae or derivatives;

(b) income generated by the collateral securing the obligations of the investor under the protection agreement.

Any referenced interest payments due under the underlying exposures shall be based on generally used market interest rates, or generally used sectoral rates reflective of the cost of funds, and shall not reference complex formulae or derivatives.

4.   Following the occurrence of an enforcement event in respect of the originator, the investor shall be permitted to take enforcement action.

In the case of a securitisation using a SSPE, where an enforcement or termination notice of the credit protection agreement is delivered, no amount of cash shall be trapped in the SSPE beyond what is necessary to ensure the operational functioning of that SSPE, the payment of the protection payments for defaulted underlying exposures that are still being worked out at the time of the termination, or the orderly repayment of investors in accordance with the contractual terms of the securitisation.

5.   Losses shall be allocated to the holders of a securitisation position in the order of seniority of the tranches, starting with the most junior tranche.

Sequential amortisation shall be applied to all tranches to determine the outstanding amount of the tranches at each payment date, starting from the most senior tranche.

By way of derogation from the second subparagraph, transactions which feature non-sequential priority of payments shall include triggers related to the performance of the underlying exposures resulting in the priority of payments reverting the amortisation to sequential payments in order of seniority. Such performance-related triggers shall include as a minimum:

(a) either the increase in the cumulative amount of defaulted exposures or the increase in the cumulative losses greater than a given percentage of the outstanding amount of the underlying portfolio;

(b) one additional backward-looking trigger; and

(c) one forward-looking trigger.

EBA shall develop draft regulatory technical standards on the specification, and where relevant, on the calibration of the performance-related triggers.

EBA shall submit those draft regulatory technical standards to the Commission by 30 June 2021.

The Commission is empowered to supplement this Regulation by adopting the regulatory technical standards referred to in the fourth subparagraph in accordance with Articles 10 to 14 of Regulation (EU) No 1093/2010.

As tranches amortise, the amount of the collateral equal to the amount of the amortisation of those tranches shall be returned to the investors, provided the investors have collateralised those tranches.

Where a credit event, as referred to in Article 26e, has occurred in relation to underlying exposures and the debt workout for those exposures has not been completed, the amount of credit protection remaining at any payment date shall be at least equivalent to the outstanding nominal amount of those underlying exposures, minus the amount of any interim payment made in relation to those underlying exposures.

6.   The transaction documentation shall include appropriate early amortisation provisions or triggers for termination of the revolving period, where a securitisation is a revolving securitisation, including at least the following:

(a) a deterioration in the credit quality of the underlying exposures to or below a predetermined threshold;

(b) a rise in losses above a predetermined threshold;

(c) a failure to generate sufficient new underlying exposures that meet the predetermined credit quality during a specified period.

7.   The transaction documentation shall clearly specify:

(a) the contractual obligations, duties and responsibilities of the servicer, the trustee and other ancillary service providers, as applicable, and the third-party verification agent referred to in Article 26e(4);

(b) the provisions that ensure the replacement of the servicer, trustee, other ancillary service providers or the third-party verification agent referred to in Article 26e(4) in the event of default or insolvency of either of those service providers, where those service providers differ from the originator, in a manner that does not result in the termination of the provision of those services;

(c) the servicing procedures that apply to the underlying exposures at the closing date of the transaction and thereafter and the circumstances under which those procedures may be modified;

(d) the servicing standards that the servicer is obliged to adhere to in servicing the underlying exposures during the entire life of the securitisation.

8.   The servicer shall have expertise in servicing exposures of a similar nature to those securitised and shall have well-documented and adequate policies, procedures and risk-management controls relating to the servicing of exposures.

The servicer shall apply servicing procedures to the underlying exposures that are at least as stringent as the ones applied by the originator to similar exposures that are not securitised.

9.   The originator shall maintain an up-to-date reference register to identify the underlying exposures at all times. That register shall identify the reference obligors, the reference obligations from which the underlying exposures arise, and, for each underlying exposure, the nominal amount that is protected and that is outstanding.

10.   The transaction documentation shall include clear provisions that facilitate the timely resolution of conflicts between different classes of investors. In the case of a securitisation using a SSPE, voting rights shall be clearly defined and allocated to bondholders and the responsibilities of the trustee and other entities with fiduciary duties to investors shall be clearly identified.

Article 26d

[EU version only]:  Requirements relating to transparency

1.   The originator shall make available data on static and dynamic historical default and loss performance such as delinquency and default data, for substantially similar exposures to those being securitised, and the sources of those data and the basis for claiming similarity, to potential investors before pricing. Those data shall cover a period of at least five years.

2.   A sample of the underlying exposures shall be subject to external verification prior to the closing of the transaction by an appropriate and independent party, including verification that the underlying exposures are eligible for credit protection under the credit protection agreement.

3.   The originator shall, before the pricing of the securitisation, make available to potential investors a liability cash flow model which precisely represents the contractual relationship between the underlying exposures and the payments flowing between the originator, investors, other third parties and, where applicable, the SSPE, and shall, after pricing, make that model available to investors on an ongoing basis and to potential investors upon request.

4.   In the case of a securitisation where the underlying exposures are residential loans or auto loans or leases, the originator shall publish the available information related to the environmental performance of the assets financed by such residential loans, auto loans or leases, as part of the information disclosed pursuant to point (a) of the first subparagraph of Article 7(1).

By way of derogation from the first subparagraph, originators may, from 1 June 2021, decide to publish the available information related to the principal adverse impacts of the assets financed by the underlying exposures on sustainability factors.

5.   The originator shall be responsible for compliance with Article 7. The information required by point (a) of the first subparagraph of Article 7(1) shall be made available to potential investors before pricing upon request. The information required by points (b) to (d) of the first subparagraph of Article 7(1) shall be made available before pricing, at least in draft or initial form. The final documentation shall be made available to investors at the latest 15 days after the closing of the transaction.

6.   By 10 July 2021, the ESAs shall develop, through the Joint Committee of the European Supervisory Authorities, draft regulatory technical standards in accordance with Articles 10 to 14 of Regulations (EU) No 1093/2010, (EU) No 1094/2010 and (EU) No 1095/2010 on the content, methodologies and presentation of information referred to in the second subparagraph of paragraph 4 of this Article, in respect of the sustainability indicators in relation to adverse impacts on the climate and other environmental, social and governance-related adverse impacts.

Where relevant, the draft regulatory technical standards referred to in the first subparagraph of this paragraph shall mirror or draw upon the regulatory technical standards developed in compliance with the mandate given to the ESAs in Regulation (EU) 2019/2088, in particular in Article 2a, and Article 4(6) and (7) thereof.

The Commission is empowered to supplement this Regulation by adopting the regulatory technical standards referred to in the first subparagraph in accordance with Articles 10 to 14 of Regulations (EU) No 1093/2010, (EU) No 1094/2010 and (EU) No 1095/2010.

Article 26e

[EU version only:] Requirements concerning the credit protection agreement, the third-party verification agent and the synthetic excess spread

1. The credit protection agreement shall at least cover the following credit events:

(a) where the transfer of risk is achieved by the use of guarantees, the credit events referred to in point (a) of Article 215(1) of Regulation (EU) No 575/2013 [CRR];

(b) where the transfer of risk is achieved by the use of credit derivatives, the credit events referred to in point (a) of Article 216(1) of Regulation (EU) No 575/2013 [CRR].

All credit events shall be documented.

Forbearance measures within the meaning of Article 47b of Regulation (EU) No 575/2013 [CRR] that are applied to the underlying exposures shall not preclude the triggering of eligible credit events.

2. The credit protection payment following the occurrence of a credit event shall be calculated based on the actual realised loss suffered by the originator or the original lender, as worked out in accordance with their standard recovery policies and procedures for the relevant exposure types and recorded in their financial statements at the time the payment is made. The final credit protection payment shall be payable within a specified period of time after the debt workout for the relevant underlying exposure where the debt workout has been completed before the scheduled legal maturity or early termination of the credit protection agreement.

An interim credit protection payment shall be made at the latest six months after the occurrence of a credit event as referred to in paragraph 1 in cases where the debt workout of the losses for the relevant underlying exposure has not been completed by the end of that six-month period. The interim credit protection payment shall be at least the higher of the following:

(a) the expected loss amount that is equivalent to the impairment recorded by the originator in its financial statements in accordance with the applicable accounting framework at the time the interim payment is made on the assumption that the credit protection agreement does not exist and does not cover any losses;

(b) where applicable, the expected loss amount as determined in accordance with Chapter 3 of Title II of Part Three of Regulation (EU) No 575/2013 [CRR].

Where an interim credit protection payment is made, the final credit protection payment referred to in the first subparagraph shall be made in order to adjust the interim settlement of losses to the actual realised loss.

The method for the calculation of interim and final credit protection payments shall be specified in the credit protection agreement.

The credit protection payment shall be proportional to the share of the outstanding nominal amount of the corresponding underlying exposure that is covered by the credit protection agreement.

The right of the originator to receive the credit protection payment shall be enforceable. The amounts payable by investors under the credit protection agreement shall be clearly set out in the credit protection agreement and limited. It shall be possible to calculate those amounts in all circumstances. The credit protection agreement shall clearly set out the circumstances under which investors shall be required to make payments. The third-party verification agent referred to in paragraph 4 shall assess whether such circumstances have occurred.

The amount of the credit protection payment shall be calculated at the level of the individual underlying exposure for which a credit event has occurred.

3. The credit protection agreement shall specify the maximum extension period that shall apply for the debt workout for the underlying exposures in relation to which a credit event as referred to in paragraph 1 has occurred, but where the debt workout has not been completed upon the scheduled legal maturity or early termination of the credit protection agreement. Such an extension period shall not be longer than two years. The credit protection agreement shall provide that, by the end of that extension period, a final credit protection payment shall be made on the basis of the originator’s final loss estimate that would have to be recorded by the originator in its financial statements at that time on the assumption that the credit protection agreement does not exist and does not cover any losses.

In the event that the credit protection agreement is terminated, the debt workout shall continue in respect of any outstanding credit events that occurred prior to that termination in the same way as that described in the first subparagraph.

The credit protection premiums to be paid under the credit protection agreement shall be structured as contingent on the outstanding nominal amount of the performing securitised exposures at the time of the payment and reflect the risk of the protected tranche. For those purposes, the credit protection agreement shall not stipulate guaranteed premiums, upfront premium payments, rebate mechanisms or other mechanisms that may avoid or reduce the actual allocation of losses to the investors or return part of the paid premiums to the originator after the maturity of the transaction.

By way of derogation from the third subparagraph of this paragraph, upfront premium payments shall be allowed, provided State aid rules are complied with, where the guarantee scheme is specifically provided for in the national law of a Member State and benefits from a counter-guarantee of any of the entities listed in points (a) to (d) of Article 214(2) of Regulation (EU) No 575/2013 [CRR].

The transaction documentation shall describe how the credit protection premium and any note coupons, if any, are calculated in respect of each payment date over the entire life of the securitisation.

The rights of the investors to receive credit protection premiums shall be enforceable.

4. The originator shall appoint a third-party verification agent before the closing date of the transaction. For each of the underlying exposures for which a credit event notice is given, the third party verification agent shall verify, as a minimum, all of the following:

(a) that the credit event referred to in the credit event notice is a credit event as specified in the terms of the credit protection agreement;

(b) that the underlying exposure was included in the reference portfolio at the time of the occurrence of the credit event concerned;

(c) that the underlying exposure met the eligibility criteria at the time of its inclusion in the reference portfolio;

(d) where an underlying exposure has been added to the securitisation as a result of a replenishment, that such a replenishment complied with the replenishment conditions;

(e) that the final loss amount is consistent with the losses recorded by the originator in its profit and loss statement;

(f) that, at the time the final credit protection payment is made, the losses in relation to the underlying exposures have correctly been allocated to the investors.

The third-party verification agent shall be independent from the originator and investors, and, where applicable, from the SSPE and shall have accepted the appointment as third-party verification agent by the closing date of the transaction.

The third-party verification agent may perform the verification on a sample basis instead of on the basis of each individual underlying exposure for which credit protection payment is sought. Investors may, however, request the verification of the eligibility of any particular underlying exposure where they are not satisfied with the sample-basis verification.

The originator shall include a commitment in the transaction documentation to provide the third-party verification agent with all the information necessary to verify the requirements set out in the first subparagraph.

5. The originator may not terminate a transaction prior to its scheduled maturity for any other reason than any of the following events:

(a) the insolvency of the investor;

(b) the investor’s failures to pay any amounts due under the credit protection agreement or a breach by the investor of any material obligation laid down in the transaction documents;

(c) relevant regulatory events, including:

(i) relevant changes in Union or national law, relevant changes by competent authorities to officially published interpretations of such laws, where applicable, or relevant changes in the taxation or accounting treatment of the transaction that have a material adverse effect on the economic efficiency of a transaction, in each case compared with that anticipated at the time of entering into the transaction and which could not reasonably be expected at that time;

(ii) a determination by a competent authority that the originator or any affiliate of the originator is not or is no longer permitted to recognise significant credit risk transfer in accordance with Article 245(2) or (3) of Regulation (EU) No 575/2013 [CRR] in respect of the securitisation;

(d) the exercise of an option to call the transaction at a given point in time (time call), when the time period measured from the closing date of the transaction is equal to or greater than the weighted average life of the initial reference portfolio at the closing date of the transaction;

(e) the exercise of a clean-up call option as defined in point (1) of Article 242 of Regulation (EU) No 575/2013 [CRR];

(f) in the case of unfunded credit protection, the investor no longer qualifies as an eligible protection provider in accordance with the requirements set out in paragraph 8.

The transaction documentation shall specify whether any of the call rights referred to in points (d) and (e) are included in the transaction concerned and how such call rights are structured.

For the purposes of point (d), the time call shall not be structured to avoid allocating losses to credit enhancement positions or other positions held by investors and shall not be otherwise structured to provide credit enhancement.

Where the time call is exercised, originators shall notify competent authorities how the requirements referred to in the second and third subparagraphs are fulfilled, including with a justification of the use of the time call and a plausible account showing that the reason to exercise the call is not a deterioration in the quality of the underlying assets.

In the case of funded credit protection, upon termination of the credit protection agreement, collateral shall be returned to investors in order of the seniority of the tranches subject to the provisions of the relevant insolvency law, as applicable to the originator.

6. Investors may not terminate a transaction prior to its scheduled maturity for any other reason than a failure to pay the credit protection premium or any other material breach of contractual obligations by the originator.

7 The originator may commit synthetic excess spread, which shall be available as credit enhancement for the investors, where all of the following conditions are met:

(a) the amount of the synthetic excess spread that the originator commits to using as credit enhancement at each payment period is specified in the transaction documentation and expressed as a fixed percentage of the total outstanding portfolio balance at the start of the relevant payment period (fixed synthetic excess spread);

(b) the synthetic excess spread which is not used to cover credit losses that materialise during each payment period shall be returned to the originator;

(c) for originators using the IRB Approach referred to in Article 143 of Regulation (EU) No 575/2013 [CRR], the total committed amount per year shall not be higher than the one-year regulatory expected loss amounts on all underlying exposures for that year, calculated in accordance with Article 158 of that Regulation;

(d) for originators not using the IRB Approach referred to in Article 143 of Regulation (EU) No 575/2013 [CRR], the calculation of the one-year expected loss of the underlying portfolio shall be clearly determined in the transaction documentation;

(e) the transaction documentation specifies the conditions laid down in this paragraph.

8. A credit protection agreement shall take the form of:

(a) a guarantee meeting the requirements set out in Chapter 4 of Title II of Part Three of Regulation (EU) No 575/2013 [CRR], by which the credit risk is transferred to any of the entities listed in points (a) to (d) of Article 214(2) of Regulation (EU) No 575/2013 [CRR], provided that the exposures to the investor qualify for a 0 % risk weight under Chapter 2 of Title II of Part Three of that Regulation;

(b) a guarantee meeting the requirements set out in Chapter 4 of Title II of Part Three of Regulation (EU) No 575/2013 [CRR], which benefits from a counter-guarantee of any of the entities referred to in point (a) of this paragraph; or

(c) another credit protection not referred to in points (a) and (b) of this paragraph in the form of a guarantee, a credit derivative or a credit linked note that meets the requirements set out in Article 249 of Regulation (EU) No 575/2013 [CRR], provided that the obligations of the investor are secured by collateral meeting the requirements laid down in paragraphs 9 and 10 of this Article.

9. Another credit protection referred to in point (c) of paragraph 8 shall meet the following requirements:

(a) the right of the originator to use the collateral to meet protection payment obligations of the investors is enforceable and the enforceability of that right is ensured through appropriate collateral arrangements;

(b) the right of the investors, when the securitisation is unwound or as the tranches amortise, to return any collateral that has not been used to meet protection payments is enforceable;

(c) where the collateral is invested in securities, the transaction documentation sets out the eligibility criteria and custody arrangement for such securities.

The transaction documentation shall specify whether investors remain exposed to the credit risk of the originator.

The originator shall obtain an opinion from a qualified legal counsel confirming the enforceability of the credit protection in all relevant jurisdictions.

10. Where another credit protection is provided in accordance with point (c) of paragraph 8 of this Article, the originator and the investor shall have recourse to high-quality collateral, which shall be either of the following:

(a) collateral in the form of 0 % risk-weighted debt securities referred to in Chapter 2 of Title II of Part Three of Regulation (EU) No 575/2013 [CRR] that meet all of the following conditions:

(i) those debt securities have a remaining maximum maturity of three months which shall be no longer than the remaining period up to the next payment date;

(ii) those debt securities can be redeemed into cash in an amount equal to the outstanding balance of the protected tranche;

(iii) those debt securities are held by a custodian independent of the originator and the investors;

(b) collateral in the form of cash held with a third-party credit institution with credit quality step 3 or above in line with the mapping set out in Article 136 of Regulation (EU) No 575/2013 [CRR].

By way of derogation from the first subparagraph of this paragraph, subject to the explicit consent in the final transaction documentation by the investor after having conducted its due diligence according to Article 5 of this Regulation, including an assessment of any relevant counterparty credit risk exposure, only the originator may have recourse to high quality collateral in the form of cash on deposit with the originator, or one of its affiliates, if the originator or one of its affiliates qualifies as a minim um for credit quality step 2 in line with the mapping set out in Article 136 of Regulation (EU) No 575/2013 [CRR].

The competent authorities designated pursuant to Article 29(5) may, after consulting EBA, allow collateral in the form of cash on deposit with the originator, or one of its affiliates, if the originator or one of its affiliates qualifies for credit quality step 3 provided that market difficulties, objective impediments related to the credit quality step assigned to the Member State of the institution or significant potential concentration problems in the Member State concerned due to the application of the minimum credit quality step 2 requirement referred to in the second subparagraph can be documented.

Where the third-party credit institution or the originator or one of its affiliates no longer qualifies for the minimum credit quality step, the collateral shall be transferred within nine months to a third-party credit institution with credit quality step 3 or above or the collateral shall be invested in securities meeting the criteria laid down in point (a) of the first subparagraph.

The requirements set out in this paragraph shall be deemed satisfied in the case of investments in credit linked notes issued by the originator, in accordance with Article 218 of Regulation (EU) No 575/2013 [CRR].

EBA shall monitor the application of the collateralisation practices under this Article, paying particular attention to the counterparty credit risk and other economic and financial risks borne by investors resulting from such collateralisation practices.

EBA shall submit a report on its findings to the Commission by 10 April 2023.

By 10 October 2023, the Commission shall, on the basis of that EBA report submit a report to the European Parliament and to the Council on the application of this Article with particular regard to the risk of excessive build-up of counterparty credit risk in the financial system, together with a legislative proposal for amending this Article, if appropriate.]

Article 27

Section 3

STS notification

STS notification requirements

[EU version:

Originators and sponsors shall jointly notify ESMA by means of the template referred to in paragraph 7 of this Article where a securitisation meets the requirements set out in Articles 19 to 22, Articles 23 to 26 or Articles 26a to 26e (“STS notification”). In the case of an ABCP programme, only the sponsor shall be responsible for the notification of that programme and, within that programme, of the ABCP transactions complying with Article 24. In the case of synthetic securitisation, only the originator shall be responsible for the notification.

The STS notification shall include an explanation by the originator and sponsor of how the STS criteria set out in Articles 20 to 22, Articles 24 to 26 or Articles 26b to 26e have been complied with.

ESMA shall publish the STS notification on its official website pursuant to paragraph 5. Originators and sponsors of a securitisation shall inform their competent authorities of the STS notification and designate amongst themselves one entity to be the first contact point for investors and competent authorities.]

[UK version:  

1.  Where a securitisation which is not an ABCP programme or an ABCP transaction meets the requirements of Articles 19 to 22, the originator and sponsor involved in the securitisation must jointly notify the FCA of that fact by means of the template referred to  in paragraph 7 of this Article.

Where an ABCP programme meets the requirements of Articles 23 to 26, or an ABCP  transaction meets the requirements of Article 24, the sponsor involved in the programme must notify the FCA of that fact by means of the template referred to in paragraph 7 of this Article.

A notice given in accordance with the first or second subparagraph (‘STS notification’) must include an explanation of how the relevant STS criteria set out in Articles 20 to 22 or,  as the case may be, Articles 24 to 26 have been complied with.  The FCA must publish the STS notification on its official website pursuant to paragraph 5.  Where the STS notification is given jointly by the originator and sponsor involved in a securitisation, the STS notification must designate one of them to be the first contact point for investors and the FCA.

Related recital: Recital (31)

2.  [EU versionThe originator, sponsor or SSPE may use the service of a third party authorised under Article 28 to assess whether a securitisation complies with Articles 19 to 22, Articles 23 to 26 or Articles 26a to 26e.]  [UK version:  The originator, sponsor or SSPE may use the service of a third party authorised under Article 28 to check whether a securitisation complies with Articles 19 to 22 or Articles 23 to 26.]  However, the use of such a service shall not, under any circumstances, affect the liability of the originator, sponsor or SSPE in respect of their legal obligations under this Regulation. The use of such service shall not affect the obligations imposed on institutional investors as set out in Article 5.

[EU versionWhere the originator, sponsor or SSPE uses the service of a third party authorised pursuant to Article 28 to assess whether a securitisation complies with Articles 19 to 22, Articles 23 to 26 or Articles 26a to 26e, the STS notification shall include a statement that compliance with the STS criteria was confirmed by that authorised third party.]  [UK version:  Where the originator, sponsor or SSPE use the service of a third party authorised pursuant to Article 28 to assess whether a securitisation complies with Articles 19 to 22 or Articles 23 to 26, the STS notification shall include a statement that compliance with the STS criteria was confirmed by that authorised third party.]   The notification shall include the name of the authorised third party, [EU version:  its place of establishment and the name of the competent authority that authorised it] [UK version:  and its place of establishment].

3.  Where the originator or original lender is not a credit institution or investment firm, as defined in points (1) and (2) of Article 4(1) of Regulation (EU) No 575/2013 [CRR], established in the [EU version: Union] [UK version:  United Kingdom], the notification pursuant to paragraph 1 of this Article shall be accompanied by the following:

(a)  confirmation by the originator or original lender that its credit-granting is done on the basis of sound and well-defined criteria and clearly established processes for approving, amending, renewing and financing credits and that the originator or original lender has effective systems in place to apply such processes in accordance with Article 9 of this Regulation; and

(b)  a declaration by the originator or original lender as to whether credit granting referred to in point (a) is subject to supervision.

[UK version:  4.  The originator and sponsor shall immediately notify [EU version:  ESMA and inform their competent authority] [UK version: the FCA] when a securitisation no longer meets the requirements of either Articles 19 to 22 or Articles 23 to 26.]

[EU version4.   The originator and, where applicable, sponsor, shall immediately notify ESMA and inform their competent authority when a securitisation no longer meets the requirements set out in Articles 19 to 22, Articles 23 to 26, or Articles 26a to 26e.]

Related recital: Recital (32)

[EU version:  

5.  ESMA shall maintain, on its official website, a list of all securitisations which the originators and sponsors have notified it of meeting the requirements set out in Articles 19 to 22, Articles 23 to 26, or Articles 26a to 26e.  ESMA shall add each securitisation so notified to that list immediately and shall update the list where the securitisations are no longer considered to be STS following a decision of competent authorities or a notification by the originator or sponsor. Where the competent authority has imposed administrative sanctions in accordance with Article 32, it shall notify ESMA thereof immediately. ESMA shall  immediately indicate on the list that a competent authority has imposed administrative sanctions in relation to the securitisation concerned.]

[UK version:  

5. The FCA must maintain on its official website a list of all securitisations notified to it as meeting the requirements of Articles 19 to 22 or Articles 23 to 26. The FCA must add each securitisation so notified to that list immediately and must update the list where a securitisation is no longer considered to be STS following a decision of the FCA or a notification by the originator or sponsor concerned.

Where the PRA or the Pensions Regulator, acting as the competent authority, has imposed a relevant sanction in relation to a securitisation, it must notify the FCA of that fact immediately. Where a competent authority has imposed a relevant sanction in relation to a securitisation, the FCA must immediately indicate that fact in relation to the securitisation concerned on the list which it maintains in accordance with the first subparagraph.

In the second subparagraph ‘relevant sanction’ means any sanction imposed or other measure taken where by reason of any act or failure, whether intentional or through negligence - 

(a)  an originator, sponsor or original lender fails to meet the requirements set out in Article 6;

(b)  an originator, sponsor or original lender fails to meet the criteria set out in Article 9;

(c)  an originator, sponsor or SSPE fails to meet the requirements set out in Article 7 or 18;

(d)  a securitisation is designated as STS and an originator, sponsor or SSPE of that securitisation fails to meet the requirements set out in Article 19 to 22 or Articles 23 to 26;

(e)  an originator or sponsor makes a notification pursuant to Article 27(1) which is misleading;

(f)  an originator or sponsor fails to meet the requirements set out in Article 27(4); or 

(g)  a third party authorised pursuant to Article 28 fails to notify a material change to the information provided pursuant to Article 28(1), including any change which could reasonably be considered to affect the competent authority’s assessment of the third party’s competence to assess STS compliance.]

6.  [EU version:  ESMA, in close cooperation with the EBA and EIOPA, shall develop draft regulatory] [UK version: The FCA shall make] technical standards specifying the information that the originator, sponsor and SSPE are required to provide in order to comply with the obligations referred to in paragraph 1.

[EU version only:  ESMA shall submit those draft regulatory technical standards to the Commission by 10 October 2021.]

[EU version only:  The Commission is empowered to supplement this Regulation by adopting the regulatory technical standards referred to in this paragraph in accordance with Articles 10 to 14 of Regulation (EU) No 1095/2010.]

Related RTS

7.  In order to ensure uniform conditions for the implementation of this Regulation, [EU version:  ESMA, in close cooperation with the EBA and EIOPA, shall develop draft implementing] [UK version: The FCA may make] technical standards to establish the templates to be used for the provision of the information referred to in paragraph 6.

[EU version only:  ESMA shall submit those draft implementing technical standards to the Commission by 10 October 2021.]

[EU version only:  Power is conferred on the Commission to adopt the implementing technical standards referred to in this paragraph in accordance with Article 15 of Regulation (EU) No 1095/2010.]

Related ITS

Article 28

Third party verifying STS compliance

1. [EU versionA third party as referred to in Article 27(2) shall be authorised by the competent authority to assess the compliance of securitisations with the STS criteria provided for in Articles 19 to 22, Articles 23 to 26, or Articles 26a to 26e.]  [UK version:  A third party referred to in Article 27(2) shall be authorised by the FCA to assess the compliance of securitisations with the STS criteria provided for in Articles 19 to 22 or Articles 23 to 26.]  The [EU version:  competent authority] [UK version:  FCA] shall grant the authorisation if the following conditions are met:

(a)  the third party only charges non-discriminatory and cost-based fees to the originators, sponsors or SSPEs involved in the securitisations which the third party assesses without differentiating fees depending on, or correlated to, the results of its assessment;

(b)  the third party is neither a regulated entity as defined in point (4) of Article 2 of Directive 2002/87/EC [Financial Conglomerates Directive] nor a credit rating agency as defined in [EU version only:  point (b) of] Article 3(1) of Regulation (EC) No 1060/2009 [Credit Rating Agencies Regulation], and the performance of the third party’s other activities does not compromise the independence or integrity of its assessment;

(c)  the third party shall not provide any form of advisory, audit or equivalent service to the originator, sponsor or SSPE involved in the securitisations which the third party assesses;

(d)  the members of the management body of the third party have professional qualifications, knowledge and experience that are adequate for the task of the third party and they are of good repute and integrity;

(e)  the management body of the third party includes at least one third, but no fewer than two, independent directors;

(f)  the third party takes all necessary steps to ensure that the verification of STS compliance is not affected by any existing or potential conflicts of interest or business relationship involving the third party, its shareholders or members, managers, employees or any other natural person whose services are placed at the disposal or under the control of the third party. To that end, the third party shall establish, maintain, enforce and document an effective internal control system governing the implementation of policies and procedures to identify and prevent potential conflicts of interest. Potential or existing conflicts of interest which have been identified shall be eliminated or mitigated and disclosed without delay. The third party shall establish, maintain, enforce and document adequate procedures and processes to ensure the independence of the assessment of STS compliance. The third party shall periodically monitor and review those policies and procedures in order to evaluate their effectiveness and assess whether it is necessary to update them; and

(g)  the third party can demonstrate that it has proper operational safeguards and internal processes that enable it to assess STS compliance.

The [EU version:  competent authority] [UK version:  FCA] shall withdraw the authorisation when it considers the third party to be materially non-compliant with the first subparagraph.

2.  A third party authorised in accordance with paragraph 1 shall notify [EU version:  its competent authority] [UK version:  the FCA] without delay of any material changes to the information provided under that paragraph, or any other changes that could reasonably be considered to affect the assessment of [EU version:  its competent authority] [UK version:  the FCA].

3.  [EU version:  The competent authority] [UK version:  The FCA] may charge cost-based fees to the third party referred to in paragraph 1, in order to cover necessary expenditure relating to the assessment of applications for authorisation and to the subsequent monitoring of compliance with the conditions set out in paragraph 1.

4.  [EU version:  ESMA shall develop draft regulatory] [UK version: the FCA may make]  technical standards specifying the information to be provided to [EU version:  the competent authorities] [[UK version:  it] in the application for the authorisation of a third party in accordance with paragraph 1.

[EU version only:  ESMA shall submit those draft regulatory technical standards to the Commission by 18 July 2018.]

[EU version only:  The Commission is empowered to supplement this Regulation by adopting the regulatory technical standards referred to in this paragraph in accordance with Articles 10 to 14 of Regulation (EU) No 1095/2010.]

Related recital: Recital (34)

Commentary: Reliance on third party verification agents

Chapter 5

STS equivalent non-UK securitisations

Article 28A

No text yet.

Chapter 6

Supervision

Article 29

Designation of competent authorities

[EU version:  

1.  Compliance with the obligations set out in Article 5 of this Regulation shall be  supervised by the following competent authorities in accordance with the powers granted by the relevant legal acts:

(a)  for insurance and reinsurance undertakings, the competent authority designated in accordance with point (10) of Article 13 of Directive 2009/138/EC [Solvency II] ;

(b)  for alternative investment fund managers, the competent authority responsible designated in accordance with Article 44 of 2011/61/EU [AIFM Directive];

(c)  for UCITS and UCITS management companies, the competent authority designated in accordance with Article 97 of Directive 2009/65/EC [UCITS Directive];

(d)  for institutions for occupational retirement provision, the competent authority designated in accordance with point (g) of Article 6 of Directive 2003/41/EC of the European Parliament and of the Council;

(e)  for credit institutions or investments firms, the competent authority designated in accordance with Article 4 of Directive 2013/36/EU [CRD IV], including the ECB with regard to specific tasks conferred on it by Regulation (EU) No 1024/2013.]  

2.  Competent authorities responsible for the supervision of sponsors in accordance with Article 4 of Directive 2013/36/EU [CRD IV], including the ECB with regard to specific tasks conferred on it by Regulation (EU) No 1024/2013, shall supervise compliance by sponsors with the obligations set out in Articles 6, 7, 8 and 9 of this Regulation.

3.  Where originators, original lenders and SSPEs are supervised entities in accordance with Directives 2003/41/EC, 2009/138/EC [Solvency II] , 2009/65/EC [UCITS Directive],  2011/61/EU [AIFM Directive] and 2013/36/EU [CRD IV] and Regulation (EU) No 1024/2013, the relevant competent authorities designated according to those acts, including the ECB with regard to specific tasks conferred on it by Regulation (EU) No 1024/2013, shall supervise compliance with the obligations set out in Articles 6, 7, 8 and 9 of this Regulation.]

[UK version: 

1.  Compliance with the obligations set out in Article 5 of this Regulation is to be supervised as follows - 

(a)  where the institutional investor is an insurance undertaking or a reinsurance undertaking, by the PRA; 

(b)  where the institutional investor is an AIFM which markets or manages AIFs in the United Kingdom, by the FCA;

(c)  where the institutional investor is a management company or a UCITS which is an authorised open ended investment company as defined in section 237(3) of the 2000 Act, by the FCA; 

(d)  where the institutional investor is an occupational pension scheme, by the  pensions Regulator;

(e) where the institutional investor is a CRR firm, by the PRA;

(f) where the institutional investor is an FCA investment firm, by the FCA.

 2.  Compliance by a sponsor with the obligations set out in Articles 6, 7, 8 and 9 of this Regulation is to be supervised by the PRA, if the sponsor is a PRA-authorised person, and in any other case by the FCA.

3.  Paragraph 3A applies where an originator, original lender or SSPE is an insurance undertaking or a reinsurance undertaking, an AIFM, a management company, a UCITS which is an authorised open ended investment company, an institution for occupational retirement provision a CRR firm or an FCA investment firm.

3A.  Where this paragraph applies, compliance with the obligations set out in Articles 6, 7, 8 and 9 of this Regulation is to be supervised as follows - 

(a)  where the originator, original lender or SSPE is a PRA-authorised person, by the PRA;

(b)  where the originator, original lender or SSPE is an institution for occupational retirement provision, by the Pensions Regulator; and

(c)  in any other case by the FCA.

3B. In paragraphs (1) to (3A) -

(a)  ‘AIF’ and AIFM’ have the meaning given in regulations 3 and 4(1) of the Alternative Investment Fund Managers Regulation 2013;

(b) ‘CRR firm’ has the meaning given by Article 4(1)(2A) of Regulation (EU) No 575/2013;

(ba) ‘FCA investment firm’ has the meaning given by Article 4(1)(2AB) of Regulation (EU) No 575/2013;

(c)  ‘occupational pension scheme’ has the meaning given in section 1(1) of the Pension Schemes Act 1993; 

(d)  ‘insurance undertaking’, ‘reinsurance undertaking’ and ‘PRA-authorised person’ have the meaning given in section 417(1) of the 2000 Act;

(e)  ‘management company’ has the meaning given in section 237(2) of the 2000 Act; and

(f)  ‘UCITS’ has the meaning given in section 236A of the 2000 Act.]

4.  For originators, original lenders and SSPEs established in [EU version:  the Union and not covered by the Union legislative acts referred to in paragraph 3, Member States] [UK version:  United Kingdom in relation to which paragraph 3A does not apply, the Treasury] shall designate one or more competent authorities to supervise compliance with the obligations set out in Articles 6, 7, 8 and 9.  [EU version only:  Member States shall inform the Commission and ESMA of the designation of competent authorities pursuant to this paragraph by 1 January 2019.]  That obligation shall not apply with regard to those entities that are merely selling exposures under an ABCP programme or another securitisation transaction or scheme and are not actively originating exposures for the primary purpose of securitising them on a regular basis.

5.  [EU version:  Member States] [ UK version:  The Treasury] shall designate one or more competent authorities to supervise the compliance of originators, sponsors and SSPEs with Articles 18 to 27, and the compliance of third parties with Article 28.  [EU versionMember States shall inform the Commission and ESMA of the designation of competent authorities pursuant to this paragraph by 10 October 2021. Until the designation of a competent authority to supervise the compliance with the requirements set out in Articles 26a to 26e, the competent authority designated to supervise the compliance with the requirements set out in Articles 18 to 27 applicable at 8 April 2021 shall also supervise the compliance with the requirements set out in Articles 26a to 26e.]

6.  Paragraph 5 of this Article shall not apply with regard to those entities that are merely selling exposures under an ABCP programme or other securitisation transaction or scheme and are not actively originating exposures for the primary purpose of securitising them on a regular basis. In such a case, the originator or sponsor shall verify that those entities fulfil the relevant obligations set out in Articles 18 to 27.

[EU verson only: 

7.  ESMA shall ensure the consistent application and enforcement of the obligations set out in Articles 18 to 27 of this Regulation in accordance with the tasks and powers set out in Regulation (EU) No 1095/2010. ESMA shall monitor the Union securitisation market in accordance with Article 39 of Regulation (EU) No 600/2014 of the European Parliament and the Council(34) and apply, where appropriate, its temporary intervention powers in accordance with Article 40 of Regulation (EU) No 600/2014.

8.  ESMA shall publish and keep up-to-date on its website a list of the competent authorities referred to in this Article.]

Article 30

Powers of the competent authorities

[EU version only:  1.  Each Member State shall ensure that the competent authority designated in accordance with Article 29(1) to (5) has the supervisory, investigatory and sanctioning powers necessary to fulfil its duties under this Regulation.]

2.  [EU version:  The competent authority] [UK version:  Competent authorities] shall regularly review the arrangements, processes and mechanisms that originators, sponsors, SSPEs and original lenders have implemented in order to comply with this Regulation.

The review referred to in the first subparagraph shall include:

[UK version:  (a)  the processes and mechanisms to correctly measure and retain the material net economic interest on an ongoing basis, the gathering and timely disclosure of all information to be made available in accordance with Article 7 and the credit-granting criteria in accordance with Article 9;]

[EU version(a)       the processes and mechanisms to correctly measure and retain the material net economic interest on an ongoing basis in accordance with Article 6(1) and the gathering and timely disclosure of all information to be made available in accordance with Article 7;]

[EU version only

(aa)     for exposures that are not part of an NPE Securitisation:

(i)            the credit-granting criteria applied to performing exposures in accordance with Article 9;

(ii)           the sound standards for selection and pricing applied to underlying exposures that are non-performing exposures as referred to in the second subparagraph of Article 9(1);]

(b)  for STS securitisations which are not securitisations within an ABCP programme, the processes and mechanisms to ensure compliance with Article 20(7) to (12), Article 21(7), and Article 22; and

(c)  for STS securitisations which are securitisations within an ABCP programme, the processes and mechanisms to ensure, with regard to ABCP transactions, compliance with Article 24 and, with regard to ABCP programmes, compliance with Article 26(7) and (8).

[EU version only:  (d)       for NPE securitisations, the processes and mechanisms to ensure compliance with Article 9(1) preventing any abuse of the derogation provided for in the second subparagraph of Article 9(1);

(e)          for STS on-balance-sheet securitisations, the processes and mechanisms to ensure compliance with Articles 26b to 26e.]

3.  Competent authorities shall require that risks arising from securitisation transactions, including reputational risks, are evaluated and addressed through appropriate policies and procedures of originators, sponsors, SSPEs and original lenders.

4.  [EU version:  The competent authority] [UK version:  Competent authorities] shall monitor, as applicable, the specific effects that the participation in the securitisation market has on the stability of the financial institution that operates as original lender, originator, sponsor or investor as part of its prudential supervision in the field of securitisation, taking into account, without prejudice to stricter sectoral regulation:

(a)  the size of capital buffers;

(b)  the size of the liquidity buffers; and

(c)  the liquidity risk for investors due to a maturity mismatch between their funding and investments.

[EU version:  In cases where the competent authority identifies a material risk to financial stability of a financial institution or the financial system as a whole, irrespective of its obligations under Article 36, it shall take action to mitigate those risks, report its findings to the designated authority competent for macroprudential instruments under Regulation (EU) No 575/2013 [CRR] and the ESRB.]

[UK version:  Where a competent authority identifies a material risk to the financial stability of a financial institution or to the financial system as a whole, it must take action to mitigate those risks and, unless it is the PRA, report its findings to the Bank of England.]

[EU version:  5.  The competent authority shall monitor any possible circumvention of the obligations set out in Article 6(2) and ensure that sanctions are applied in accordance with Articles 32 and 33.]

[UK version:  5.  Competent authorities shall monitor any suspected circumvention of the obligations set out in Article 6(2) and ensure that sanctions are applied for a  circumvention.]

Related recital: Recital (35)

Article 31

[EU version only: 

Macroprudential oversight of the securitisation market

Within the limits of its mandate, the ESRB shall be responsible for the macroprudential oversight of the Union’s securitisation market.

In order to contribute to the prevention or mitigation of systemic risks to financial stability in the Union that arise from developments within the financial system and taking into account macroeconomic developments, so as to avoid periods of widespread financial distress, the ESRB shall continuously monitor developments in the securitisation markets. Where the ESRB considers it necessary, and at least every three years, the ESRB shall, in cooperation with EBA, publish a report on the financial stability implications of the securitisation market in order to highlight financial stability risks.

Without prejudice to paragraph 2 of this Article and to the report referred to in Article 44, the ESRB shall, in close cooperation with the ESAs, publish by 31 December 2022 a report assessing the impact of the introduction of STS on-balance-sheet securitisations on financial stability, and any potential systemic risks, such as risks created by concentration and inter-connectedness among non-public credit protection sellers.

The ESRB report referred to in the first subparagraph shall take into account the specific features of synthetic securitisation, namely its typical bespoke and private character in financial markets, and examine whether the treatment of STS on-balance-sheet securitisation is conducive to overall risk reduction in the financial system and to better financing of the real economy.

When preparing its report, the ESRB shall use a variety of relevant data sources, such as:

(a)          data collected by competent authorities in accordance with Article 7(1);

(b)          the outcome of reviews carried out by competent authorities in accordance with Article 30(2); and

(c)           data held in securitisation repositories in accordance with Article 10.

In accordance with Article 16 of Regulation (EU) No 1092/2010, the ESRB shall provide warnings and, where appropriate, issue recommendations for remedial action in response to the risks referred to in paragraphs 2 and 3 of this Article, including on the appropriateness of modifying the risk-retention levels, or other macroprudential measures.

Within three months of the date of transmission of the recommendation, the addressee of the recommendation shall, in accordance with Article 17 of Regulation (EU) No 1092/2010, communicate to the European Parliament, the Council, the Commission and the ESRB the actions it has taken in response to the recommendation and shall provide adequate justification for any inaction.]

Article 32

[EU version only:  

Administrative sanctions and remedial measures

1.  Without prejudice to the right for Member States to provide for and impose criminal sanctions pursuant to Article 34, Member States shall lay down rules establishing appropriate administrative sanctions, in the case of negligence or intentional infringement, and remedial measures, applicable at least to situations where:

(a)  an originator, sponsor or original lender has failed to meet the requirements provided for in Article 6;

(b)  an originator, sponsor or SSPE has failed to meet the requirements provided for in Article 7;

(c)  an originator, sponsor or original lender has failed to meet the criteria provided for in Article 9;

(d)  an originator, sponsor or SSPE has failed to meet the requirements provided for in Article 18;

[UK version:  (e)  a securitisation is designated as STS and an originator, sponsor or SSPE of that securitisation has failed to meet the requirements provided for in Articles 19 to 22 or Articles 23 to 26;]

[EU version:  (e)  a securitisation is designated as STS and an originator, sponsor or SSPE of that securitisation has failed to meet the requirements provided for in Articles 19 to 22, Articles 23 to 26 or Articles 26a to 26e;]

(f)  an originator or sponsor makes a misleading notification pursuant to Article 27(1);

(g)  an originator or sponsor has failed to meet the requirements provided for in Article 27(4); or

(h)  a third party authorised pursuant to Article 28 has failed to notify material changes to the information provided in accordance with Article 28(1), or any other changes that could reasonably be considered to affect the assessment of its competent authority.

Member States shall also ensure that administrative sanctions and/or remedial measures are effectively implemented.

Those sanctions and measures shall be effective, proportionate and dissuasive.

2.  Member States shall confer on competent authorities the power to apply at least the following sanctions and measures in the event of the infringements referred to in paragraph 1:

(a)  a public statement which indicates the identity of the natural or legal person and the nature of the infringement in accordance with Article 37;

(b)  an order requiring the natural or legal person to cease the conduct and to desist from a repetition of that conduct;

(c)  a temporary ban preventing any member of the originator’s, sponsor’s or SSPE’s management body or any other natural person held responsible for the infringement from exercising management functions in such undertakings;

[UK version:  (d)  in the case of an infringement as referred to in point (e) or (f) of the first subparagraph of paragraph 1 of this Article a temporary ban preventing the originator and sponsor from notifying under Article 27(1) that a securitisation meets the requirements set out in Articles 19 to 22 or Articles 23 to 26;]

[EU version(d)       in the case of an infringement as referred to in point (e) or (f) of the first subparagraph of paragraph 1 of this Article, a temporary ban preventing the originator and sponsor from notifying under Article 27(1) that a securitisation meets the requirements set out in Articles 19 to 22, Articles 23 to 26 or Articles 26a to 26e;]

(e)  in the case of a natural person, maximum administrative pecuniary sanctions of at least EUR 5 000 000 or, in the Member States whose currency is not the euro, the corresponding value in the national currency on 17 January 2018;

(f)  in the case of a legal person, maximum administrative pecuniary sanctions of at least EUR 5 000 000, or in the Member States whose currency is not the euro, the corresponding value in the national currency on 17 January 2018 or of up to 10 % of the total annual net turnover of the legal person according to the last available accounts approved by the management body; where the legal person is a parent undertaking or a subsidiary of the parent undertaking which has to prepare consolidated financial accounts in accordance with Directive 2013/34/EU of the European Parliament and of the Council (35), the relevant total annual net turnover shall be the total net annual turnover or the corresponding type of income in accordance with the relevant accounting legislative acts according to the last available consolidated accounts approved by the management body of the ultimate parent undertaking;

(g)  maximum administrative pecuniary sanctions of at least twice the amount of the benefit derived from the infringement where that benefit can be determined, even if that exceeds the maximum amounts in points (e) and (f);

[UK version:  (h)  in the case of an infringement as referred to in point (h) of the first subparagraph of paragraph 1 of this Article, a temporary withdrawal of the authorisation referred to in Article 28 for the third party authorised to check the compliance of a securitisation with Articles 19 to 22 or Articles 23 to 26.]

[EU version(h)  in the case of an infringement as referred to in point (h) of the first subparagraph of paragraph 1 of this Article, a temporary withdrawal of the authorisation referred to in Article 28 for the third party authorised to assess the compliance of a securitisation with Articles 19 to 22, Articles 23 to 26 or Articles 26a to 26e.]

3.  Where the provisions referred to in the first paragraph apply to legal persons, Member States shall confer on competent authorities the power to apply the administrative sanctions and remedial measures set out in paragraph 2, subject to the conditions provided for in national law, to members of the management body, and to other individuals who under national law are responsible for the infringement.

4.  Member States shall ensure that any decision imposing administrative sanctions or remedial measures set out in paragraph 2 is properly reasoned and is subject to a right of appeal.]

Commentary: Sanctions for breach

Article 33

[EU version only:

Exercise of the power to impose administrative sanctions and remedial measures

1.  Competent authorities shall exercise the powers to impose administrative sanctions and remedial measures referred to in Article 32 in accordance with their national legal frameworks, as appropriate:

(a)  directly;

(b)  in collaboration with other authorities;

(c)  under their responsibility by delegation to other authorities;

(d)  by application to the competent judicial authorities.

2.  Competent authorities, when determining the type and level of an administrative sanction or remedial measure imposed under Article 32, shall take into account the extent to which the infringement is intentional or results from negligence and all other relevant circumstances, including, where appropriate:

(a)  the materiality, gravity and the duration of the infringement;

(b)  the degree of responsibility of the natural or legal person responsible for the infringement;

(c)  the financial strength of the responsible natural or legal person;

(d)  the importance of profits gained or losses avoided by the responsible natural or legal person, insofar as they can be determined;

(e)  the losses for third parties caused by the infringement, insofar as they can be determined;

(f)  the level of cooperation of the responsible natural or legal person with the competent authority, without prejudice to the need to ensure disgorgement of profits gained or losses avoided by that person;

(g)  previous infringements by the responsible natural or legal person.]

Article 34

[EU version only:

Criminal sanctions

1.  Member States may decide not to lay down rules for administrative sanctions or remedial measures for infringements which are subject to criminal sanctions under their national law.

2.  Where Member States have chosen, in accordance with paragraph 1 of this Article, to lay down criminal sanctions for the infringement referred to in Article 32(1), they shall ensure that appropriate measures are in place so that competent authorities have all the necessary powers to liaise with judicial, prosecuting, or criminal justice authorities within their jurisdiction to receive specific information related to criminal investigations or proceedings commenced for the infringements referred to in Article 32(1), and to provide the same information to other competent authorities as well as ESMA, the EBA and EIOPA to fulfil their obligation to cooperate for the purposes of this Regulation.]

Article 35

[EU version only:

Notification duties

Member States shall notify the laws, regulations and administrative provisions implementing this Chapter, including any relevant criminal law provisions, to the Commission, ESMA, the EBA and EIOPA by 18 January 2019. Member States shall notify the Commission, ESMA, the EBA and EIOPA without undue delay of any subsequent amendments thereto.]

Article 36

[EU version only:

Cooperation between competent authorities and the ESAs

1.  The competent authorities referred to in Article 29 and ESMA, the EBA and EIOPA shall cooperate closely with each other and exchange information to carry out their duties pursuant to Article 30 to 34.

2.  Competent authorities shall closely coordinate their supervision in order to identify and remedy infringements of this Regulation, develop and promote best practices, facilitate collaboration, foster consistency of interpretation and provide cross-jurisdictional assessments in the event of any disagreements.

3.  A specific securitisation committee shall be established within the framework of the Joint Committee of the European Supervisory Authorities, within which competent authorities shall closely cooperate, in order to carry out their duties pursuant to Articles 30 to 34.

4.  Where a competent authority finds that one or more of the requirements under Articles 6 to 27 have been infringed or has reason to believe so, it shall inform the competent authority of the entity or entities suspected of such infringement of its findings in a sufficiently detailed manner. The competent authorities concerned shall closely coordinate their supervision in order to ensure consistent decisions.

5.  Where the infringement referred to in paragraph 4 of this Article concerns, in particular, an incorrect or misleading notification pursuant to Article 27(1), the competent authority finding that infringement shall notify without delay, the competent authority of the entity designated as the first contact point under Article 27(1) of its findings. The competent authority of the entity designated as the first contact point under Article 27(1) shall in turn inform ESMA, the EBA and EIOPA and shall follow the procedure provided for in paragraph 6 of this Article.

6.  Upon receipt of the information referred to in paragraph 4, the competent authority of the entity suspected of the infringement shall take within 15 working days any necessary action to address the infringement identified and notify the other competent authorities involved, in particular those of the originator, sponsor and SSPE and the competent authorities of the holder of a securitisation position, when known. When a competent authority disagrees with another competent authority regarding the procedure or content of its action or inaction, it shall notify all other competent authorities involved about its disagreement without undue delay. If that disagreement is not resolved within three months of the date on which all competent authorities involved are notified, the matter shall be referred to ESMA in accordance with Article 19 and, where applicable, Article 20 of Regulation (EU) No 1095/2010. The conciliation period referred to in Article 19(2) of Regulation (EU) No 1095/2010 shall be one month.

Where the competent authorities concerned fail to reach an agreement within the conciliation phase referred to in the first subparagraph, ESMA shall take the decision referred to in Article 19(3) of Regulation (EU) No 1095/2010 within one month. During the procedure set out in this Article, a securitisation appearing on the list maintained by ESMA pursuant to Article 27 of this Regulation shall continue to be considered as STS pursuant to Chapter 4 of this Regulation and shall be kept on such list.

Where the competent authorities concerned agree that the infringement is related to non-compliance with Article 18 in good faith, they may decide to grant the originator, sponsor and SSPE a period of up to three months to remedy the identified infringement, starting from the day the originator, sponsor and SSPE were informed of the infringement by the competent authority. During this period, a securitisation appearing on the list maintained by ESMA pursuant to Article 27 shall continue to be considered as STS pursuant to Chapter 4 and shall be kept on such list.

Where one or more of the competent authorities involved is of the opinion that the infringement is not appropriately remedied within the period set out in third subparagraph, first subparagraph shall apply.]

Related recital: Recital (37)

7  Three years from the date of application of this Regulation, ESMA shall conduct a peer review in accordance with Article 30 of Regulation (EU) No 1095/2010 on the implementation of the criteria provided for in Articles 19 to 26 of this Regulation.

8.  ESMA shall, in close cooperation with the EBA and EIOPA, develop draft regulatory technical standards to specify the general cooperation obligation and the information to be exchanged under paragraph 1 and the notification obligations pursuant to paragraphs 4 and 5.

ESMA shall, in close cooperation with the EBA and EIOPA, submit those draft regulatory technical standards to the Commission by 18 January 2019.

The Commission is empowered to supplement this Regulation by adopting the regulatory technical standards referred to in this paragraph in accordance with Articles 10 to 14 of Regulation (EU) No 1095/2010.

Related recital: Recital (36)

Article 37

[EU version only:

Publication of administrative sanctions

1.  Member States shall ensure that competent authorities publish on their official websites, without undue delay and as a minimum, any decision imposing an administrative sanction against which there is no appeal and which is imposed for infringement of Article 6, 7, 9 or 27(1) after the addressee of the sanction has been notified of that decision.

2.  The publication referred to in paragraph 1 shall include information on the type and nature of the infringement and the identity of the persons responsible and the sanctions imposed.

3.  Where the publication of the identity, in the case of legal persons, or of the identity and personal data, in the case of natural persons is considered by the competent authority to be disproportionate following a case-by-case assessment, or where the competent authority considers that the publication jeopardises the stability of financial markets or an on-going criminal investigation, or where the publication would cause, insofar as it can be determined, disproportionate damages to the person involved, Member States shall ensure that competent authorities either:

(a)  defer the publication of the decision imposing the administrative sanction until the moment where the reasons for non-publication cease to exist;

(b)  publish the decision imposing the administrative sanction on an anonymous basis, in accordance with national law; or

(c)  not publish at all the decision to impose the administrative sanction in the event that the options set out in points (a) and (b) are considered to be insufficient to ensure:

(d)  that the stability of financial markets would not be put in jeopardy; or

(e)  the proportionality of the publication of such decisions with regard to measures which are deemed to be of a minor nature.

4.  In the case of a decision to publish a sanction on an anonymous basis, the publication of the relevant data may be postponed. Where a competent authority publishes a decision imposing an administrative sanction against which there is an appeal before the relevant judicial authorities, competent authorities shall also immediately add on their official website that information and any subsequent information on the outcome of such appeal. Any judicial decision annulling a decision imposing an administrative sanction shall also be published.

5.  Competent authorities shall ensure that any publication referred to in paragraphs 1 to 4 shall remain on their official website for at least five years after its publication. Personal data contained in the publication shall only be kept on the official website of the competent authority for the period which is necessary in accordance with the applicable data protection rules.

6.  Competent authorities shall inform ESMA of all administrative sanctions imposed, including, where appropriate, any appeal in relation thereto and the outcome thereof.

7.  ESMA shall maintain a central database of administrative sanctions communicated to it. That database shall be only accessible to ESMA, the EBA, EIOPA and the competent authorities and shall be updated on the basis of the information provided by the competent authorities in accordance with paragraph 6.]

Chapter 7

Amendments

Article 38

[EU version only:

Amendment to Directive 2009/65/EC [UCITS Directive]

Article 50a of Directive 2009/65/EC [UCITS Directive] is replaced by the following:

‘Article 50a

Where UCITS management companies or internally managed UCITS are exposed to a securitisation that no longer meets the requirements provided for in the Regulation (EU) 2017/2402 of the European Parliament and of the Council (*1), they shall, in the best interest of the investors in the relevant UCITS, act and take corrective action, if appropriate.]

Related recital: Recital (39)

Article 39

[EU version only:

Amendment to Directive 2009/138/EC [Solvency II]

Directive 2009/138/EC [Solvency II] is amended as follows:

  1. in Article 135, paragraphs 2 and 3 are replaced by the following:

    ‘2. The Commission shall adopt delegated acts in accordance with Article 301a of this Directive supplementing this Directive by laying down the specifications for the circumstances under which a proportionate additional capital charge may be imposed when the requirements provided for in Articles 5 or 6 of Regulation (EU) 2017/2402 of the European Parliament and of the Council (*2) have been breached, without prejudice to Article 101(3) of this Directive.

    3. In order to ensure consistent harmonisation in relation to paragraph 2 of this Article, EIOPA shall, subject to Article 301b, develop draft regulatory technical standards to specify the methodologies for the calculation of a proportionate additional capital charge referred to therein.

    The Commission is empowered to supplement this Directive by adopting the regulatory technical standards referred to in this paragraph in accordance with Articles 10 to 14 of Regulation (EU) No 1094/2010.'
  1. Article 308b(11) is deleted.]

Related recital: Recital (39)

Article 40

Amendment to Regulation (EC) No 1060/2009 [Credit Rating Agencies Regulation]

Regulation (EC) No 1060/2009 [Credit Rating Agencies Regulation] is amended as follows:

  1. in recitals 22 and 41, in Article 8c and in point 1 of Part II of Section D of Annex I, ‘structured finance instrument’ is replaced by ‘securitisation instrument’;
  1. in recitals 34 and 40, in Articles 8(4), 8c, 10(3) and 39(4) as well as in the fifth paragraph of point 2 of Section A of Annex I, point 5 of Section B of Annex I, the title and point 2 of Part II of Section D of Annex I, points 8, 24 and 45 of Part I of Annex III and point 8 of Part III of Annex III, ‘structured finance instruments’ is replaced by ‘securitisation instruments’;
  1. in Article 1, the second subparagraph is replaced by the following:

    ‘This Regulation also lays down obligations for issuers and related third parties established in the Union regarding securitisation instruments.’
  1. in Article 3(1), point (l) is replaced by the following:

    ‘(l) “securitisation instrument” means a financial instrument or other assets resulting from a securitisation transaction or scheme referred to in Article 2(1) of Regulation (EU) 2017/2402 (Securitisation Regulation);’
  1. Article 8b is deleted;
  1. in point (b) of Article 4(3), point (b) of the second subparagraph of Article 5(6) and Article 25a, the reference to Article 8b is deleted.

Related recital: Recital (39)

Article 41

[EU version only:

Amendment to Directive 2011/61/EU [AIFM Directive]

Article 17 of Directive 2011/61/EU [AIFM Directive] is replaced by the following:

‘Article 17

Where AIFMs are exposed to a securitisation that no longer meets the requirements provided for in Regulation (EU) 2017/2402 of the European Parliament and of the Council, they shall, in the best interest of the investors in the relevant AIFs, act and take corrective action, if appropriate.']

Related recital: Recital (39)

Article 42

Amendment to Regulation (EU) No 648/2012 [EMIR]

Regulation (EU) No 648/2012 [EMIR] is amended as follows:

  1. in Article 2, the following points are added:

    ‘(30)  “covered bond” means a bond meeting the requirements of Article 129 of Regulation (EU) No 575/2013[CRR].

    (31)  “covered bond entity” means the covered bond issuer or cover pool of a covered bond.’
  1. in Article 4, the following paragraphs are added:

    ‘5.    Paragraph 1 of this Article shall not apply with respect to OTC derivative contracts that are concluded by covered bond entities in connection with a covered bond, or by a securitisation special purpose entity in connection with a securitisation, within the meaning of Regulation (EU) 2017/2402 of the European Parliament and of the Council (*4) provided that:
    1. in the case of securitisation special purpose entities, the securitisation special purpose entity shall solely issue securitisations that meet the requirements of Article 18, and of Articles 19 to 22 or 23 to 26 of Regulation (EU) 2017/2402 (the Securitisation Regulation);
    2. the OTC derivative contract is used only to hedge interest rate or currency mismatches under the covered bond or securitisation; and
    3.   the arrangements under the covered bond or securitisation adequately mitigate counterparty credit risk with respect to the OTC derivative contracts concluded by the covered bond entity or securitisation special purpose entity in connection with the covered bond or securitisation.

6.  In order to ensure consistent application of this Article, and taking into account the need to prevent regulatory arbitrage, the ESAs shall develop draft regulatory technical standards specifying criteria for establishing which arrangements under covered bonds or securitisations adequately mitigate counterparty credit risk, within the meaning of paragraph 5.

The ESAs shall submit those draft regulatory technical standards to the Commission by 18 July 2018.

Power is delegated to the Commission to supplement this Regulation by adopting the regulatory technical standards referred to in this paragraph in accordance with Articles 10 to 14 of Regulations (EU) No 1093/2010, (EU) No 1094/2010 or (EU) No 1095/2010.'


  1. in Article 11, paragraph 15 is replaced by the following:

    ‘15. In order to ensure consistent application of this Article, the ESAs shall develop common draft regulatory technical standards specifying:
    1. the risk-management procedures, including the levels and type of collateral and segregation arrangements, required for compliance with paragraph 3;
    2. the procedures for the counterparties and the relevant competent authorities to be followed when applying exemptions under paragraphs 6 to 10;
    3. the applicable criteria referred to in paragraphs 5 to 10 including in particular what is to be considered as a practical or legal impediment to the prompt transfer of own funds and repayment of liabilities between the counterparties.

The level and type of collateral required with respect to OTC derivative contracts that are concluded by covered bond entities in connection with a covered bond, or by a securitisation special purpose entity in connection with a securitisation within the meaning of this Regulation and meeting the conditions of Article 4(5) of this Regulation and the requirements set out in Article 18, and in Articles 19 to 22 or 23 to 26 of Regulation (EU) 2017/2402 (the Securitisation Regulation) shall be determined taking into account any impediments faced in exchanging collateral with respect to existing collateral arrangements under the covered bond or securitisation.

The ESAs shall submit those draft regulatory technical standards to the Commission by 18 July 2018.

Depending on the legal nature of the counterparty, power is delegated to the Commission to adopt the regulatory technical standards referred to in this paragraph in accordance with Articles 10 to 14 of Regulations (EU) No 1093/2010, (EU) No 1094/2010 or (EU) No 1095/2010.’


 Related articles: Article (39)Article (40)Article (41)

Article 43

Transitional provisions

1.  This Regulation shall apply to securitisations the securities of which are issued on or after 1 January 2019, subject to paragraphs 7 and 8.

Related recital: Recital (47)

2.  In respect of securitisations the securities of which were issued before 1 January 2019, originators, sponsors and SSPEs may use the designation ‘STS’ or ‘simple, transparent and standardised’, or a designation that refers directly or indirectly to those terms, only where the requirements set out in Article 18 and the conditions set out in paragraph 3 of this Article are complied with.

Related recital: Recital (48)

3.  Securitisations the securities of which were issued before 1 January 2019, other than securitisation positions relating to an ABCP transaction or an ABCP programme, shall be considered ‘STS’ provided that:

(a)  they met, at the time of issuance of those securities, the requirements set out in Article 20(1) to (5), (7) to (9) and (11) to (13) and Article 21(1) and (3); and

(b)  they meet, as of the time of notification pursuant to Article 27(1), the requirements set out in Article 20(6) and (10), Article 21(2) and (4) to (10) and Article 22(1) to (5).

4.  For the purposes of point (b) of paragraph 3, the following shall apply:

(a)  in Article 22(2), ‘prior to issuance’ shall be deemed to read ‘prior to notification under Article 27(1)’;

(b)  in Article 22(3), ‘before the pricing of the securitisation’ shall be deemed to read ‘prior to notification under Article 27(1)’;

(c)  in Article 22(5):

(i)  in the second sentence, ‘before pricing’ shall be deemed to read ‘prior to notification under Article 27(1)’;

(ii)  ‘before pricing at least in draft or initial form’ shall be deemed to read ‘prior to notification under Article 27(1)’;

(iii)  the requirement set out in the fourth sentence shall not apply;

(iv)  references to compliance with Article 7 shall be construed as if Article 7 applied to those securitisations notwithstanding Article 43(1).

[UK version only:  4A.  Subject to the second subparagraph, in paragraphs 3 and 4 a reference to a numbered Article is a reference to the Article so numbered of this Regulation as it had effect immediately before exit day, or as it has effect on or after exit day in relation to an EEA State.

In paragraphs 3(b) and 4, in relation to a STS notification made on or after exit day by a person who is established in the United Kingdom, a reference to Article 27(1) is a reference to that Article as it has effect on or after exit day in the United Kingdom.

"STS notification” means notification that a securitisation meets the requirements of Section 1 or Section 2 of Chapter 4. 

5.  In respect of securitisations the securities of which were issued on or after 1 January 2011 but before 1 January 2019 and in respect of securitisations the securities of which were issued before 1 January 2011 where new underlying exposures have been added or substituted after 31 December 2014, the due-diligence requirements as provided for in Regulation (EU) No 575/2013 [CRR], Delegated Regulation Commission Delegated Regulations (EU) 2015/35 [Solvency II Delegated Act] and Delegated Regulation (EU) No 231/2013 [supplementing the AIFM Directive] respectively shall continue to apply in the version applicable on 31 December 2018.

[UK version only:

For the purposes of this paragraph, Articles 407 and 410 of Regulation (EU) No 575/2013(a) (which set out, in part, requirements for due diligence) have effect with the following modifications - 

(a)  in Article 407 (additional risk weight) and Article 410 (uniform condition of application) a reference to Article 405 (retained interest of the issuer) is a reference to that Article as modified by paragraph 6;

(b)  in Article 407, in the first subparagraph ignore the reference to Article 409; and

(c)  in Article 410 - 

(i)  ignore paragraph 1;

(ii)  in paragraph 2 -

(aa)  in the first subparagraph read the opening words as if for “EBA shall develop draft regulatory” there were substituted “The FCA and the PRA may each make”, and ignore point (d);

(bb)  ignore the second and third subparagraphs; and

(iii)  in paragraph 3, - 

(aa)  in the first subparagraph read the opening words as if for “EBA shall develop draft regulatory” there were substituted “The FCA and the PRA may each make”;

(bb)  ignore the second and third subparagraphs.]

Related recital: Recital (49)

6.  In respect of securitisations the securities of which were issued before 1 January 2019 [EU version:  credit institutions or investment firms as defined in points (1) and (2) of Article 4(1) of Regulation (EU) No 575/2013 [CRR], insurance undertakings as defined in point (1) of Article 13 of Directive 2009/138/EC [Solvency II] , reinsurance undertakings as defined in point (4) of Article 13 of Directive 2009/138/EC [Solvency II] and alternative investment fund managers (AIFMs) as defined in point (b) of Article 4(1) of Directive 2011/61/EU [AIFM Directive]] [UK version:  a CRR firm (as defined by Article 4(1)(2A) of Regulation (EU) No 575/2013) as that Regulation had effect on IP completion day, an insurance undertaking (as defined in section 417(1) of the 2000 Act), a reinsurance undertaking (as defined in that section) and an AIFM (as defined by regulation 4(1) of the Alternative Investment Fund Managers Regulation 2013)] shall continue to apply Article 405 of Regulation (EU) No 575/2013 [CRR] and Chapters I, II and III and Article 22 of Delegated Regulation (EU) No 625/2014 [RTS relating to risk retention made under CRR], Articles 254 and 255 of Delegated Regulation  Commission Delegated Regulations (EU) 2015/35[Solvency II Delegated Act] and Article 51 of Delegated Regulation (EU) No 231/2013 [supplementing the AIFM Directive] respectively as in the version applicable on 31 December 2018.

[UK version only:

For the purposes of this paragraph, Article 405 of Regulation (EU) No 575/2013(a) has effect with the following modifications - 

(a)  read paragraph 2 as if - 

(i)  for the first subparagraph there were substituted - 

Where - 

(a)  a mixed financial holding company,

(b)  a UK parent institution which is a credit institution,

(c)  a financial holding company established in the United Kingdom, or

(d)  a subsidiary of such a company or institution, 

as an originator or sponsor, securitises exposures from one or more credit institutions, investment firms or other financial institutions which are included in the scope of supervision on a consolidated basis, the requirement set out in paragraph 1 may be satisfied on the basis of the consolidated situation of the mixed financial holding company, UK parent institution or financial holding company concerned.”;

(ii)  in the second subparagraph for the words from “, in a timely manner” to the end there were substituted “the information needed to satisfy the requirements set out in Article 409, in a timely manner, to the originator or sponsor and, if the originator or sponsor is a subsidiary, to the mixed financial holding company, UK parent institution or financial holding company which is the parent undertaking of the subsidiary”; and

(iii)  after the second subparagraph there were inserted - 

“In this paragraph - 

(a)  ‘credit institution’, ‘financial holding company’, ‘financial institution’, ‘investment firm’, ‘subsidiary’ and ‘UK parent institution’ have the meaning given in Article 4(1) of Regulation (EU) No 575/2013; and

(b)  ‘mixed financial holding company” has the meaning given in regulation 1(2) of the Financial Conglomerates and Other Financial Groups Regulations 2004(b).”; and

(b) in paragraph 3, in point (b) ignore “of Member States”.]

Related recital: Recital (49)

7.  Until the [EU version:  regulatory technical standards to be adopted by the Commission pursuant Article 6(7) of this Regulation apply] [UK version:  FCA and the PRA, acting jointly, have made technical standards pursuant to Article 6(7) of this Regulation], originators, sponsors or the original lender shall, for the purposes of the obligations set out in Article 6 of this Regulation, apply Chapters I, II and III and Article 22 of Delegated Regulation (EU) No 625/2014 [RTS relating to risk retention made under CRR] to securitisations the securities of which are issued on or after 1 January 2019.

Related recital: Recital (49)

8.  Until the [EU version:  regulatory technical standards to be adopted by the Commission pursuant to Article 7(3) of this Regulation apply] [UK version:  FCA and the PRA,acting jointly, have made technical standards pursuant to Article 6(7) of this Regulation], originators, sponsors and SSPEs shall, for the purposes of the obligations set out in points (a) and (e) of the first subparagraph of Article 7(1) of this Regulation, make the information referred to in Annexes I to VIII of Delegated Regulation Commission Delegated Regulations (EU) 2015/35 [Solvency II Delegated Act] available in accordance with Article 7(2) of this Regulation.

Related recital: Recital (49)

9.  For the purpose of this Article, in the case of securitisations which do not involve the issuance of securities, any references to ‘securitisations the securities of which were issued’ shall be deemed to mean ‘securitisations the initial securitisation positions of which are created’, provided that this Regulation applies to any securitisations that create new securitisation positions on or after 1 January 2019.

Article 43a

[EU  version only:] 

Transitional provisions for STS on-balance-sheet securitisations

1.   In respect of synthetic securitisations for which the credit protection agreement has become effective before 9 April 2021, originators and SSPEs may use the designation “STS” or “simple, transparent and standardised”, or a designation that refers directly or indirectly to those terms, only where the requirements set out in Article 18 and the conditions set out in paragraph 3 of this Article are complied with at the time of the notification referred to in Article 27(1).

2.   Until the date of application of the regulatory technical standards referred to in Article 27(6), originators shall, for the purposes of the obligation set out in Article 27(1), make the necessary information available to ESMA in writing.

3.   Securitisations the initial securitisation positions of which were created before 9 April 2021 shall be considered to be STS provided that:

(a) they met, at the time of the creation of the initial securitisation positions, the requirements set out in Articles 26b(1) to (5), (7) to (9) and (11) and (12), Articles 26c(1) and (3), Article 26e(1), the first subparagraph of Article 26e(2), the third and fourth subparagraph of Article 26e(3), and Articles 26e(6) to (9); and

(b) they meet, as of the time of notification pursuant to Article 27(1), the requirements set out in Articles 26b(6) and (10), Articles 26c(2) and (4) to (10), Articles 26d(1) to (5) and the second to seventh subparagraph of Article 26e(2), the first, second and fifth subparagraph of Article 26e(3) and Articles 26e(4) and (5).

4.   For the purposes of point (b) of paragraph 3 of this Article, the following shall apply:

(a) in Article 26d(2), “prior to the closing of the transaction” shall be deemed to read “prior to notification under Article 27(1)”;

(b) in Article 26d(3), “before the pricing of the securitisation” shall be deemed to read “prior to notification under Article 27(1)”;

(c) in Article 26d(5):

(i) in the second sentence, “before pricing” shall be deemed to read “prior to notification under Article 27(1)”;

(ii) in the third sentence, “before pricing at least in draft or initial form” shall be deemed to read “prior to notification under Article 27(1)”;

(iii) the requirement set out in the fourth sentence shall not apply;

(iv) references to compliance with Article 7 shall be construed as if Article 7 applied to those securitisations notwithstanding Article 43(1).]

Article 44

[EU version only:

Reports

By 1 January 2021 and every three years thereafter, the Joint Committee of the European Supervisory Authorities shall publish a report on:

(a)  the implementation of the STS requirements as provided for in Articles 18 to 27;

(b)  an assessment of the actions that competent authorities have undertaken, on material risks and new vulnerabilities that may have materialised and on the actions of market participants to further standardise securitisation documentation;

(c)  the functioning of the due-diligence requirements provided for in Article 5 and the transparency requirements provided for in Article 7 and the level of transparency of the securitisation market in the Union, including on whether the transparency requirements provided for in Article 7 allow the competent authorities to have a sufficient overview of the market to fulfil their respective mandates;

(d)  the requirements provided for in Article 6, including compliance therewith by market participants and the modalities for retaining risk pursuant to Article 6(3);

(e)       the geographical location of SSPEs.

Based on the information provided to it every three years under point (e), the Commission shall provide an assessment of the reasons behind the location choice, including, subject to the availability and accessibility of information, to what extent the existence of a favourable tax and regulatory regime plays a critical role.]

Related recital: Recital (38)

Article 45

[now deleted in both UK and EU versions]

 

Article 45a

[EU version only]:  

Development of a sustainable securitisation framework

1.   By 1 November 2021, EBA, in close cooperation with ESMA and EIOPA, shall publish a report on developing a specific sustainable securitisation framework for the purpose of integrating sustainability-related transparency requirements into this Regulation. That report shall duly assess in particular:

(a) the implementation of proportionate disclosure and due diligence requirements relating to potential positive and adverse impacts of the assets financed by the underlying exposures on sustainability factors;

(b) the content, methodologies and presentation of information in respect of sustainability factors in relation to positive and adverse impacts on environmental, social and governance-related matters;

(c) how to establish a specific sustainable securitisation framework that mirrors or draws upon financial products covered under Articles 8 and 9 of Regulation (EU) 2019/2088 [Sustainable Finance Disclosure Regulation] and takes into account, where appropriate, Regulation (EU) 2020/852 [Taxonomy Regulation] of the European Parliament and of the Council;

(d) possible effects of a sustainable securitisation framework on financial stability, the scaling up of the Union securitisation market and of bank lending capacity.

2.   In drafting the report referred to in paragraph 1 of this Article, EBA shall where relevant, mirror or draw upon the transparency requirements set out in Articles 3, 4, 7, 8 and 9 of Regulation (EU) 2019/2088 [Sustainable Finance Disclosure Regulation] and seek input from the European Environment Agency and the Joint Research Centre of the European Commission.

3.   In conjunction with the review report under Article 46, the Commission shall, based on the EBA report referred to in paragraph 1 of this Article, submit a report to the European Parliament and to the Council on the creation of a specific sustainable securitisation framework. The Commission’s report shall, where appropriate, be accompanied by a legislative proposal.]

Article 46

Review

[EU only: revoked in the UK as from 14th Decemvber 2023]

By 1 January 2022, the Commission shall present a report to the European Parliament and the Council on the functioning of this Regulation, accompanied, if appropriate, by a legislative proposal.

That report shall consider in particular the findings of the reports referred to in Article 44, and shall assess:

(a)  the effects of this Regulation, including the introduction of the STS securitisation designation, on the functioning of the market for securitisations, the contribution of securitisation to the real economy, in particular on access to credit for SMEs and investments, and interconnectedness between financial institutions and the stability of the financial sector;

(b)  the differences in use of the modalities referred to in Article 6(3), based on the data reported pursuant to point (e)(iii) of the first subparagraph of Article 7(1). If the findings show an increase in prudential risks caused by the use of the modalities referred to in points (a), (b), (c) and (e) of Article 6(3), then suitable redress shall be considered;

(c)  whether there has been a disproportionate rise of the number of transactions referred to in the third subparagraph of Article 7(2), since the application of this Regulation and whether market participants structured transactions in a way to circumvent the obligation under Article 7 to make available information through securitisation repositories;

(d)  whether there is a need to extend disclosure requirements under Article 7 to cover transactions referred to in the third subparagraph of Article 7(2) and investor positions;

(e) whether in the area of STS securitisations an equivalence regime could be introduced for third-country originators, sponsors and SSPEs, taking into consideration international developments in the area of securitisation, in particular initiatives on simple, transparent and comparable securitisations;

(f)  the implementation of the requirements set out in Articles 22(4) and 26d(4) and whether they may be extended to securitisation where the underlying exposures are not residential loans or auto loans or leases, with a view to mainstreaming environmental, social and governance disclosure;

(g)  the appropriateness of the third-party verification regime as provided for in Articles 27 and 28, and whether the authorisation regime for third parties provided for in Article 28 fosters sufficient competition among third parties and whether changes in the supervisory framework need to be introduced in order to ensure financial stability; 

(h)  whether there is a need to complement the framework on securitisation set out in this Regulation by establishing a system of limited licensed banks, performing the functions of SSPEs and having the exclusive right to purchase exposures from originators and sell claims backed by the purchased exposures to investors; and

(i)        the possibility for further standardisation and disclosure requirements in view of evolving market practices, namely through the use of templates, for both traditional and synthetic securitisations, including for bespoke private securitisations where no prospectus has to be drawn up in compliance with Regulation (EU) 2017/1129 of the European Parliament and of the Council [Prospectus Regulation.]

Article 47

[EU version only

Exercise of the delegation

1.  The power to adopt delegated acts is conferred on the Commission subject to the conditions provided for in this Article.

2.  The power to adopt delegated acts referred to in Article 16(2) shall be conferred on the Commission for an indeterminate period of time from 17 January 2018.

3.  The delegation of power referred to Article 16(2) may be revoked at any time by the European Parliament or by the Council. A decision to revoke shall put an end to the delegation of the power specified in that decision. It shall take effect the day following the publication of the decision in the Official Journal of the European Union or at a later date specified therein. It shall not affect the validity of any delegated acts already in force.

4.  Before adopting a delegated act, the Commission shall consult experts designated by each Member State in accordance with the principles laid down in the Interinstitutional Agreement of 13 April 2016 on Better Law-Making.

5.  As soon as it adopts a delegated act, the Commission shall notify it simultaneously to the European Parliament and to the Council.

6.  A delegated act adopted pursuant to Article 16(2) shall enter into force only if no objection has been expressed either by the European Parliament or the Council within a period of two months of notification of that act to the European Parliament and the Council or if, before the expiry of that period, the European Parliament and the Council have both informed the Commission that they will not object. That period shall be extended by two months at the initiative of the European Parliament or of the Council.]

Article 48

Entry into force

This Regulation shall enter into force on the twentieth day following that of its publication in the Official Journal of the European Union.

It shall apply from 1 January 2019.

[EU version only:  This Regulation shall be binding in its entirety and directly applicable in all Member States.]

Done at Strasbourg, 12 December 2017. 

For the European Parliament
The President
A. TAJANI 

For the Council
The President
M. MAASIKAS


The text of the Securitisation Regulation is reproduced with the permission of the European Union and is © European Union, https://eur-lex.europa.eu.

Footnotes

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Acquired portfolios

For any securitisation of an acquired portfolio, Article 9(3) (and its UK equivalents) require the originator - which, in such a case, will be a limb (b) originator - to "verify that:

  • the entity which was, directly or indirectly, involved in the original agreement which created the obligations or potential obligations to be securitised applied "the same sound and well-defined criteria for credit-granting" to both the exposures being securitised and those which were not;
  • the entity applied "the same clearly established processes for approving and, where relevant, amending, renewing and refinancing credits"
  • the relevant originators, sponsors and original lenders have "effective systems in place to apply those criteria and processes in order to ensure that credit-granting is based on a thorough assessment of the obligor’s creditworthiness taking appropriate account of factors relevant to verifying the prospect of the obligor meeting his obligations under the credit agreement".

and, if STS is envisaged, the limb (b) originator must also comply with Article 20(11) and the equivalent FCA rule 2.2.12.  Post-securitisation, the Article 7 transparency and reporting obligations apply. 

The corresponding post-Brexit UK rules concerning credit-granting criteria are Rule 8.2 (Granting of credit) in the FCA rulebook and Article 9 of the PRA rulebook, and since these are largely identical, in what follows reference is made to the EUSR only for convenience..

Article 9(3)

In Article 9(3) the obligation is to "verify" that the "entity which was, directly or indirectly, involved in the original agreement which created the obligations or potential obligations to be securitised [in other words, the limb (a) originator of the exposures] fulfils the requirements referred to in paragraph 1". 

This may be difficult.  For example, seller warranties may not be available e.g. if the seller is not the original lender, or if the original lender has been wound up.  In response to a question from AFME in 2018, the EBA published an answer in its single rulebook in September 2019 addressing this difficulty.  The EBA considered that Article 9(3) "should be interpreted consistently with" the purpose of Article 9(1) and "appropriately to the class of assets being purchased and the nature and type of securitisation".  This meant verifying "through any appropriate means" that the original lender did not apply different credit-granting criteria to the assets to be securitised compared to non-securitised exposures; which of course is consistent with the rationale for Article 9, i.e. as one of the safeguards in the Securitisation Regulation against an "originate to distribute" model.  The EBA concludes that a limb (b) originator "should use adequate resources and make reasonable efforts to obtain as much information as is available and appropriate for such verification in accordance with sound market standards of due diligence for the class of assets and the nature and type of securitisation". 

For NPL portfolios particularly, there are two exemptions that can help:

  • Article 9(4)(a) disapplies Article 9(3) if the original loan agreements pre-dated the application of the Mortgage Credits Directive (which will vary from country to country but which had to be by 21st March 2016)
  • Article 9(4)(b) permits limb (b) originators to comply instead with Article 21(2) of the RTS relating to risk retention made under CRR (and so "obtain all the necessary information to assess whether the criteria applied in the credit-granting for those exposures are as sound and well-defined as the criteria applied to non-securitised exposures").

Last update: 29/4/2024

Agency and model risk

Agency risk

The Securitisation Regulation refers to but never defines “agency risks”.  The EBA seems to have seen them as being risks, over and above the credit risks of the assets, which arise as a result of the fact of their being securitised.  The concept of "agency risk" underpins the non-neutrality of the capital treatment for securitisations: the currently-severe non-neutrality of the capital treatment (via the "p" factor - see further our commentaries on "Capital and liquidity requirements" and "Securitisation capital requirements under Basel and the CRR") is in order to counter the perceived severity of the agency risk.    

These phrases, all taken from the EBA 2015 Report on STS, indicate what the EBA has in mind:

“the agency risks due to the multiplicity of parties involved in the transaction…”

“…active portfolio management adds a layer of complexity and increases the agency risk arising in the securitisation by making the securitisation’s performance dependent on both the performance of the underlying exposures and the performance of the management of the transaction…”

“The approach to regulatory capital applicable to securitisations… has taken the form of, inter alia, risk weight floors and risk weight adjustments for maturity, aimed at addressing modelling/agency risks introduced by the securitisation process…”

and the issue is thoughtfully discussed in a piece, "Securitisation: Ghosts of Crisis Past"  written by PCS and published in the September 2022 Eurofi Regulatory Update.

Model risk

Model risk means the risk that a pool of assets will not perform when under stress in the way that was modelled. The EBA in its 2015 Report on STS focusses particularly on the risk arising from high degrees of leverage and the consequent volatility of any lower ranking tranche:

“… many securitisations which contained high levels of leverage failed (CDOs of ABS, CDOs squared, CPDOs, etc.). Leverage implies that very small changes in the credit performance of the underlying assets have a substantial impact on the credit performance of the securitisation. As such, these securitisations relied on a purported degree of accuracy in the measurement of the credit risk (including issues of correlation) that proved highly illusory. Put differently, highly leveraged securitisations are very vulnerable to model risk and the credit rating agencies, as well as the market, placed unwarranted faith in the capacity of models based on limited data sets to gauge credit outcomes”.

This underpins many of the STS requirements, such as the concerns about transparency (to provide the underlying information to investors) and homogeneity (to make it relatively straightforward to do the modelling), plus a requirement that there should be no derivatives apart from those used for prudent hedging, and so on. 

It can be, and often is, argued that the risk, as perceived by the EBA, is overstated.

Last update: 26/2/2024

A history of homogeneity

Under reconstruction.

Article 20(5) – minimum perfection triggers

Under reconstruction.

Article 20(6) – underlying exposures unencumbered and enforceable

Under reconstruction.

A unified regime for investors

Under reconstruction.

Capital and liquidity requirements

The post-GFC perception that all securitisation was too complex, with too much agency and model risk, and, to some, dangerous and unnecessary, led to several MEPs displaying quite high levels of suspicion and hostility to very idea of securitisation during the passage of the Securitisation Regulation. 

The European Commission accepted that securitisation could be an important part of its Capital Markets Union plan, but a consequence of this unfavourable perception was that the regulatory capital regime retained a deliberate bias against securitisation.  This regulatory bias persists, both in relation to capital adequacy treatment and liquidity treatment (under the LCR - see below), especially in comparison to the treatment of covered bonds, and the industry continues to point out that the capital required is disproportionate to the amount of risk which the actual evidence shows to exist.  As of May 2024, it seems to be almost universally accepted that this is the case, and a reformed capital treatment seems to be only a matter of time, once the 2024 elections are out of the way.

CAPITAL ADEQUACY

Hierarchies

As regards EU banks, the amendments set out in the 2017 CRR Amendment Regulation broadly implemented the changes made by the BCBS in July 2016 to the original Basel III requirements to accommodate STC securitisations.  The main deviation from Basel concerned Article 254 and the hierarchy of approaches: the Basel hierarchy of IRBA -> ERBA -> SA was inverted so that in principle, and subject to the caveats in article 254, SA ranks before ERBA.  This was the outcome of a debate about the effect of sovereign rating caps which had been going on between the north and south of Europe since at least 2014, and represented a victory for banks in the south over the EBA, which had considered the possibility of discarding SEC-ERBA altogether (in order to avoid precisely this consequence and to underpin the principle that the three methods should produce progressively higher levels of capital charge as one descended the hierarchy) but then rejected it in the 2014 EBA Report. This led to a public statement on 28th June 2017 by the United Kingdom and Germany expressing concerns about the consequences for financial stability and the wider economy, and calling on the EBA and the EC to monitor closely the impact of the reversed hierarchy of methods on financial stability and other potential unintended consequences. 

The CRR Amendment Regulation provided however for some moderation of this inversion:

  • Firstly, the availability of SEC-IRBA was widened by permitting greater use of proxy data “where sufficient accurate or reliable data on the underlying pool is not available” (Article 255(9)(b)
  • Secondly, SEC-SA ranks behind (not ahead of) SEC-ERBA:
    • for STS securitisations where SEC-SA would result in a risk weight higher than 25% (Article 254(2)(a));
    • for non-STS securitisations where SEC-SA would result in a risk weight higher than 25% or where SEC-ERBA would result in a risk weight higher than 75% (Article 254(2)(b));
    • for securitisations backed by pools of auto loans, auto leases or equipment leases (Article 254(2)(c));
    • if regulators have elected to prohibit its use, which they may on the ground that the application of SEC-SA “is not commensurate to the risks posed to the institution or to financial stability” (which a preamble explains is particularly concerned with the "risks that the securitisation poses to the solvability of the institution concerned or to financial stability”) (Article 254(4));
    • where institutions have notified their national regulator that they intend to apply SEC-ERBA to all their rated securitisation positions (Article 254(3): a development which only emerged during the trilogues).

Regulators may prohibit institutions, on a case by case basis, from applying SEC-SA if the resulting risk weighted exposure amount is not commensurate to the risks, particularly as regards (non-STS) securitisations with complex and risky features. 

The UK position is now governed by the retained EU law version of the CRR (UK CRR) together with the PRA rulebook.  The UK's prudential requirements for banks currently reflect the EU's approach to the implementation of the Basel framework.  The Bank of England’s “Securitisation Capital Framework” webpage lists policies on the treatment of securitisations in the credit risk risk-weighted assets framework (its ”Securitisation General Framework” page has its policies on securitisation which are unrelated to the calculation of credit Risk RWAs).

Why are securitisation holdings penalised compared to covered bonds?

Overall levels of capital required for STS securitisation holdings are disproportionately higher than comparable investments such as covered bonds, because regulators regard the tranching of risk in a securitisation as giving rise to structural risks, such as agency risk (the unaligned interests of the parties which arise where the originator and sponsor have little or no skin in the game – although this is nowadays addressed by risk retention requirements) and model risk, which go beyond simple credit risks, and which require additional capital as a counterbalance.  In the words of recital (5) of the CRR Amendment Regulation , securitisations “give rise to some degree of uncertainty in the calculation of capital requirements for securitisations even after all appropriate risk drivers have been taken into account”, and the EBA sees significant differences between the two:

  • the dual recourse under covered bonds – to the assets and to the issuer – and correspondingly the absence of any risk transfer
  • the fact that the issuer is (for CRR-compliant covered bonds at least) a supervised credit institution
  • the absence of tranching in covered bonds
  • the much lower or absence of model and agency risk
  • differences in default and loss performance during the financial crisis

For senior positions, the CRR provides (Article 267) that the risk weighting should be no higher than the exposure-weighted average risk weighting that would apply to the underlying assets if they had not been securitised.  This so-called “look-through approach” arguably illustrates the inherent regulatory prejudice against securitisations, since the approach takes no account of the credit enhancement provided by the tranching and the existence of any lower-ranking tranches; logically, the weight should not be “no higher than” the underlying exposures, but “much less”. 

The risk weight floors and, under the formula-based approaches, a minimum supervisory parameter “p” of 0.3, ensure that overall securitisation capital surcharges are higher than the total capital requirements on the underlying exposures.  Accordingly, the sum of the capital charges applying to all the tranches of a given portfolio of underlying assets which have been securitised is “ non-neutral”; it is higher than the sum of the charges that would apply if they had not been and remained on the originating lender's balance sheet.  

This degree of non-neutrality has been criticised many times; see for example the EBA 2014 paper on securitisation risk retention, due diligence and disclosure, the 2015 EBA Report on Qualifying Securitisations (and especially page 41 of the Report), and the June 2020 report on CMU by the "High Level Forum on the Capital Markets Union – a group of market participants, trade bodies and academics, which made several recommendations for alleviating this degree of capital penalisation.

LIQUIDITY

The LCR is the ratio of a banks’ “high quality liquid assets” to its total net liquidity outflows over a 30 day period.  In short, it requires a bank to maintain adequate liquidity – in the form of cash, government bonds, covered bonds, and other HQLAs such as investment grade corporate bonds.  Holdings of securitisation paper can count as HQLAs, but only up to a point, and that point is set at a level which is consistent with the undue regulatory bias that applies as regards capital treatment.  Even the most senior tranche of the highest quality securitisation has a minimum haircut of 25%.  For covered bonds, it is only 7%.  

INSURERS

Insurers are regulated under Solvency II in the EU, which was onshored at Brexit with some conforming changes but not major policy shifts.  They are potentially an important part of the investor base for securitisations, and if they were encouraged to invest in securities issued by SSPEs it would allow them to acquire some exposure to the underlying assets - but in a liquid form, which would enable them to spread the risk of their investments, and, by allowing them to do this, would allow the risk on the underlying financial assets to be more widely spread; all of which would surely be desirable.  However, as it is, Solvency II actually creates disincentives for insurers:  although senior STS positions are treated in the same way as covered bonds, non-senior STS positions, and non-STS holdings, are made unattractive, and perversely insurers are encouraged to invest in the underlying assets (in an un-securitised and illiquid format) rather than liquid securitised form: the capital requirement for an insurer investing in the senior tranche of a securitisation is , according to AFME, often higher than it is for the holding of a whole loan despite the senior tranche benefitting from the credit enhancement which arises from the fact of the junior tranche(s) being subordinated behind the senior tranche.

The financial industry’s position on Solvency II is set out well in this paper issued jointly by AFME, ICMA, and various pan-European, Dutch and German trade bodies in June 2018.

Last update 15/5/2024

CMBS – a cinderella asset class?

CMBS is excluded from STS, and industry appeals for its rehabilitation have fallen on stony ground.  Pre-2009 direct real estate finance without doubt had shortcomings, but European CMBS did not suffer from them.  Typically, loans were bifurcated, with only the senior slice being securitised, and logically it should be preferable for risk-averse REF investors to be able to buy the highest-rated bonds issued by a CMBS issuer rather than having to seek exposure via direct lending. 

However, the European Commission has not yet been persuaded. Following the line taken by Basel/IOSCO, it considered CMBS inappropriate for STS status because it entailed too much refinancing risk, and this sentiment is reflected in Recital (29) of the EUSR, reflecting similar provisions in the BCBS criteria for STC securitisation.

As such, Article 20(13) applies (in the UK, the equivalent rule is FCA rule 2.2.14).  This expressly excludes structures where repayment of the bonds or notes depends predominately on the sale of the underlying assets (as does Recital (29)). It does not refer to their refinancing, and conceivably a deal could perhaps be structured so that the SPV and its directors would go down a refinancing route ahead of bond maturity, but this would be directly contrary to what Recital (29) says in black and white, and so would be more than a little bold, and Paragraphs 43-46 of the EBA Guidelines, which elaborate on this, say that "it is expected" that CMBS would not meet these requirements.

And for bank investors, CMBS are unlikely to qualify as STS for capital treatment purposes because they lack the necessary granularity: CRR Article 243(2) requirement that no single exposure exceeds 2% (the test being done at the loan level rather than, as commercial logic might suggest, looking at diversification at the rental payment level and the creditworthiness of the underlying tenants).  For example, a CMBS of a shopping centre might involve a handful of anchor tenants and dozens of individual tenants; a more extreme example would be a CMBS where the underlying loan is to a landlord providing private or social housing to several thousands of separate tenants.

Last update 15/5/2024

Do EU investors need loan level data to invest in non-EU issues?

A major uncertainty in the early months and years of the Securitisation Regulation concerned what transparency it (indirectly) required non-EU issuers to provide to potential EU investors so that they could do their due diligence under Article 5(1)(e)

Unfortunately for EU investors, that uncertainty was largely resolved in an unhelpful way by the European Commission's Article 46 review issued on 11th October 2022.  The position for UK investors looking to invest in non-UK issues is significantly better.

By way of a reminder:

  • Article 5 applies to EU institutional investors in securitisations, and Article 5(1)(e) requires the originator, sponsor or SSPE to have "where applicable, made available the information required by Article 7 in accordance with the frequency and modalities provided for in that Article". 
  • Article 7’s “modalities” include using specific templates issued under the disclosure ITS and the associated Annexes
  • Article 7 cannot apply to non-EU issuers without being extra-territorial (which on first principles it should not be, and other parts of the text support this).
  • However, even though Article 7 does not apply directly to an issue, it seems that the issue does have to comply with it indirectly in order to allow non-EU issuers to invest. 

The key question had been what “where applicable” meant in Article 5(1)(e), and the problem was that there were two ways to interpret it, neither of which was satisfactory:

  • if it meant “in a case where Article 7 applies to the issue directly” then some would argue that you could get round the disclosure requirements easily by having a non-EU issue denominated in EUR with EU assets, which would drive a coach and horses through the regulation - although, against this, Recital (9) says “it is essential that institutional investors be subject to proportionate due-diligence requirements…” and Article 5(3) and (4) contain general requirements on EU investors to do proper due diligence before investing, so this was not the "coach and horses" that some might argue it was;
  • if it meant “as the case may be”, you would have an extra-territorial effect that would prevent EU investors buying non-EU issues, thus preventing them diversifying their investments and fragmenting the market.

Different investors had taken different views on this, and in particular some had been happy to buy "EU Lite", presumably based on good faith reliance on legal advice.  The ESAs' Joint Opinion was obviously very unhelpful, but even then the debate raged on and the EBAs views were not generally accepted. 

For EU investors

What changed on 11th October 2022 was the European Commission pretty much endorsing these views, and its views are almost certainly going to be followed by the EU27 national competent authorities. 

The big sticking point had concerned loan-level data disclosure, as Article 7 requires.  In the USA (and apparently Australia and Japan too) this kind of granular loan level disclosure is not the norm.  In the USA, there is no loan level data disclosure required for issues under Rule 144A, just aggregated data; public (prospectus) issues require asset-level data for RMBS, CMBS, and auto loans/leases, but not for credit cards.

The EC received several communications during the course of 2019, such as from AFME, the US-based Structured Finance Association and the FMLC, requesting it to provide clarity, and the 2020 Work Programme of the joint committee of the ESAs identified "the jurisdictional scope of application" as one of the issues requiring their attention, and on 25 March 2021 the ESAs' Joint Opinion was issued.  Unfortunately for the market, it came to the conclusion that, given the reference to complying with the “frequency and modalities” of disclosure referred to in Article 7, a third country securitisation would have to use ESMA templates or, at a minimum, templates with the same content, and that those be disclosed with the same frequency as that of ESMA’s.  The ESAs therefore concluded that:

"it seems very unlikely, or at least very challenging, that EU-located institutional investors would currently be able to discharge the requirement set out in Article 5(1)(e) of the SECR in relation to third country securitisations, as a result of which they will not be able to invest in them". 

The ESAs did admit that "the current verification duty laid out in Article 5(1)(e) of the SECR may be overly inflexible for third country securitisations" and recommended that it "should be reassessed to determine whether more flexibility could be added to the framework without undermining its ultimate objective".

The European Commission was thought to have been disappointed at the muted effect on the securitisation market that had been seen since the Securitisation Regulation came into force, and it seems to remain keen to improve matters, but the EU legislative process can be lengthy, and not all factions within the European Parliament are predisposed to look favourably on securitisation.  

Two possibilities for reform had already been aired before the ESAs' Opinion:

  • one, mooted during 2020 in some quarters, was to promote the idea of "substantive compliance", i.e. that disclosure would be made, even if not on the prescribed official ESMA templates, but the SFA letter (see above) had said that this would still be a problem for its USA-based members.  The revised UK position (see below) is somewhat similar to this;
  • in June 2020, the High Level Forum on Capital Markets Union's final report invited the EC to "allow an EU-regulated investor in third-country securitisations to determine [i.e. for itself] whether it has received sufficient information to meet the requirements of Article 5... to carry out its due diligence obligation proportionate to the risk profile of such securitisation" and suggested "clarificationthat Article 5(1)(e) does not apply to securitisations with non-EU originators, sponsors or SSPEs, and that, instead, the EU investor must receive "sufficient information to meet the requirements for due diligence proportionate to the risk profile of the securitisation exposure".

The ESAs' Joint Opinion of 25 March 2021 suggested a third approach:

  • the EUSR should be amended to include an "equivalence" regime for transparency requirements in relation to third country securitisations i.e. its disclosure obligations should require:
    • "substantially the same information" as that required by Article 7
    • with "sufficient frequency” even if the exact frequency of disclosure is not exactly the same as under Article 7
    • with a “modality” of disclosure in the form of disclosure templates of "similar quality and granularity" as those set out in the Disclosure RTS and the Disclosure ITS
  • an EU institutional investor could then comply with Article 5(1)(e) by verifying disclosure compliance either with Article 7 or the equivalent disclosure regime.

This was in some respects similar to "substantive compliance", and it would not have satisfied the market, because it would require the same granularity of disclosure and so run into the same problem in cases where that is not the market norm in the place where the issue takes place.  In any event, the Article 46 review paid short shrift to any equivalence solutions.  

The EC accepted in the Article 46 review that this “de facto excludes EU institutional investors” and that “the issue might deserve thorough consideration in the context of a future amendment of the Securitisation Regulation”. 

Until that day arrives, the EC can only offer some lukewarm comfort, that the envisaged reduction in the Article 7 disclosure requirements - with the prospect of a significantly reduced reporting requirement for any "private" issues (i.e. that are issued without having to issue a prospectus - which would include most US CLOs) “might help reduce the competitive disadvantage for EU institutional investors”. 

Within two days of the Article 46 review being issued, ESMA began the process of consulting the market, and specifically one of its questions was about what asset classes would not need to have loan level data.  This was promising, and once it is implemented, the problems should pretty much go away, but in the meantime we are left in an awkward position. 

For UK investors

For UK investors, as from 1st January 2021 the problem went away, as regards UK investors buying into EU issues, because the legislation which implemented the Securitisation (Amendment) (EU Exit) Regulations 2019 improved the drafting in Article 5(1)(e), so that (e) applied in relation to originators, sponsors and SPPEs established in the UK, and a new sub-clause (f) applied to those established elsewhere, requiring "substantially" the same information, which contains some latitude and does not require use of the Article 7 templates.  Since the EU/UK article 7 disclosure requirements are unmatched by anything in the USA or Japan or elsewhere in the world, Article 5(1)(f) was of no help to help UK investors other than with regard to EU issues; US issues wanting to attract UK investors would still have "substantially" to meet relevant UK standards. 

We said at the time that it would be better if the UK were to move away from the Article 5(1)(e) and (f) requirements and replace them with a more general and flexible principle, such as is to be found in Article 5(3) and (4), and this has now happened as of 1st November 2024, with the old due diligence provisions in Article 5 of the UK Securitisation Regulation being repealed and replaced by provisions in the PRA and FCA rulebooks (and the amended Securitisation Regulations 2024 for occupational pension investors) which replace Article 5(1)(e) and (f) of the Securitisation Regulation with a “more principles-based and proportionate approach” (with Articles 5(3) and 5(4) being retained). 

So, instead of requiring a potential investor to verify that information will be disclosed in accordance with the detailed requirements of Article 7, we have identical requirements – see our due diligence comparison table for the detail - that they must verify that the sell-side “has made available sufficient information to enable the institutional investor independently to assess the risks of holding the securitisation position and has committed to make further information available on an ongoing basis, as appropriate”. 

The UK rules then go on to specify a minimum level of disclosure (which tracks the Basel requirements) but does not require its disclosure to be in any particular form or using any particular template.  So this is significant for UK investors wanting to invest in US securitisations and other non-EU securitisations (EU securitisations will be subject to more than enough disclosure in any event), and in particular investors must obtain “sufficient information” but it does not need to be on prescribed templates, and does not necessarily have to be loan-level. 

The existing Article 7 disclosure requirements will be retained for UK sell-side parties.  

This is to be welcomed, because it should reduce the compliance cost for PRA-authorised institutional investors’ due diligence, and will do away with the current legal uncertainty over what due diligence is required in relation to overseas securitisations, which will save some legal fees, and provide a boost for UK investors, and US sell-side parties.

Last update 15/5/2024

Due diligence, risk retention and transparency – extra-territorial?

Under reconstruction.

Environmental disclosures

The EU and UK are projecting slightly different paths on ESG disclosures as a result of a divergence in Article 22(4) made by the EU in its April 2021 "quick fix" changes.

The position in the UK

The original environmental reporting requirement in Article 22(4) required "available information related to the environmental performance" of the houses financed by an STS RMBS or the cars financed by an STS of auto loans and leases to be disclosed to investors quarterly (it only applies to term STS, not ABCP).  

Publication should be done as part of the Article 7(1)(a) disclosure, via the disclosure templates set out in the disclosure ITS.  Line items RREC 10 and RREC11 in Annex 2 (for residential real estate) and AUTL57 and AUTL58 in Annex 5 (for auto) both prescribe “Energy Performance Certificate Value” and “Energy Performance Certificate Provider Name”.  

The EBA STS Guidelines say that the mandatory Article 22(4) requirement:

“should be applicable only if the information on the energy performance certificates for the assets financed by the underlying exposures is available to the originator, sponsor or the SSPE and captured in its internal database or IT systems. Where information is available only for a proportion of the underlying exposures, the requirement should apply only in respect of the proportion of the underlying exposures for which information is available”.

Article 46(f) required the UK Treasury review to consider, inter alia, whether the existing Article 22(4) requirements “need to be extended to securitisation where the underlying exposures are not residential loans or auto loans or leases, with the view to mainstreaming environmental, social and governance disclosure”, and the HM Treasury December 2021 Article 46 report addressed this in Chapter 6.  Its significant conclusions were (paragraphs 6.19 et seq):

“6.21 With a view to striking a balance between helping mainstream ESG disclosures, not overburdening securitisation manufacturers, and providing information that investors would find most useful, HM Treasury and the regulators will consider whether it is appropriate to extend the Sec Reg’s environmental information disclosure requirements, as raised in Article 46(2)(f).  It is likely that any additional information required by the Sec Reg’s disclosure templates would be subject to availability, as is the case for the Regulation’s current requirements.

6.22 Any such changes would be subject to consultation with industry. Any changes will also take account of developments in the regulation of green finance disclosure that will soon be implemented (e.g. the Sustainability Disclosure Requirements (SDR)), and they will consider how current and future environmental information disclosure requirements interact to ensure a consistent and proportionate approach…

6.24 … HM Treasury does not expect to set up a green securitisation framework in the immediate future, especially prior to a broader sustainability disclosure framework being set up in the SDR. Given the evolving dynamic of the securitisation market and wider ESG developments, HM Treasury may consider such a framework in the future.

6.25 Regarding the ask for green securitisations to be given beneficial capital treatment, HM Treasury does not think this is appropriate at present. In lieu of a comprehensive framework for reporting on sustainable economic and financial activities being established in SDR, we think that there are currently more prudent ways to incentivise the financing of green projects.”

The position in the EU

In the EU, some MEPs successfully manoeuvred for a more pro-Green slant as part of their cooperation on what became the 2021 “quick fix” amendments, and so Article 22(4) of the EUSR now includes that “originators may, from 1 June 2021, decide to publish the available information related to the principal adverse impacts of the assets financed by underlying exposures on sustainability factors”. 

The ESAs then issued proposals, including discussion draft RTS on the content, methodologies and presentation of these principal adverse impacts, on 2nd May 2022.  The ESAs' The 50-page joint consultation paper includes a proposal that the originator or sponsor would be required to deliver to ESMA a “principal adverse impact statement” in a prescribed form, with similar information as would be required by the Sustainable Finance Disclosure Regulation.  By way of background, securitisations do not fall within the definition of financial product, so none of the mandatory disclosure required by the SFDR is relevant to securitisations, but the quick fix contemplates that any voluntary disclosures should be as consistent as they can with the SFDR: the logic being that when a loan (or other asset) is being originated, it may or may not end up being securitised, and so the information to be collected for disclosure purposes should be decided at that time.  The ESAs proposed that this statement should include a calculation of the ratio of the green assets in the pool to the non-green assets (along the lines of the Green Asset Ratio), but disclosed the other way around – i.e. the percentage would be the percentage that was not green rather than the percentage which was; called the “non-green asset ratio”. 

The 2nd May 2022 Joint Consultation Paper from ESMA, EBA et al. proposed disclosures (regarding, but not necessarily limited to, residential property and motor vehicles) which tracked:

  • the Climate Delegated Act made in respect of Article 8 of the Taxonomy Regulation (which establishes the “technical screening criteria” for determining the conditions under which an economic activity qualifies as contributing substantially to climate change mitigation or climate change adaptation, and for determining whether that economic activity causes no significant harm to any of the other environmental objectives); and
  • the draft RTS made under the SFDR.

On 25th May 2023, the ESAs submitted the final draft RTS to the EC, and these formed the basis of the sustainability factors disclosure RTS (CDR (EU) 2024/1700), which are applicable as from 8th July 2024 .

Compliance with the RTS is – for the moment – voluntary.  Whether that will one day change may depend on whether the pressure for more ESG regulation continues or dissipates.  So long as these are voluntary, the question will be whether compliance with the additional bureaucracy, and the completion of another set of disclosure templates, is thought worthwhile to access any perceived so-called “greenium”, and whether investors will be drawn to an issue that does comply, or not. 

The direction of travel?

Although the EUSR version of Article 22(4) refers only to residential and auto, the ESAs took the opportunity in the JCP to canvass views on having originators make equivalent disclosures about the “principal adverse impacts on sustainability” regarding exposures to corporates, trade receivables and commercial real estate, adding that:

“This may lead to adjustments to Annex I ultimately”.

They also solicited market views on the feasibility and desirability of developing indicators for credit card debt and consumer loans. 

EUSR – Article 45a

The EUSR (but not the UKSR) contains Article 45a - "Development of a sustainable securitisation framework".  This required the EBA to produce a report on “developing a framework for sustainable securitisation, and this was issued in February 2022.  Its key findings included: 

  • A proposal that the EUSR’s existing Article 22(4) should be amended to extend voluntary “principal adverse impact” disclosures to non-STS securitisations
  • mandatory PAI disclosures should be considered “in the medium term once the EU sustainable securitisation market has further matured and more experience has been gained on the implementation of sustainability-related disclosures for securitisation”.

By way of background, the original Securitisation Regulation had a difficult legislative passage, with some Green/Left factions of the European Parliament seemingly suspicious if not hostile to the very idea of this financial technique, whilst being keen to promote their political preferences for "environmental" issues.  These were largely kept at bay, save for two concessions which were offered as a quid pro quo for their giving up some of their more contentious positions, such as relating to risk retention:

  • Article 22(4), which required "available information related to the environmental performance" of the houses financed by an STS RMBS or the cars financed by an STS of auto loans and leases to be disclosed to investors quarterly (it only applies to term STS, not ABCP).  The EBA Guidelines paragraph 84 require this only if the information on the energy performance certificates for the assets financed by the underlying exposures is available to the originator, sponsor or the SSPE and captured in its internal database or IT systems;
  • Article 46(f), which expressly required the European Commission review under Article 46 (due within the first three years) to review the working of Article 22(4), on the face of it to consider whether the disclosure should be extended to other asset classes.  

Some of the same MEPs represented the Parliament in its examination of the EC's 2020 draft "quick fix" amendments in response to coronavirus, and their efforts led to two further ESG-related positions being conceded for the purpose of getting the EC's "quick fix" package of measures to help with synthetic and NPL securitisations over the line: the amendment to Article 22(4)  (Requirements relating to transparency), and the inclusion of Article 45a- "Development of a sustainable securitisation framework", both mentioned above.

Last update 15/5/2024

Green securitisations

The EU Green Bond Regulation (Regulation (EU) 2023/2631 “on European Green Bonds and optional disclosures for bonds marketed as environmentally sustainable and for sustainability-linked bonds”) sets out a regime for public issues of bonds which are permitted to use the "EuGB" or "European Green Bond" label.  It accommodates securitisation issues: whilst, as a general rule, it looks at the issuer's use of proceeds, for securitisations, the focus is on the originator's use.  So, as long as a prospectus is issued (it does not apply to private issues) a securitisation issue is in principle able to acquire the EuGB label and be sold as such to EU investors.

The Regulation contains detailed disclosure requirements, including the completion of a pre-issue “European Green Bond factsheet”, which must be positively reviewed by an external reviewer which, whether based in the EU or not, has been registered or recognised by, and is subject to ongoing supervision by, ESMA; and at least once during the lifetime of the bonds, a “European Green Bond impact report” on the environmental impact of the use of the bond proceeds must be published, using a specified template.  

For securitisation issues, originators are subject to “specific disclosure and exclusion requirements”, along with safeguards to avoid the pool assets including exposures which finance non-de minimis fossil fuel activity (although exposures financing electricity generation and/or “heat/cool” from fossil fuels is allowed where the activity meets the Taxonomy Regulation’s criteria for “do no significant harm” set out in the Climate Delegated Act).  Originators must disclose (“on a best efforts basis and to the best of the originator’s ability, using available data such as data gathered in the originator’s internal database or IT system”) information about taxonomy eligibility, taxonomy alignment and compliance with the principle of “do no significant harm”.   

Will the “EuGB” label be enthusiastically taken up by the market?  Or will jumping through all these hoops be seen as excessive in order to obtain such “greenium” as may exist? 

The UK FCA indicated in Feedback Statement FS22/4 in June 2022 that it would not be developing a UK green bond standard in the immediate future.

Last update 15/5/2024

Investor due diligence

Divergence

The major policy divergence as regards due diligence requirements as between the UK and the EU is that Article 5(1)(e) of the EUSR requires strict adherence to the requirements of Article 7, whereas the UK has a more principles-based approach, coupled with the specification of certain minimum requirements, which, in particular, do not require institutional investors to obtain article 7-standard disclosures.  Our due diligence comparison table notes some other minor divergences, and otherwise  the due diligence provisions remain broadly comparable as between the two regimes.

Sound and consistent credit-granting criteria

Article 5(1)(a) and (b) in the EUSR (and the equivalent rules in the UK: Article 5 of Chapter 2 of the PRA Rulebook, and SECN 4.2 of the FCA Rules) require institutional investors to verify, before investing, that the originator or original lender grants all the credits giving rise to the securitised on the basis of sound and well-defined criteria and clearly established processes for approving, amending, renewing and financing those credits and has effective systems in place to apply those criteria and processes to ensure that credit-granting is based on a thorough assessment of the obligor’s creditworthiness.  Article 5(1)(a) and its UK equivalents apply where the originator or original lender is not a credit institution or an investment firm, and is established in the EU, or UK as the case may be, and Article 5(1)(b) and equivalent apply if it is not. 

These should be read together with Article 9(1) (Criteria for credit-granting) or, as the case may, Article 9 of Chapter 2 of the PRA Rulebook or FCA rule 8.2, which require originators, sponsors and original lenders to operate the same clearly established processes for approving and, where relevant, amending, renewing and refinancing credits to securitised and non-securitised assets, and to have effective systems in place to apply those criteria and processes in order to ensure that credit-granting is based on a thorough assessment of the obligor’s creditworthiness taking appropriate account of factors relevant to verifying the prospect of the obligor meeting his obligations under the credit agreement.  The EU version then has a derogation in respect of NPLs which the UKSR does not (yet) have.

The degree of due diligence that an investor should perform in order to comply with its due diligence obligation will vary from one case to another.  If there is a prospectus, the disclosure to be found in it might be enough by themselves.  Reliance on properly-drafted warranties from a reputable originator may be sufficient, so long as no blind eyes are being turned, and the investor adopts a consistent approach to any proposed securitisation investment: there has to be a limit on what they are required to do, and evidence of a reasonable and consistent approach would help to satisfy its regulator that it has not been cavalier.

Article 9(3) of the EUSR and its UK equivalents all have a somewhat similar requirement for a limb (b) originator to verify that the original lender has applied the same “sound and well-defined criteria for credit-granting” to the securitised assets as it did to non-securitised exposures.  In November 2018, AFME asked the EBA about the amount of due diligence that needed to be done to verify the original credit-granting criteria in a case such as with NPLs, where the assets were originated some time ago, perhaps by a lender which no longer existed, or which had no incentive nor obligation to help.  The EBA’s answer said that the securitising originator should use “adequate resources” and “make reasonable efforts” to obtain “as much information as is available and appropriate for such verification in accordance with sound market standards of due diligence for the class of assets and the nature and type of securitisation”.

No RTS for due diligence requirements 

The EUSR due diligence obligations contain no provision for RTS nor even guidelines to supplement them, unlike the RTS in Commission Delegated Regulation 625/2014 which were issued to supplement the old Article 406 of the CRR.  The existing joint committee Q&A do not extend to anything in Article 5 (nor do ESMA's Q&A), nor the EBA single rulebook.  Regulated investors need to establish and follow reasonable procedures which satisfy their regulators.

AIFMs

The ESAs' Joint Opinion of 25 March 2021 noted potential inconsistencies between the provisions of the EUSR and the requirements of the AIFM Directive 2011/61/EU, especially the lack of clarity regarding how the due diligence obligations on AIFMs in respect of securitisations in Article 17 ("Investment in securitisation positions") meshes with the EUSR, and which national regulator should ensure compliance with the relevant due diligence obligations.  The ESAs recommended various clarifications and changes including:

  • amending the EUSR and the AIFMD to ensure that third country AIFMs comply with the due diligence obligations with respect to funds marketed in the EU, and to clarify whether third country AIFMs should be regarded as “institutional investors”;
  • amending the EUSR to clarify the powers of EU national regulators to enforce the due diligence requirements in respect of third country AIFMs, and to clarify whether smaller AIFMs (those below the threshold in article 3(2)) are within the definition of an “institutional investor” or not (the ESAs think they should be);
  • clarification regarding the ability of a fund manager to delegate the due diligence activity to another manager; and
  • amending the EUSR definition of “sponsor” to clarify that AIFM sponsors may only delegate day-to-day active portfolio management involved with a securitisation to a servicer which is an EU authorised investment firm, AIFM or UCITS management company, and not to third country AIFMs or sub-threshold AIFMs).

However, the EC's Article 46 Review rather shied away from this solution.  

In the UK, the FCA is obliged by paragraph 34 of the UK Securitisation Regulations 2024 to make due diligence rules for “small registered AIFMs (also known as “sub-threshold AIFMs”) when investing in securitisations.  This has been done in the Securitisation Regulations 2024, which expressly define an “institutional investor” so as to include a “small registered UK AIFM”.

AIFMs which are not authorised in the UK no longer fall within the definition of “institutional investor.

Last update 15/5/2024

Links and background materials

PRIMARY REGULATIONS

The EU Securitisation Regulation (consolidated text)

The UK Securitisation Regulations 2024 and the UK Securitisation (Amendment) Regulations 2024 (in force 1st November 2024)

The FCA's Securitisation (Smarter Regulatory Framework and Consequential Amendments) Instrument 2024 (FCA 2024/18), incorporating the FCA Securitisation Sourcebook SECN (in force 1st November 2024)

The PRA Rulebook: CRR Firms, Non-CRR Firms, Solvency II Firms, Non-Solvency II Firms: Securitisation (And Miscellaneous Amendments) Instrument 2024 (in force 1st November 2024)

 

SECONDARY REGULATIONS

EU MATERIALS

A.  RTS and ITS

Risk retention (Article 6)

The risk retention RTS (CDR 2023/2175), effective 7th November 2023. 

CDR 2023/2175 is substantially identical to the European Commission's July 2023 revised final draft risk retention RTS (which superseded the EBA final draft risk retention RTS (12th April 2022), which themselves superseded the EBA's June 2021 consultation draft).   

The draft risk retention RTS July 2018 were never implemented.

The old RTS made in 2014 under the CRR were repealed as from 7th November 2023.  They remain relevant for UK purposes for issues done before 1st November 2024.

Disclosure (Article 7) 

The disclosure RTS ((EU) 2020/1224), effective 23rd September 2020

The disclosure ITS (EU) 2020/1225), effective 23rd September 2020

B.  STS requirements

Homogeneity

The homogeneity RTS (EU) 2019/1851), effective 28th May 2019 (as amended by CDR (EU) 2024/584 of 7th November 2023 to accommodate synthetics, effective 6th March 2024)

The EBA final draft of the 2019 homogeneity RTS (which contains the EBA commentary on them)

The February 2023 EBA final draft homogeneity RTS (which superseded the July 2022 EBA consultation paper.

STS notifications

The sustainability factors disclosure RTS (CDR (EU) 2024/1700), which are applicable (on a voluntary basis) as from 8th July 2024.

STS notifications RTS ((EU) 2020/1226), effective 23rd September 2020, as amended by CDR 2022/1301 with effect from 15th August 2022, particularly to accommodate synthetic STS disclosures.

STS notifications ITS ((EU) 2020/1227), effective 23rd September 2020, as amended by CIR (EU) 2022/1929

Synthetics

CDR (EU) 2024/920 of 13th December 2023 containing the RTS specifying performance-related triggers for the purposes of Article 26c(5). 

This superseded the EBA's draft RTS specifying performance-related triggers for synthetic securitisations which permit non-sequential amortisation issued on 20th December 2021.

ITS ((EU) 2022/1929) containing templates for STS synthetic notification requirements.

The EBA final draft RTS on "specifying the determination by originator institutions of the exposure value of synthetic excess spread pursuant to Article 248(4) of Regulation (EU) No 575/2013" are not yet in force.

C.  Level three materials

Q&A

Joint Committee of ESAs Q&A

EBA Single rulebook questions on the EUSR

ESMA Q&A on the Securitisation Regulation (this is ESMA's Q&A app - the old Q&A document has been discontinued)

ESMA Q&A on CRA III

The EBA's Q&A on the 31st December 2010 CEBS guidelines regarding article 122a of the Capital Requirements Directive can be interesting background (article 122a was replaced by Part 5 of the CCR, which was in turn replaced by the Securitisation Regulation).  The CEBS Guidelines themselves are hard to find these days, but here they are.

Guidance, opinions and non-no action letters

ECB “non-binding guidance” 21 March 2022 for EU "significant institutions" regarding Articles 6-8. 

ESAs’ Opinion to the EC on the Jurisdictional Scope of Application of the Securitisation Regulation 25 March 2021

ESMA Guidelines on securitisation repository data completeness and consistency thresholds 10 July 2020 (use of ‘No-Data’ options in data submissions for public issues).

EBA Guidelines on STS requirements 12 December 2018 (non-ABCP)

EBA Guidelines on STS requirements 12 December 2018 (ABCP)

Article 7: the ESAs' non-no action letter of 30th November 2018

The CEBS guidelines of 31 December 2010

The 2006 CEBS Guidelines “on the implementation, validation and assessment of Advanced Measurement (AMA) and Internal Ratings Based (IRB) Approaches”.

Official reports

European Commission Article 46 report 10th October 2022, and summary of responses.

EBA report on significant risk transfer (CRR Articles 244(6) and 245(6)) May 2022

EBA February 2022 report (under Article 45a) on "developing a specific sustainable securitisation framework".

Consultation papers and working documents

EBA consultation paper 21st April 2023, on synthetic STS guidelines and some proposed amendments to its December 2018 cash securitisation guidelines.

The ESAs 50-page consultation paper on 2nd May 2022 containing draft RTS for STS environmental disclosures (Article 22(4)).

The December 2014 EBA report on "securitisation risk retention, due diligence and disclosure"

The ECB-BOE May 2014 joint paper, “The case for a better functioning securitisation market in the European Union

The EC September 2015 consultation paper (including first draft of the Securitisation Regulation)

The November 2002 European Commission "Working Document of the Commission Services on Capital Requirements for Credit Institutions and Investment Firms" (a precursor of the Basel II capital adequacy regime, and the origin of some key definitions in the Securitisation Regulation) 

UK MATERIALS

A.  Policy notes and official statements

The PRA’s policy statement PS7/24 (Securitisation: General requirements)

PRA policy statement 2024/3 (Securitisation (and Miscellaneous Amendments) Instrument 2024)

The FCA’s PS24/4 (Rules Relating to Securitisation - feedback to CP23/17 and final rules)

The UK FCA's securitisation page

The H.M. Treasury 11th July 2023 policy note 

The December 2022 H.M. Treasury policy note, which heralded various reforms to the UK regime

PRA Supervisory Statement SS10/18 ("Securitisation: General requirements and capital framework") October 2021 (updating November 2018)

Bank of England and PRA Statement of Policy, “Interpretation of EU Guidelines and Recommendations: Bank of England and PRA approach after the UK’s withdrawal from the EU”, April 2019

PRA and FCA joint statement on reporting of private securitisations, 20th December 2018.

The PRA’s “approach to rule permissions and waivers

B.  Official reports

The H.M. Treasury December 2021 Article 46 report 

C.  Consultation papers and working documents

FCA 7th August 2023 consultation 

PRA 27th July 2023 consultation paper CP15/23

H.M. Treasury's June 2021 Call for Evidence 

The ECB-BOE May 2014 joint paper, “The case for a better functioning securitisation market in the European Union

INDUSTRY PAPERS

The submission from AFME and UK Finance dated 2nd September 2021 in response to the FCA's article 46 consultation, and the related appendix.

European Banking Federation paper "Relaunching the European Union's securitisation market: what needs to be done in the context of the Capital Markets Union" September 2021

The June 2020 “Final report” on CMU by the High Level Forum on the Capital Markets Union.

Non-performing loans

Under reconstruction.

Reliance on asset sales

The STS restriction regarding reliance on asset sales reflects the concern set out in the December 2014 EBA "Report on Qualifying Securitisation" that, to mitigate refinancing risk and the extent to which an STS securitisation embedded maturity transformation, the exposures to be securitised should be largely self-liquidating.  The EBA went on to explain that reliance on refinancing and/or asset liquidation increased the liquidity and market risks to which the securitisation was exposed and made the credit risk of the securitisation more difficult to model and assess from an investor’s perspective, and so created model risk.

The EBA envisaged, following the Basel Committee almost to the letter, that partial reliance on refinancing or resale of the assets securing the exposure would be permissible, so long as that re-financing was sufficiently distributed within the pool and the residual values on which the transaction relied were sufficiently low, and the position in the Securitisation Regulation is essentially the same or perhaps even a little more liberal.  Article 20(8) and SECN 2.2.9(4) each states that:

“underlying exposures may also generate proceeds from the sale of any financed or leased assets”.

Article 20(13) states (and SECN 2.2.14 has effectively the same wording) that:

“repayment of the holders of the securitisation positions shall not have been structured to depend predominately on the sale of assets securing the underlying exposures. This shall not prevent such assets from being subsequently rolled-over or refinanced. The repayment of the holders of a securitisation position whose underlying exposures are secured by assets the value of which is guaranteed or fully mitigated by a repurchase obligation by the seller of the assets securing the underlying exposures or by another third party shall not be considered to depend on the sale of assets securing those underlying exposures”. 

To take the example of car loans, where it is not uncommon for a new car to be taken by the buyer on a relatively short lease – 3 years perhaps – under which the PV of the rentals is much less than the cost of the car, leaving residual value risk with the lessor, if those assets were transferred to an issuer together with title to the vehicles, the structure could not qualify as STS, because the debt is supporting the RV as well as the committed rentals.  Hence we have the carve-out, which allows structures - common in Germany - where the RV is underwritten by the manufacturer or its finance company.  The EBA Guidelines have more to say on this (see below).

So, the intention is to prevent holders taking any significant residual value risk or market risk on asset values, and the focus is on how the deal is structured (Article 20(13) and SECN 2.2.14)) rather than what actually happens in practice (Article 20(8) and SECN 2.2.9(4)).

Paragraphs 43-46 of the EBA Guidelines elaborate on this, particularly that to assess "predominant dependence", three aspects should be taken into account:

(i) the principal balance of the underlying exposures that depend on the sale of assets securing those underlying exposures to repay the balance (or, presumably, their refinancing, although paragraph 45 does not mention refinancing);

(ii) the distribution of maturities of those exposures across the life of the transaction (a broad distribution will reduce the risk of correlated defaults due to idiosyncratic shocks); and

(iii) how granular the asset pool is.

The Guidelines say that no types of assets will automatically fail this test, but "it is expected" that CMBS, and securitisations where the assets are commodities (e.g. oil, grain, gold), or bonds with maturity dates falling after the maturity date of the securitisation, would not meet these requirements, because then (a) the repayment would be predominantly reliant on the sale of the assets, (b) other possible ways to repay the securitisation positions would be substantially limited, and (c) the granularity of the portfolio would be low.

The second subparagraph of Article 20(13) expressly permits cases where repayment does depend on a sale of the assets but the value "is guaranteed or fully mitigated by a repurchase obligation by the seller", and the wording in SECN 2.2.14 is similar (“is guaranteed or fully mitigated by an obligation on the seller or another third party to repurchase them”).  This is an EU addition, not to be found in Basel, and inserted to permit STS securitisations of German auto loans and leases, where this structure is common.  The Guidelines say that that the guarantor or repurchase entity must not be "an empty-shell or defaulted entity, so that it has sufficient loss absorbency to exercise the guarantee of the repurchase of the assets"; presumably to be tested at the time of the STS notification rather than any later date.  A full put-back or guarantee clearly falls within this but the position of partial or limited guarantees remains uncertain, beyond the general principles to be found in Recital (29) that note how "strong reliance... on the sale of assets securing the underlying assets creates vulnerabilities", singling out CMBS here, and Paragraphs 43-46 of the Guidelines.

For regulated EU banks which securitise lease receivables with a view to them being eligible collateral for the ECB, residual value cannot be included in the securitisation.  Article 73 of the 19th December 2014 ECB Guidelines (ECB/2014/60) on the implementation of the Eurosystem monetary policy framework requires all assets backing eligible ABS to be homogenous by reference to one of 8 categories, one of which is "leasing receivables", which is defined in Article 2 as "the scheduled and contractually mandated payments by the lessee to the lessor under the terms of a lease agreement", and the definition concludes starkly: "Residual values are not leasing receivables". 

Last update 15/5/2024

Reliance on third party verification agents

Under reconstruction.

Resecuritisations

Under reconstruction.

Risk retention

A brief history

Risk retention was one of the most controversial aspects during the passage of the Securitisation Regulation.  Amongst other controversial proposals, the European Parliament had proposed increasing minimum risk retention levels to 10%, except for a first loss tranche, where the minimum would remain at 5%, and retention of a first loss exposure for every securitised exposure, where the minimum would be 7.5%. Further, it had proposed that the EBA and ESRB would have the power to revise retention rates up to 20% on the basis of market circumstances.

The outcome however, was the position remained unchanged from the old CRR and Solvency II, and the only remaining vestiges of the European Parliament’s failed attempts to change it were (a) the prohibition (Article 6(2) on deliberately adverse selection practices, and (b) Article 31, which gives the ESRB a mandate to monitor developments in the securitisation market with respect to the build-up of any excessive risk and, where necessary, in collaboration with the EBA, to issue warnings and recommendations for action, including on the appropriateness of modifying the risk retention levels.

What if the retainer goes into insolvency?

Article 6 of the EUSR says that the originator, sponsor or original lender of a securitisation shall retain the risk retention “on an ongoing basis”.  The corresponding PRA Rule (Article 6) uses the same language, and the FCA rule SECN 5.2.1 says effectively the same thing. 

So the original retainer has, in principle, no ability to transfer the retention.  But what if it goes into insolvency, or other circumstances outside its control arise making it impossible to continue to hold it?  Does this mean that the securitisation ceases to comply with the applicable risk retention rules?

Article 6(7) empowered and directed the EBA to “specify in greater detail… the prohibition of hedging or selling the retained interest”, and presumably it concluded that this permitted the RTS to derogate from the Article 6(1) requirement that the originator, sponsor or original lender “shall retain on an ongoing basis…” where the failure to retain was for involuntary reasons, so long as this did not undermine the spirit of Article 6. 

This led to the derogations, which now appear in Article 12 of risk retention RTS, SECN 5.5.1(3) and Chapter 3, Article 12 in the PRA Rules.  All three permit a change of the risk retainer in the event of the retainer’s insolvency.  Article 12(3) of the risk retention RTS goes further, also permitting a change “where the retainer, for legal reasons beyond its control and beyond the control of its shareholders, is unable to continue acting as a retainer”.   The FCA and PRA Rules do not include this.

There is an apparent inconsistency between Recital (12) - which says that the retention could be retained by "another legal entity complying with Article 6 of Regulation (EU) 2017/2402" - and Article 12 of the RTS, which just disapplies the prohibition on the retention being sold or transferred in the involuntary circumstances which it mentions, such as the insolvency of the original retainer.  The idea behind Recital (12) is to ensure that there continues to be an alignment of interest, and it reflects what Article 6 itself requires: in other words, that the retention must be held by the originator, original lender of the sponsor. 

Nevertheless, it is worth noting that the point could be problematic.  In a scenario where there was no sponsor, and the retention had been held by a now-insolvent entity which was both the originator and the original lender, Article 12 of the RTS (and the equivalent FCA and PRA Rules) would disapply the prohibition, but this would not help because there would be no possible transferee complying with Article 6, PRA Article 6 or FCA rule SECN 5.2.1, because there would not be a possible transferee which had an interest with which the retention could be aligned.  

The EBA received representations about this back in 2018, but it considers this to require a change to Article 6 itself, and not something that could be fixed by level 2 RTS.  The EBA may be right about this, because Article 6 only permits the originator, the sponsor or the original lender to hold the retention.  The FCA and PRA had the opportunity to fix this lacuna but have not done so.

What does "beyond the control" mean?

Article 12(3)(b) permits a retainer to cease to hold the retention in cases where "the retainer, for legal reasons beyond its control and beyond the control of its shareholders, is unable to continue acting as a retainer".  Does this include cases where a contractual  term or trigger applies?  If it did, how would the required inability be proved?  The RTS are silent.

Geographical scope?

Article 6(1) of the Securitisation Regulation is clear that the originator, sponsor or original lender should hold the retention, and they should agree amongst themselves which one will.  Article 6(4) - where its conditions are met - allows the retention to be done by another group company on a consolidated basis.  Article 2 of the EU risk retention RTS requires that where the exposures have been created by multiple originators, the retention should be held by each originator or original lender on a pro rata basis, but  Article 2(4) (tracking what the old CRR RTS said) permits the retention to be held by a single originator or original lender if it has "established" the securitisation and is managing it, or has established it and has originated more than 50 % of the total securitised exposures (and there is a provision covering multiple sponsors).  The position is the same under the FCA and PRA Rules.

Contrary to this, the 1st April 2021 joint opinion of the ESAs “On the Jurisdictional Scope of Application of the Securitisation Regulation” came to the unhelpful view that where some of the relevant entities (originators or whatever) were outside the EU, the risk retention should, under Article 6, be held by a party that was within the EU.  The ESAs' rationale was that the retention should be held by an entity within the EU jurisdiction and so subject to the (direct) obligation contained in Article 6. 

However, this restrictive interpretation seemed contrary to the level 1 text, as the EC Article 46 report noted, and the EC report went on to say that in any event this was unnecessary to achieve the legislative intent of Article 6 because it was effectively met via the institutional investor’s due diligence obligations imposed by Article 5.  The risk retention requirement was there in order to align the interests of the sell-side and the buy-side, and the investor verification duty effectively ensured that risk retention was complied with for any securitisation bought by EU investors. 

Different sole purposes tests

The EU and UK have adopted similar, but in some ways different, sole purpose tests to assess the “sole purpose” question (in Article 2(6) of Chapter 3 of the new PRA rules and rule SECN 5.2.11R in the FCA rulebook).  The UK rules broadly follow the now-superseded EBA draft risk retention RTS in requiring that it should be “taken into account” whether the entity has a business strategy and payment capacity “consistent with a broader business model” and whether the members of its management body have the necessary experience to enable the entity to pursue the established business strategy and the entity has adequate corporate governance arrangements, whereas the RTS have made this into a safe harbour, rather than a ”take into account” requirement.   The EU RTS also refer to the entity not relying on income from the securitised exposures as its “sole or predominant” source of revenue.  This reference had excited adverse market comment, but the EC stuck with it, despite it arguably going against what Article 6(1) of the EUSR itself says.  The UK thankfully omitted the reference to “or predominant”, and added, interestingly, that it would monitor market practice to see whether a review of the sole purpose test would be appropriate.

Other differences

Article 3 of the risk retention RTS permits the retention requirement to be satisfied through a synthetic or contingent form of retention, so long as the conditions specified in Article 3 are met, and SECN 5.2.13 and PRA Article 3 say the same thing.  The UK position is slightly more liberal: the EU requires that for risk to be retained in a synthetic or contingent form, the relevant guarantee, LC or similar instrument must be fully collateralised in cash and held on a segregated basis as clients’ money, unless the retainer is a credit institution.  The UK extends this derogation to all CRR and Solvency II firms.

Last update 15/5/2024

Sanctions for breach

Under reconstruction.

Securitisation capital requirements under Basel and the CRR

In this section, we consider:

Why is there a special capital regime for securitisation?

Securitisation exposures are viewed by regulators as having two fundamental characteristics which make a separate capital regime appropriate:

  • the existence of different tranches of debt, each with its own characteristics, and with the credit risk of senior tranches being supported by the existence of lower-ranked tranches;
  • the fact that securitisations are structured products, and that the structure itself creates complications and risks which go over and above the credit risks on the underlying assets, making them in principle inherently riskier than a simple holding of the underlying assets: these additional risks are known as “agency risk” and “model risk”.

Basel, and CRR Chapter 5, therefore have self-contained regimes for securitisation and the capital charges associated with it.  We look at these in detail below.

The CRR rules in the UK

This commentary usually refers to provisions of the EU CRR.  The UK equivalent provisions are in the course of transition. 

Upon Brexit, the CRR was onshored into the UK by the European Union (Withdrawal Agreement) Act 2020), with various amendments being made then and since.  On 1st January 2022, it was further amended to reflect requirements of Basel 3 (implemented in the EU through the CRR II Regulation), including as regards the leverage ratio, the net stable funding ratio, and the output floor, and at the same time various provisions which had been in the UK CRR were transferred into the PRA rulebook (this page on the Bank of England website gives the details).  These include provisions relating to capital requirements for credit risk, large exposures, liquidity, leverage, reporting requirements and disclosures.

The final Basel III standards (known as Basel 3.1 or Basel 4) will lead to further revisions to the UK CRR capital adequacy rules.  A  November 2022 consultation paper said that H.M. Treasury intended that these would similarly be incorporated in the PRA rulebook, and that in the short term, the UK CRR would continue to cover, amongst other things, securitisation (Articles 242 to 270e).  The current expectation of H.M. Treasury (in the November 2023 Financial Initiatives Grid) is that UK CRR would be repealed and restated pursuant to Part 1 of Financial Services and Markets Act 2023 during 2026. 

Significant risk transfer and implicit support - two limitations on securitisation treatment

A true sale securitisation, which removes assets from an institution’s balance sheet, should result in a capital saving for the selling institution, even after taking account of the exposure it retains so as to comply with the risk retention requirements of the Securitisation Regulation.  There are, however, limitations to ensure that this regulatory capital advantage is not achieved in cases where there is not actually significant risk transfer (“SRT”), or where the institution was providing “implicit support”, meaning that, in the event of losses being incurred, the institution would be likely to, and be expected to, want to intervene and support them, even if it was not strictly obliged to (so-called “moral hazard”), and so we begin by looking at these two limitations.

Significant risk transfer

For a traditional (not synthetic) securitisation, CRR Article 244 permits an originator institution to exclude the underlying exposures from its calculation of RWEAs if “significant credit risk associated with the underlying exposures” is transferred to third parties.  This  permission means that the securitised assets will be removed from its regulatory balance sheet, and its capital charge will be assessed only on whatever interest it holds in the securitisation (for example, its risk retention under Article 6 of the Securitisation Regulation). 

SRT will usually be important in order to remove the assets from its non-regulatory (e.g. Companies Act) balance sheet too, and the accounting factors relevant to this overlap with the legal considerations for a “true sale” of the assets (although, of course, the accounting will proceed on the basis of the true and fair view regardless of the legal form); and a true sale is a precondition for SRT under Article 244(4)(c). 

Significant credit risk is deemed to be transferred if either:

  • the RWEAs of any mezzanine securitisation positions[1] held by the originator institution in the securitisation do not exceed 50% of the RWEAs of all mezzanine securitisation positions in the securitisation; or
  • the originator institution does not hold more than 20% of the exposure value of the first loss tranche in the securitisation, provided that both of the following conditions are met:
    1. the originator “can demonstrate that the exposure value of the first loss tranche exceeds a reasoned estimate of the expected loss on the underlying exposures by a substantial margin”; and
    2. there are no mezzanine securitisation positions;

and regulators have some overriding latitude to refuse or deny SRT status, including where an institution (using the IRB approach) has recognised that there is SRT.  There are EBA guidelines on SRT from 2014, and in November 2020 the EBA issued a welcome Report on SRT with a view to providing more clarity and certainty than had existed up to that time.

To achieve SRT, the originator must not have any right to repurchase any securitised exposures, and any repurchase obligation must comply with Article 244.  These considerations are also relevant to achieving accounting off-balance sheet treatment (generally, off-balance sheet treatment will be available even if the seller undertakes a repurchase obligation which applies in the event of a breach of normal commercial warranties given at the time of sale – e.g. that the seller has good title, but not if recourse to the seller arises simply because the obligor defaults in payment); and, of course, any repurchase right may (depending on how the repurchase price is determined) present additional challenges to achieving a legal true sale analysis. 

SRT and synthetic securitisations

For a synthetic securitisation, Article 245 has parallel SRT provisions (but, of course, not requiring a true sale) which, if met, permit the originator to exclude the underlying exposures from its calculation of RWEAs (and, where relevant, expected loss amounts) with respect to the underlying exposures in accordance with Chapter 5 – in effect, on the basis that the synthetic securitisation has removed the asset from its regulatory balance sheet, and so that capital is calculated only on the basis of the exposures which it holds under the synthetic securitisation.

No implicit support

Article 250 contains a related prohibition against any “implicit support”, and the deal documentation (e.g. the sale agreement) will usually make it clear that the originator is under no obligation to provide any support or buy back any exposures.  A contravention of Article 250 would be serious – Article 250(5) provides that the underlying exposures in their entirety would remain on the balance sheet as if the securitisation had not been entered into.  A clean-up call option is permitted so long as (amongst other things) it may only be exercised when 10% or less of the original value of the underlying exposures remains unamortised.

Additional criteria for STS issues

STS issues can qualify for favourable capital treatment, but it is not simply a matter of complying with the STS requirements set out in the Securitisation Regulation.  Article 243 identifies some additional criteria for STS securitisations to qualify for the favourable capital treatment, over and above the Securitisation Regulation STS requirements[2]:

    1. concentration limit: at the time of inclusion in the securitisation, the aggregate exposure value of all exposures to a single obligor (or a group of connected obligors) in the pool must not exceed 2% of the aggregate outstanding exposure values of the underlying pool (with a special carve-out for some auto vehicle leasing structures)[3];
    2. maximum risk weights: at the time of inclusion in the securitisation, under SEC-SA, and taking into account any eligible credit risk mitigation, the underlying exposures must qualify for a risk weight equal to or smaller than:
      • 40% on an exposure value-weighted average basis for the portfolio as a whole, where the exposures are loans secured by residential mortgages or fully guaranteed residential loans;
      • 50% on an individual exposure basis where the exposure is a loan secured by a commercial mortgage; 
      • 75% on an individual exposure basis where the exposure is a retail exposure;
      • for any other exposures, 100% on an individual exposure basis;
    3. where points (b)(i) and (b)(ii) apply, the loans secured by lower ranking security rights on a given asset shall only be included in the securitisation if all loans secured by higher-ranking security rights on that asset are also included;
    4. where point (b)(i) applies, no loan in the pool may have an LTV higher than 100% at the time of inclusion in the securitisation.

Regulatory capital for securitisations - introduction

What follows considers the major technical terms which are relevant to the calculation of the risk weight for a securitisation exposure.  This mostly concerns SEC-IRBA and SEC-SA, and only touches on SEC-ERBA.

Exposure value

Article 248 defines the exposure value of an on-balance sheet securitisation position as, essentially, its accounting value after any relevant specific credit risk adjustments on the securitisation position have been applied.  The precise position is very detailed, and there are also related RTS.

KIRB and KSA[4]

Both “KIRB” and “KSA“ embody the same concept.  Both indicate, in a case where a bank has securitised some assets and so got them off its balance sheet, the amount of capital that the bank would have had to allocate to those assets if they had not been securitised, and were still on its balance sheet. 

This concept is defined separately for the purposes of the IRB approach (“KIRB”) and the SA (“KSA”), and it is central to the calculation of the regulatory capital requirement for a securitisation exposure using either SEC-IRB or SEC-SA. 

Article 255 sets out how to determine “KIRB[5] and “KSA”.  A bank’s capital must be at least 8% of its risk-weighted exposures, and so KIRB and KSA are determined by dividing:

  • the RWEAs that would be calculated under Chapter 3 in respect of the underlying exposures as if they had not been securitised, multiplied by 8%; by
  • the exposure value of the (non-risk-weighted) underlying exposures.  

So:

  • if the pool is made up of exposures with a RW of 100%[6], then KIRB/KSA will be 0.08 (8%[7]);
  • if however the pool is made up of residential mortgages which qualify for a 35% risk weighting under the SA, KSA would only be 0.028 (2.8%), and if the fair assessment of the PD and LGD of these exposures under the IRB approach was that the RW should be 15%, then  KIRB would only be 0.012 (1.2%). 

There are specific rules for the calculation of KIRB and KSA in respect of purchased receivables as opposed to receivables where the institution is the original lender and, indeed, there is a great deal of detail, both in the CRR and in RTS and EBA guidelines.

Attachment points and detachment points

Chapter 5 has three methods of determining the capital charge for a securitisation position: SEC-IRBA, SEC-SA and SEC-ERBA.  All three methods require an institution to determine, for each tranche in a securitisation, its “attachment point” and “detachment point”, and so it is important to understand what these are: 

  • the attachment point is the position in the capital stack where a tranche would start to suffer losses; and so it reflects the amount of credit enhancement from which the tranche benefits as a result of the subordination of the lower-ranking tranches.  So an attachment point of 0 means it is the lowest-ranking tranche[8];
  • the detachment point of a tranche is the position where the tranche would be completely wiped out by losses.  So a detachment point of 1 means it is the highest-ranking tranche[9]

For example:

Tranche

Value

Attachment point

Detachment point

AAA

700

0.3

1.0

AA

250

0.05

0.3

NR

50

0.0

0.05

or diagrammatically:

A and D

Hierarchies

As mentioned above, Chapter 5 has three methods of determining the capital charge for a securitisation position: SEC-IRBA, SEC-ERBA and SEC-SA.  In principle, Basel provides that this order of priority should result in progressively more capital being required, with SEC-IRBA being the most benign and SEC-SA requiring the most capital. 

This is not however the order of priority contained in the CRR.  Under Article 254, in principle, and subject to the caveats in article 254, SEC-IRBA is first (if an institution is permitted to use it), followed by SEC-SA, and SEC-ERBA relegated to third place.  The reason for this change is political.  You can read more about it here.

Calculating risk capital under SEC-IRBA

RWEA

The RWEA for a tranche is calculated via various formulae and depends on (inter alia):

  • KIRB;
  • the tranche’s attachment point (A) and detachment point (D), and the “thickness” of the tranche i.e. the difference between A and D;
  • whether the pool is regarded as granular (meaning 25 or more exposures) or not; and
  • the weighted average LGD for the pool.

How it is calculated then depends on whether KIRB is more than the detachment point for the tranche, or less than the tranche’s attachment point, or falls between the two (but whichever it is, there is a floor of 15%), in accordance with this table, which is in Article 259 of CRR:

RW = 1,250%

when D ≤ KIRB

RW = 12,5 KSSFA (KIRB)

when A ≥ KIRB

SEC-IRBA formula

when A < KIRB < D

This is much simpler than it might appear, and a diagram is easier to follow than the text, and so below is a diagram illustrating the attachment and detachment points for three tranches of a hypothetical securitisation  (on the right of the coloured boxes).  For the sake of illustration, this asssumes that the risk weight of the underlying pool, using the IRB approach, was 65%, and so KIRB was 0.052:

CRR diagram

In effect the capital is calculated on the basis of a RW of 1,250% - giving a one-for-one capital charge - if the exposure sits below KIRB (as the NR tranche does here), and on the basis of the value of KSSFA (KIRB) - see below - if it sits entirely above KIRB (as the AAA tranche does here).  The apparently-complicated formula in the table above is simply applying a weighted average of these two methods in the case of a tranche which sits astride KIRB (as the AA tranche does).  So:

  • The first row in this table ascribes a risk weight of 1,250% to a tranche if its detachment point is less than KIRB.  KIRB represents the capital charge if the pool was still on balance sheet.  The entirety of the NR tranche sits lower than KIRB, and so the capital charge to be allocated to it will simply be 1,250%.  This is equivalent to a one-for-one deduction from capital if the institution’s capital ratio is 8% (because 8% x 1,250 = 100%)[16].
  • The second row is making the equal and opposite point about the AAA tranche[17].  The entirety of this tranche sits higher than KIRB – a loss of 52 will leave it entirely unaffected.  So for the AAA tranche, the capital charge is simply 12.5 x KSSFA (KIRB)[18]
  • The third row in the table above is a formula which gives a blended risk weight, and that is what has to be used to determine the risk weight for the AA tranche, because although it would not be fully wiped out by a loss of 52, it would be hit[19].  Diagrammatically, for a  mezzanine tranche with A of 0.05 and D of 0.3, and where KIRB was 0.052:

So, given that KSSFA (KIRB) governs exposures to the extent that they sit above KIRB , it makes sense to turn to what this means.

KSSFA (KIRB)

KSSFA (KIRB)[10] is defined in respect of a securitisation position in Article 259 by this formula[11]:

KSSFA KIRB

This formula is complex.  However, it can be seen that a factor in this formula is “a”, which is defined in Article 259 as being:

– (1/(p * KIRB))

and it can be seen that this contains a reference to a term “p”, which is known as the “supervisory parameter”.

The supervisory parameter “p” - what is “p” and why is it so important[12]?

The definition of “p” is:

p

This means that “p” will be the higher of (“max”) 0.3 and the formula amount.  So the minimum level of “p” is 0.3.  There is no maximum, and the actual amount depends on the various values in the formula[13].  In SEC-SA, it is simply set at 1, and in the USA equivalent of SEC-SA, it is set at 0.5.

It can be seen that the right-hand side of this equation contains references to various factors:

A, B, C, D and E

These are defined in a table in Article 259, and have different values depending on whether:

  • the pool exposures are retail or non-retail
  • the pool is “granular” or not (Article 259 deems it to be “granular” if it has 25 or more exposures)
  • the relevant tranche is the senior tranche or not

N

the number of exposures in the pool

KIRB

the capital charge that would have applied for the pool if it had not been securitised

LGD

the loss given default

MT

the maturity of the tranche

So the supervisory parameter will depend on all of these factors.  So, for example, it will be higher for a non-granular pool, and higher the longer the maturity of the tranche is; and it will depend on the assets in the pool – because KIRB will be higher if you have 100%-weighted corporate exposures than if you have, say, 35%-weighted retail mortgages. 

The significance of “p” is that it represents a capital surcharge – an add-on, over and above the capital that would be required for the exposures if they remained unsecuritised on the institution’s balance sheet. 

So, in summary:

(1)  “p” affects “a”;

(2)  “a” affects the value of KSSFA (KIRB);

(3)  KSSFA (KIRB) is bigger than KIRB because of the existence of “p”; and

(4)  the amount by which KSSFA is bigger than KIRB is related to the size of “p”.

What is the purpose of “p”?

The effect of “p” is that, if a pool of exposures is securitised, and all the securitisation positions are held by regulated institutions, the combined capital charge for all those pieces will be more than the capital charge that would apply if the pool had not been securitised.  This is known as “non-neutrality”, and it creates a capital surcharge on the tranches of the securitisation.  So, the capital requirements are first calculated at the level of the underlying portfolio of securitised assets in accordance with the general framework for credit risk (using KIRB or KSA, as ther case may be. Each of those capital inputs is  then multiplied by the "p" factor.  A "p" of 1 implies that the relevant amount is increased by 100% (i.e. multiplied by 2) and so on.

The official regulatory justification for non-neutrality in the past has been that securitisations are structured products, and the very fact of the structure creates complications and risks which go over and above the credit risks on the underlying assets, so that institutions need to allocate more capital to them because they are inherently riskier than a simple holding of the underlying assets.  These additional risks - known as “agency risk” and “model risk” – were perceived to be significant in pre-GFC transactions, and there is more about them in this commentary

What is the problem with "p"?

The general perception is that in the post-GFC and post-regulation era, they are much more limited, if not actually non-existent in most modern securitisations, but the regulatory capital regime remains rooted in a previous era.

In the words of the EBA’s 2015 Report on Qualifying Securitisations (which discussed “p” at length):

“The prudential floor of 0.3 for the supervisory ‘p’ parameter was maintained as in the original BCBS 2014 framework so as to ensure, following the re-calibration, a minimum prudential capital surcharge on the securitisation, hence recognising that full neutrality of securitisation capital charges is neither desirable nor prudent”.

and a 2014 joint paper from various trade bodies to the Basel Committee explained:

“We understand this is intended to take into account model risk in the securitisation process and the resulting uncertainty in risk attribution across different tranches. The proposed formulation for p is based on a number of inputs and has a floor of 30%, implying that total capital across the structure after securitisation will be at least 30% higher than before. However, the current formulation is unbounded on the high end, and certain combinations of parameters can result in this factor being greater than 100%, effectively more than doubling the capital”.

The Simplified Arbitrage-Free Approach: Calculating securitisation capital based on Risk Weights alone”, an oft-cited paper from 2013, noted that if “p” = 0.5, that would produce aggregate capital for all the positions in a securitisation of 50% more than KIRB.  An analysis by the EBA in its 2014 paper showed that non-neutrality could be over 2 times under SEC-IRBA.  Both regard this kind of outcome as excessive, and a similar criticism appear in the June 2020 “final report” on CMU by the High Level Forum on the Capital Markets Union.

The EU and UK market can look enviously to the USA, which has not yet implemented Basel 3 and is using a modified version of Basel 2.  There, it seems that under the standardised approach, “p” is 0.5 for all securitisations, and, while the USA equivalent of SEC-IRBA does not explicitly have a “p” factor in the formula, according to AFME, “implicitly it is close to 0”.  And when we consider the output floor, it is ironic that the capital requirements under the SEC-SA standardised approach were, apparently, heavily based on the loss experience of US residential mortgages and US RMBS: which, for a variety of factors, was much worse than in European jurisdictions, as is shown in the chart below, taken from the FSB's July 2024 Consultation Report:

Default rates US vs EU

What CRR III says about non-neutrality

There is a general sense now that the degree of non-neutrality in the CRR is excessive, and counter-productive in the context of securitisation and the wider context of CMU.  We have seen several papers from public or official bodies to this effect, including, in April 2024, “Developing European Capital Markets to finance the future”, from a committee that included Christian Noyer, ex-governor of the Bank of France and Robert Ophèle, ex-chairman of the Autorité des Marchés Financiers (the French equivalent of the FCA) which was commissioned by Bruno Le Maire, the French finance minister.  And in June 2024, we saw the publication in the OJEU of Regulation (EU) 2024/1623 – i.e. CRR III.  It:

  • implements various stop-gap reforms to counter the adverse consequences of the output floor including, as regards securitisation, by a halving of the “p” (non-neutrality) factor; and
  • it holds out the promise of more thorough reform in the medium term to address excessive non-neutrality.  

Recital (3) notes that the EC will examine the implementation of the output floor, including its level of application, based on input from the EBA, and “will consult with interested parties to ensure that the various perspectives are appropriately considered”.  This is provided for by inserting a new Article 506d into the CRR, which requires the EBA to report to the EC no later than 31 December 2026, and which says that:

“In particular, EBA shall monitor the use of the transitional arrangement referred to in Article 465(13) [i.e. the temporary halving of “p”] and assess the extent to which the application of the output floor to securitisation exposures would affect the capital reduction obtained by originator institutions in transactions for which a significant risk transfer has been recognised, would excessively reduce the risk sensitivity and would affect the economic viability of new securitisation transactions. In such cases of a reduction of risk sensitivities, EBA may consider proposing a downward recalibration of the non-neutrality factors for transactions for which a significant risk transfer has been recognised.  EBA shall also assess the appropriateness of the non-neutrality factors under both the SEC-SA and the SEC-IRBA, taking into account the historic credit performance of securitisation transactions in the Union and the reduced model and agency risks of the securitisation framework”;

It then tells us that the EC, taking into account this report and the upcoming report from the FSB (which we were told last year was due “mid-2024”) “shall, where appropriate, submit… a legislative proposal by 31 December 2027”.  Allowing for trilogues and the rest of the usual process, we might be looking at, perhaps, late 2029 or 2030 for a permanent change in the law.  It may not all be plain sailing of course: as recently as December 2022, the ESA’s “Joint Committee advice on the review of the securitisation prudential framework” did not entirely share the market’s enthusiasm.

In the UK

In the UK, we wait to see whether the PRA, once armed with the FSB’s conclusions, will take the post-Brexit opportunity to introduce a more holistic set of reforms significantly in advance of the EU’s likely timescale.  Its October 2023 consultation seemed to indicate a preference for “a targeted and data-based adjustment to the Pillar 1 framework for determining capital requirements for securitisation exposures”, and it supported the idea that the BCBS should conduct a wider review of the Basel capital requirements for securitisation, and “particularly its level of ‘non-neutrality”: meaning the size of the “p” factor.  

How SEC-IRBA favours STS

Article 260 makes two favourable concessions for tranches in STS securitisations

  • for a “senior securitisation position”[22], the risk weight floor is 10% rather than 15%;
  • “p” is halved
Using SEC-SA

Under the SEC-SA, the RWEA for a tranche is calculated in a somewhat similar way as for SEC-IRBA, using a formula and the following bank-supplied inputs:

  • the capital charge that would have applied if the underlying exposures had not been securitised;
  • the ratio of delinquent underlying exposures to total underlying exposures in the securitisation pool;
  • the tranche’s attachment and detachment points;

but with differences - one of which is that “p” is simply equal to 1, rather than being a formula-produced amount (which could be as low as least 0.3).

The intention and effect is to produce higher RWEAs than under SEC-IRBA.  A small regulated institution which did not have the sophistication or desire to incur the cost of having an approved internal risk-based approach may be prepared to accept the higher cost because it would be less costly than the alternative.

For STS, SEC-SA makes the same two favourable concessions as does SEC-IRBA i.e., for a “senior securitisation position”, the risk weight floor is 10% rather than 15%, and “p” is halved, from 1 to 0.5.

SEC-ERBA

Articles 263 and 264 spell out the methodologies for use of SEC-ERBA – the approach which makes use of external ratings.  The exposure values are multiplied by risk weights which depend on the tranche’s credit rating (or, strictly speaking, the “credit quality step” – these are mapped to the ratings used by the major rating agencies) and also take into account the maturity, and the “thickness” of the tranche – essentially, its detachment point less its attachment point.  The intention and effect is to produce capital charges which are higher than SEC-IRBA but lower than SEC-SA.  STS issues benefit from lower risk weights (all the tranches, not only the senior ones).

SEC-ERBA is generally third in the CRR hierarchy, behind SEC-SA (unlike under Basel) but there are circumstances where it does become second.  These are:

  • where the SEC-SA would result in a risk weight higher than 25% for STS securitisation positions; 
  • where the SEC-SA would result in a risk weight higher than 25% or the SEC-ERBA would result in a risk weight higher than 75% for a non-STS securitisation position; and
  • for securitisations backed by auto-loans auto leases or equipment leases,
Caps for securitisation positions

Article 267 provides two caps on the risk weight for a senior securitisation position:

  • an institution which knows the composition of the underlying pool exposures may assign the senior securitisation position a risk weight equal to the exposure-weighted-average risk weight that would be applicable to the underlying exposures if they had not been securitised; and
  • where SEC-SA or SEC-IRBA is being used, the weight cannot exceed the exposure-weighted-average risk weight that would apply to the underlying exposures if they had not been securitised (this is called the “look-through” approach).

Article 267 only applies to senior securitisation positions.  It is in line with Basel, and the justification for it is the credit enhancement the senior tranches receive from subordinated tranches.

Article 268 then provides a further cap which permits an originator or sponsor using SEC-IRBA, SEC-SA or SEC-ERBA, and an investor using the SEC-IRBA, to apply a maximum capital requirement equal to the capital requirements that would have applied to the underlying exposures if they had not been securitised (another “look-through” approach).  The EC’s proposal justified this on the grounds that, from an originator's standpoint, the securitisation process could be viewed as being similar to credit risk mitigation, i.e. of having the effect of transferring at least some of the risks of the underlying exposures to another party and so, provided the conditions for significant risk transfer are fulfilled, it would be not justified for an institution to have to hold more capital after securitisation than before, as its risks attached to the underlying exposures would have been reduced through the process of securitisation[23]

For completeness – what else does Chapter 5 say?

In addition to the points mentioned above, Chapter 5 also deals with:

  • resecuritisations (which are penalised – for example, “p” is 1.5);
  • in the EU CRR but not the UK CRR, the treatment of non-performing exposures securitisations;
  • in Article 270, the calculation of the RWEAs in respect of the senior position in a synthetic securitisation which qualifies as STS (a regulated institution is permitted to do the calculation in accordance with Article 260, 262 or 264 of this Regulation, as applicable).

Prospects for reform

Reform in the EU

On Tuesday 24th January 2023, the European Parliament's Committee on Economic and Monetary Affairs approved some changes to the draft Regulation which had been produced by the EC in order to implement Basel 4, with a view to alleviating some of the consequences of the output floor.  These have now been adopted in Regulation (EU) 2024/1623 – i.e. CRR III - which mostly becomes effective on 1st January 2025 (with some parts earlier).  It implements various stop-gap reforms to counter the adverse consequences of the output floor by amending the CRR including, as regards securitisation, by a halving the “p” (non-neutrality) factor, and it holds out the promise of more thorough reform in the medium term to address excessive non-neutrality. 

At present, regulated banks can calculate their capital using the “standardised approach” (or the “SA”), which is rough and ready, but good enough for small banks. The SA is based on global data, including a lot from the USA, which is quite a different market from the UK, and especially different from EU27 countries which have historically had, and still have, more conservative practices.   However, any bank wanting to optimise its capital, and which has the data history to do it, can develop a model showing how risky or non-risky its assets actually are, and if that model is approved, the bank can use it to calculate the amount of capital it needs.  This is the ”internal rating-based approach”, or “IRB”, and it leads to lower capital being required because it is more precise: it is based the bank’s own actual experience and data, reflecting its particular credit underwriting standards and the culture and practices of the market in which it operates, which may well be much more conservative than those which fed into the data used to set the SA numbers (which include US sub-prime pre-GFC data).

The Basel Committee however came to the conclusion that the more precise IRB might under-estimate the risk, and so it proposed the “output floor”, which is part of Basel IV, and so in the process of being introduced in the EU and UK.  When the output floor comes fully into force (which Basel had said should be by 2028, but in the EU and the UK, 1st January 2030 is currently envisaged) it would mean that, if the IRB would lead to the required capital being less than 72.5% of what the SA would require it to be, then that 72.5% figure will apply. This 72.5% (of the SA figure) minimum is what the the output floor would be, and it would have huge ramifications for banks which use the IRB.

Securitisations have their own capital regime in the CRR because they are regarded as being inherently risky (over and above the credit risk) because of agency and model risk. In the CRR formulae, this is addressed by included a factor known as “the ‘p’ factor, which penalises securitisations.  It ensures that if (for example) an EU bank securities a pool of loans that were on its balance sheet, retaining some of the securitised notes and selling the rest to other regulated EU banks, the aggregate capital charge will be more than the originator EU bank had to bear when the assets were on its balance sheet.  This is known as “non-neutrality” and it is generally regarded as being excessive, taking into account the actual experience in the UK and EU of defaults and losses in securitisations following the GFC – which is very different from the USA experience.

In November 2022, a paper, “Impact of the SA Output Floor on the European Securitisation Market” demonstrated the seriousness of the problem that the output floor would cause:

“Corporate securitisations, both for large corporates and SME portfolios, will be largely eliminated by the introduction of the Basel SA Output Floor as currently envisaged. This could contribute to a significant reduction in the availability of bank funding to European firms...

Existing transactions done for risk management purpose, especially corporate ones, are likely to fail the EU Significant Risk Transfer (SRT) test applied by supervisors and, hence, will have to be terminated...

… the SA Output Floors regime will encourage greater securitisation activity in residential mortgage and other retail loan portfolios because the increase in capital for loans held on balance sheet will exceed, sometimes disproportionately, that of securitised assets...

The floor would affect both the capital (under IRBA and SA rules) that the bank must hold if it retains the risks on the loans, as well as the required capital (again under IRBA and SA securitisation rules) for retained tranches of securitisations…  In effect, the impact on securitisations is a ‘horse race’ between the increase in capital for on-balance-sheet loans and the capital increase for retained securitisation positions. How this ‘horse race’ turns out for a particular sub-category of loans depends crucially on the risk parameters of the loans involved, namely the PDs and LGDs. These risk parameters are specific to asset classes and countries because the loan markets in given countries have generic characteristics (high or low PDs or high or low LGDs). They are also bank specific as each IRB bank has its own IRB models...  

“… few participants in the public debate on CMU appear to understand the likely consequences of SA Output Floors…  the implementation of the SA Output Floors will disfavour one asset class substantially while benefiting another asset class with no clear rationale policy priorities. This is a consequence of adopting regulatory rules that are not soundly rooted in an understanding of the relatively riskiness of different asset classes”.

Meanwhile, MEP Gilles Boyer, after extensive consultation with interested parties (the official record shows him having had almost 50 meetings) proposed amendment 1388 to the draft CRR Amendment Regulation in order to reduce the effect of the output floor pending a “comprehensive review of the EU securitisation framework”. This was supported by sustained industry lobbying, including a letter of 3rd November 2022 co-signed by AFME, the EBF, and several other industry bodies. 

On Tuesday 24th January 2023, the Boyer amendments were approved by the ECON committee, and this has now been effected by the amendments to the CRR made by CRR III, and so, pending the completion of the comprehensive review by the EBA and ESMA (which CRR III requires to be done by 31st December 2026), the ‘p’ factor which applies under the SEC-SA (and which therefore is the one which would apply when and if the output floor kicked in) will be cut:

  • for STS securitisations, to 0.25 rather than 0.5;
  • for non-STS securitisations, to 0.5 rather than 1

This is not be a panacea as regards the output floor or its consequences, but it should tend to counteract some of, and may in saome cases eliminate, the negative effects of the output floor, and it holds out the hope that the envisaged comprehensive review will come to a sensible conclusion, with obvious beneficial consequences for the capital markets. 

What CRR III says about non-neutrality

There is a general sense now that the degree of non-neutrality in the CRR is excessive, and counter-productive in the context of securitisation and the wider context of CMU.  We have seen several papers from public or official bodies to this effect, including, in April this year, “Developing European Capital Markets to finance the future”, from a committee that includes Christian Noyer, ex-governor of the Bank of France and Robert Ophèle, ex-chairman of the Autorité des Marchés Financiers (the French equivalent of the FCA) which was commissioned by Bruno Le Maire, the French finance minister.  

CRR III holds out the promise of medium-term reform.  Recital (3) notes that the EC will examine the implementation of the output floor, including its level of application, based on input from the EBA, and “will consult with interested parties to ensure that the various perspectives are appropriately considered”.  This is provided for by inserting a new Article 506d into the CRR, which requires the EBA to report to the EC no later than 31 December 2026, and which says that:

“In particular, EBA shall monitor the use of the transitional arrangement referred to in Article 465(13) [i.e. the temporary halving of “p”] and assess the extent to which the application of the output floor to securitisation exposures would affect the capital reduction obtained by originator institutions in transactions for which a significant risk transfer has been recognised, would excessively reduce the risk sensitivity and would affect the economic viability of new securitisation transactions. In such cases of a reduction of risk sensitivities, EBA may consider proposing a downward recalibration of the non-neutrality factors for transactions for which a significant risk transfer has been recognised.  EBA shall also assess the appropriateness of the non-neutrality factors under both the SEC-SA and the SEC-IRBA, taking into account the historic credit performance of securitisation transactions in the Union and the reduced model and agency risks of the securitisation framework”;

It then tells us that the EC, taking into account this report and the upcoming report from the FSB (which we were told last year was due “mid-2024”) “shall, where appropriate, submit… a legislative proposal by 31 December 2027”.  Allowing for trilogues and the rest of the usual process, we might be looking at, perhaps, late 2029 or 2030 for a permanent change in the law.  It may not all be plain sailing of course: as recently as December 2022, the ESA’s “Joint Committee advice on the review of the securitisation prudential framework” did not entirely share the market’s enthusiasm.

Reform in the UK

PRA consultation issued on 31st October 2023 (DP 3/23) proposed three options to reform the output floor, but its preference seems clearly to be “a targeted and data-based adjustment to the Pillar 1 framework for determining capital requirements for securitisation exposures”: the other two are either to implement Basel 3.1 as is (!), or to adopt a variety of ad hoc carve-outs – the sort of thing that the EU has agreed to do as a temporary measure, pending the completion of a comprehensive review of the EU CRR capital requirements for securitisation as part of CMU. 

Over and above this, the PRA supports the idea that the BCBS should conduct a wider review of the Basel capital requirements for securitisation, and “particularly its level of ‘non-neutrality”: meaning the size of the “p” factor.  We wait to see whether the PRA will take the post-Brexit opportunity to introduce a more holistic set of reforms significantly in advance of the EU’s likely timescale.  

__________________________________________________________________________________

[1] Defined in Article 242 as “a position in the securitisation which is subordinated to the senior securitisation position and more senior than the first loss tranche, and which is subject to a risk weight lower than 1,250% and higher than 25% in accordance with Subsections 2 and 3 of Section 3”.

[2] So it would be theoretically possible for an issue to meet the STS criteria in the Securitisation Regulation but still not qualify for the STS capital regime.

[3] Which precludes any CMBS.

[4] The “K” seems to stand for “capital” (perhaps a German devised the formula).

[5] Article 255(2):  “Institutions shall determine KIRB by multiplying the risk-weighted exposure amounts that would be calculated under Chapter 3 in respect of the underlying exposures as if they had not been securitised by 8 % divided by the exposure value of the underlying exposures. KIRB shall be expressed in decimal form between zero and one.”

[6] Meaning that, under the SA, they are CQS 3 or 4 or that, under the IRB, their PD, LGD and maturity are such that the IRB-produced RW comes out at 100%.  Remember that this is very simplified for the purposes of this note, and that in reality the IRB would be expected to produce a lower RW for a given set of corporate exposures than the relatively unsophisticated SA.

[7] The percentages are included here because they are probably more familiar.  In the calculations a decimal is used – but they are the same amount either way.

[8] Article 256 defines the attachment point of a tranche as being the threshold at which losses within the pool of underlying exposures would start to be allocated to that tranche.  It is expressed as a decimal, and is equal to the ratio (expressed as a decimal) of (x) the outstanding balance of the pool of exposures minus the outstanding balance of all tranches that rank senior or pari passu with the relevant tranche to (y) the outstanding balance of all the pool.

[9] Article 256 defines the detachment point of a tranche as the threshold at which losses within the pool would result in a complete loss of principal for the tranche.  It is also expressed as a decimal, and is equal to the greater of zero and the ratio of (x) the outstanding balance of the pool minus the outstanding balance of all tranches that rank senior to the tranche to (y) the outstanding balance of all the pool.

[10] “SSFA” is an acronym for “Simplified Supervisory Formula Approach”: this is based on the then-new (in 2014) Basel securitisation framework, and replaced the “supervisory formula approach or “SFA” which had applied under Basel II.  As Perraudin et al. explained in 2013, “Contrary to a common view, the Simplified Supervisory Formula Approach is not a simplified version of the existing SFA”.  In passing, Rand Low, once a NY quant and now an Australian academic, describes the SFA as ”one of the most complicated capital modelling approaches on Wall St”.

[11] There are some papers available for anyone who is able and willing to go deeply into the maths; such as this one from Risk Control Limited in 2019.  Note that, although the CRR does define what a, u and l mean, it does not define what “e” is, and you have to search elsewhere (e.g. the Basel paper) to discover that it is “the base of the natural logarithms (which equals 2.71828)”.

[12] “p” seems to stand for “pool”.

[13] See further this commentary, and the underlying research and lobbying papers to which it refers.

[14] AFME, “Securitisation as a key pillar of the UK Future Regulatory Framework”, September 2021.

[15] See further footnote 11.

[16]  If it is targeting a higher capital ratio, then this produces a more painful capital charge: for example, if its target capital ratio is 10%, the risk weight would be 125, not merely 100.

[17] Query why it says 12.5, rather than 1,250% (which should mean the same value).  Presumably this is intended to produce a percentage value nonetheless.

[18] It is not 12.5 x KIRB, because Basel has determined that securitised assets are inherently riskier than unsecuritised ones, and so the capital weighting will be deliberately non-neutral, which is in part achieved by introducing the “p” parameter into the calculation of KSSFA.

[19] In paragraph 215 of its November 2020 report on SRT, the EBA has suggested reassessing the treatment of positions where A and D straddle KIRB or KA, and adopting, in place of the current position, "a new provision whereby positions attaching below KIRB or KA, and detaching above KIRB or KA, would be treated as two positions with attachment equal to KIRB or KA for the more senior of the positions, as in the repealed Article 266(3)(c) of the CRR under the supervisory formula approach".

[20] A 100% risk weight coupled with a capital ratio of 8% implies that, assuming there is a default on all the exposures (i.e. the PD = 100%) the LGD will be 8%, and that would be fully absorbed by a loss of capital, leaving the bank’s balance sheet solvency unimpaired

[21] 12.5 is shown in the formula, which is the same as 1,250%.

[22] Defined in Article 242 as “a position backed or secured by a first claim on the whole of the underlying exposures, disregarding for these purposes amounts due under interest rate or currency derivative contracts, fees or other similar payments, and irrespective of any difference in maturity with one or more other senior tranches with which that position shares losses on a pro-rata basis”. 

[23] It may be wondered whether this did not undermine the principle of non-neutrality, but it seems not, because it is expressed as permitting an institution to apply a maximum capital requirement for its securitisation position “equal to the capital requirements that would be calculated under Chapter 2 or 3 in respect of the underlying exposures had they not been securitised”.  A securitisation will involve at least two positions, and Article 268 does not provide for the maximum cap to be applied to a pro rata share of the underlying exposures; it applies to the entirety. 

Last update: 4/3/2024

Severe clawback

 Articles 20 and 24 do not allow deals to qualify as STS if the asset sale is subject to "severe clawback", and SECN 2.2.2 is to the same effect. 

Article 20(2) and (3) for term STS, and Article 24(2) and (3) for ABCP STS, explain that this includes a liquidator's power to invalidate a sale within a certain period regardless of the circumstances, but they make it clear that laws on fraudulent transfers (actio Pauliana), unfair prejudice and unfair preference are permitted.  The FCA rules are the same – SECN 2.2.3. 

The intent seems clearly not to overturn market expectations or undermine prevailing practices.  The EBA Guidelines envisage one or more legal opinions being obtained in respect of the insolvency aspects relating to a transfer, which is normal practice in any event.

It may be noted that the European Commission’s November 2016 proposal for a European Insolvency Directive explicitly ducked the possibility of harmonising clawback provisions, because although this would be useful for achieving cross-border certainty, “the current diversity in Member States' legal systems over insolvency proceedings seems too large to bridge”.

Last update 4/3/2024

Sole purpose

The EBA December 2014 report on risk retention had noted:

"As a result of the wide scope of the ‘originator’ definition in the CRR, it is possible to establish an ‘originator SSPE’ with third-party equity investors solely for creating an ‘originator’ that meets the legal definition of the regulation and which will become the retainer in a securitisation. For example, an ‘originator SSPE’ is established solely for buying a third party’s exposures and securitises the exposures within one day. Another example is when an ‘originator SSPE’ has asymmetric exposure to a securitisation and benefits from any ‘upside’ but not ‘downside’ of the retained interest (see Annex I for the possible transaction structure)".

It was to counter this that the following sentence was included in Article 6(1):

“For the purposes of this Article [i.e. Article 6 – risk retention], an entity shall not be considered to be an originator where the entity has been established or operates for the sole purpose of securitising exposures”.

This wording had been the subject of prior debate; an earlier draft had proposed "primary" rather than "sole".

Article 6 does not altogether reflect the EC’s original explanatory memorandum: there is no requirement that “the entity retaining the economic interest has to have the capacity to meet a payment obligation from resources not related to the exposures being securitised”, but Article 2(7) of the risk retention RTS (CDR 2023/2175) picks this up, adding some clarificatory principles regarding whether an originator has been established for the “sole purpose” of securitising exposures. 

Article 2(7) uses the phrase “sole or predominant” rather than simply “sole”, which is what Article 6(1) says.  When “or predominant” first appeared in the old EBA draft RTS, it had been queried, on the basis that it could be read as going further than was permissible: Article 6(7) only contemplates the EBA producing RTS that would "specify in greater detail" the risk retention requirement, not extending it.  The phrase "or predominant" had not appeared in the original draft RTS issued by the EBA in July 2018, and the EBA was requested to change it to avoid any ambiguity, but it was disinclined to, and so it remains. 

Under the old EBA draft risk retention RTS, the “sole or predominant source of revenue”  limitation had been a “take into account” requirement, but in the risk retention RTS it was recast as a safe harbour: the sole purpose limitation shall not apply if the originator’s sole or predominant source of revenue does not consist of the exposures being securitised. 

Of course, this does not mean that the limitation will necessarily apply if the originator’s sources of revenue do consist predominantly of the exposures being securitised.  As drafted, Article 2(7) is a safe harbour, and as a matter of law it cannot change what Article 6(1) says.  All the same, it represents official thinking, and most originators will not want to leave the safe harbour.

The UK approach

The PRA rulebook (Article 2(6) of chapter 3) and the FCA rulebook (rule SECN 5.2.11R) broadly follow the now-superseded EBA draft risk retention RTS in requiring that it should be “taken into account” whether the entity has a business strategy and payment capacity “consistent with a broader business model” and whether the members of its management body have the necessary experience to enable the entity to pursue the established business strategy and the entity has adequate corporate governance arrangements (rather than the safe harbour which the EC-adopted final draft RTS have produced). 

The PRA and FCA omitted the reference to “or predominant” which had excited some commentators, and the FCA mentioned in its consultation that it would monitor market practice to see whether a review of the sole purpose test would be appropriate.

The FCA added (page 47) that:

“Firms generally (including in the UK) have started to comply with the proposed “sole purpose” tests as soon as the EBA published its draft RTS in 2018. This is because it is difficult to change the risk retention post-closing and firms were keen to ensure that they would look to comply ahead of formal implementation. Although the UK has not since confirmed this change until this current proposal, it is our understanding that UK firms have been looking to comply and we expect that firms will continue to maintain this practice.”

Last update 4/3/2024

Spare

No text yet.

Specialised lending exposures

Introduction

Specialised lending exposures include many exposures arising in respect of commercial real estate, project finance, ship and aircraft, and the like, and these might have been caught by the definition of "securitisation" if it simply covered any situation where the credit risk was tranched, payments were dependent upon the performance of the exposure or of the pool of exposures, and the subordination of the tranches determines the distribution of losses during the ongoing life of the transaction or scheme - which had been the definition of "securitisation" in article 4(61) of the CRR.  

So, when the text of the Securitisation Regulation was brought forward, so as to avoid catching financings which nobody would have regarded as being "securitisations", and which involved exposures which were only assumed by specialist lenders which needed no protection when considering whether or not to commit themselves, the Securitisation Regulation adopted the definition of "securitisation" in article 4(61) of the CRR but then added a third limb - sub-paragraph (c) - which excludes any transaction or scheme which creates exposures which possess all the characteristics listed in Article 147(8) of the CRR, i.e. specialised lending exposures. 

"Specialised lending" has an interesting history in the definition of "securitisation", seemingly for trivial political reasons.  In the definition originally proposed by the EC back in 2002, it was carved out of the definition, but by the time the 2004 Banking Consolidation Directive was enacted, the carve-out had disappeared.  In the first draft of the Securitisation Regulation issued by the European Commission, it was put back in, and the MEPs then deleted it from the pre-trilogue text that they counter-proposed, and it  then seems to have taken two meetings during the trilogues between the European Commission and those MEPs who were often suspicious of or hostile towards securitisation, before they agreed to include it.

We comment further below on the history of this definition.   

What are specialised lending exposures?

Article 147(8) specifies the following characteristics:

  1. "the exposure is to an entity which was created specifically to finance or operate physical assets or is an economically comparable exposure;
  2. the contractual arrangements give the lender a substantial degree of control over the assets and the income that they generate;
  3. the primary source of repayment of the obligation is the income generated by the assets being financed, rather than the independent capacity of a broader commercial enterprise"

Limb (c) of the definition thus emphasises the related recital (6) (which itself repeats the final sentence of recital (50) of the CRR):

"An exposure that creates a direct payment obligation for a transaction or scheme used to finance or operate physical assets should not be considered an exposure to a securitisation, even if the transaction or scheme has payment obligations of different seniority".

The definition of “securitisation” in the UK's Securitisation Regulations 2024 removed the cross-reference to Article 147(8) but the difference is of form, not substance: the wording in part (c) of the definition repeats what is said in Article 147(8).  The December 2022 H.M. Treasury policy note did not indicate any upcoming changes of substance on this aspect.

It is generally understood that limb (c) is capable of encompassing:

  • project finance
  • object finance (e.g. ship, aircraft, rail)
  • commodities finance
  • commercial real estate
  • some types of ABL.

It is common to encounter debt structures which are not straightforward to classify. 

What follows examines the history of this category.

History

The term “specialised lending” is defined in Article 147(8) of the CRR. Conceptually, it encompasses lending where the systemic component of the credit risk is largely linked to the source of income which is generated by the holding of assets rather than an exposure to an active business; see also the EBA's 20th December 2013 commentary on the final draft RTS regarding identification of an exposure for CRD IV purposes; and, as regards UK-regulated banks, Rule 4.5.3 of the FCA's BIPRU Rulebook.

Its application in any particular case may be a matter of debate and degree, depending on the circumstances and the relative importance of the income generated - largely passively - by the assets being financed compared to the "independent capacity of a broader commercial enterprise". It is not difficult to come up with examples which are clearly one or the other, but there are inevitably some where the analysis is more nuanced.

The distinction was made in Article 86 of the Banking Consolidation Directive, which required regulated institutions to sub-divide corporate credits into those which possessed the three characteristics which are now identified in Article 147(8) from those which did not. This left it unclear whether financings which possessed the twin characteristics that (a) payment was dependent on the performance of underlying exposures and (b) ongoing losses were distributed via the tranching of different categories of debt, fell within securitisation, or within specialised lending.

Accordingly, when the distinction was continued in the CRR, recital (50) explained that an exposure that created a direct payment obligation for a transaction or scheme used to finance or operate physical assets should not be considered an exposure to a securitisation, even if the transaction or scheme had payment obligations of different seniority.  The Securitisation Regulation continued this with Recital (6) but at a trilogue meeting on 17th June 2017 it was agreed to add limb (c) - presumably for added emphasis - to provide that specialised lending exposures were, by definition, outside the meaning of "securitisation".

By way of further background, the rationale for the distinction goes back to the Basel Committee's approach to assessing corporate exposures i.e. those where the source of repayment of the loan was based primarily on the operations of the borrower, and any security taken over assets was a secondary risk mitigant: see the BCBS’s Working Paper on the Internal Ratings-Based Approach to Specialised Lending Exposures of 2001. The BCBS's task force distinguished these from what it described as "specialised lending exposures", i.e. loans which are structured in such a way that repayment depends principally on the cash flow generated by the asset rather than the credit quality of the borrower. It explained that this type of loan had certain characteristics, either in legal form or economic substance:

  • the economic purpose of the loan was to acquire or finance an asset;
  • the cash flow generated by the collateral was the loan’s sole or almost exclusive source of repayment;
  • the subject loan represented a significant liability in the borrower’s capital structure; and
  • the primary determinant of credit risk was the variability of the cash flow generated by the collateral rather than the independent capacity of a broader commercial enterprise.

The BCBS task force identified categories of loan with these characteristics  (each described in more detail in the 2001 paper):

  • project finance
  • object finance (e.g. ship, aircraft, rail)
  • commodities finance
  • income-producing real estate, and high-volatility commercial real estate.

This distinction was made for two primary reasons: firstly, because such loans possessed unique loss distribution and risk characteristics, and in particular, displayed greater risk volatility (in times of distress, banks were likely to be faced with both high default rates and high loss rates); and secondly, because most banks using the IRB had different risk rating criteria for such loans. In addition, the 2001 paper addressed other forms of ABL , i.e. loans where a company:

"uses its current assets (e.g., accounts receivable and inventory) as collateral for a loan. The loan is structured so that the amount of credit is limited in relation to the value of the collateral. The product is differentiated from other types of lending secured by accounts receivable and inventory by the lender’s use of controls over the borrower’s cash receipts and disbursements and the quality of collateral. This form of lending can be extended to both solvent and bankrupt borrowers. Debtor in possession (DIP) financing is a type of asset-based lending activity where banks extend credit to bankrupt borrowers based upon their accounts receivable and inventory which is taken as collateral";

and expressed its "preliminary view" that this kind of loan may also fall under the IRB framework for specialised lending.

This approach was followed by the European Commission in its November 2002 "Working Document of the Commission Services on Capital Requirements for Credit Institutions and Investment Firms" (see the draft Article 47(8)). 

There is also interesting commentary in 2006 CEBS Guidelines “on the implementation, validation and assessment of Advanced Measurement (AMA) and Internal Ratings Based (IRB) Approaches”.

A degree of colour regarding what "control over the assets and the income" means was provided by Commission Delegated Regulation (EU) 2021/598 of 14 December 2020, which was made under the CRR to specify what risk weights should be assigned to specialised lending exposures  (following a consultation in 2015 and a 74-page report containing final draft RTS which was issued in 2016) categorising them by reference to one of four categories: project finance, the development or acquisition of real estate, the financing of physical assets (also referred to as "object finance") and commodities finance; with different risk characteristics then leading to different capital allocations in accordance with Article 153(5) of the CRR (Article 153(5) says that, in assigning risk weights to its specialised lending exposures, an institution should take into account certain factors: financial strength, political and legal environment, transaction and/or asset characteristics, strength of the sponsor and developer, and security package).  

CDR (EU) 2021/598 does this separately for exposures to project finance, real estate, object financings and commodity financings, and in doing so it identifies various factors relating to security over the assets and control of the income, and grades each of them from strong through to weak; and presumably a classification of "strong" would equate to the required "substantial degree of control over the assets and the income that they generate".   For example, the project finance classification for "lender's control over cash flow" indicates that a "strong" classification would require that all excess free cash flow is used to pay down debt rather than distribute it to shareholders".  That is not to say that a "strong" classification in relation to every category  is necessary, but achieving "strong" would presumably act as a safe harbour.  

Last update 24/6/2024

Standard reference rates (Article 21(3))

Under reconstruction.

Synthetics

Introduction

The EU STS regime for synthetic securitisations (the EU's preferred term is "on-balance sheet" securitisations) is a world first:  there is no provision at the Basel/IOSCO level for preferential capital treatment for an STC-qualifying synthetic product. 

The 24th July 2020 proposal from the European Commission to enact an STS regime for balance sheet synthetic securitisations by amending the Securitisation Regulation and the CRR (but not, initially at least, Solvency II)  was explicitly in response to the “urgency” of the need to take measures to help the economy recover from the COVID-19 pandemic.  It was broadly welcomed by those who saw it as a way of attracting new risk-takers into the market which would be prepared to take on risk (and be able to do the related due diligence) if the overall package was sufficiently standard, simple and transparent, but not otherwise; the current synthetic market is for the most part, central banks, supranational entities such as the EIB, pension and hedge funds, with monolines having long gone.  

The proposals were adopted in early April 2021 and became effective as from 9th April 2021.  They were cautiously welcomed, even though they were not the totality of what the market had been asking for.  However, there are issues regarding complexity and cost, and one of these issues - the change to Article 248 of the CRR concerning excess spread - applies across the board, not just to STS.  

The EC proposals

When the Securitisation Regulation was originally enacted, there had been only one, minor, concession to synthetics.  Where an institution sold off a junior position in a pool of loans to SMEs via a synthetic structure, it could only apply to the retained position the lower capital requirements available for STS securitisations if the strict criteria set out in Article 270 of the CRR as amended were met, which included that the position was guaranteed by a central government, central bank, or a public sector “promotional entity”, or – but only if fully collateralised by cash on deposit with the originator – by an institution.  Otherwise, originators would have to allocate capital to the retained senior piece on the basis of the higher non-STS rules which, because of the regulatory non-neutrality baked into the regulatory capital requirement for securitisation (i.e. the sum total of capital allocated to all the various tranches of a securitisation will be more than the capital which would be required for a holding of the underlying assets) were, to say the least, discouraging.

Article 45 of the Securitisation Regulation required the EBA to report on the possibility of an STS regime for balance sheet synthetics by 2nd July 2019.  Its "Draft report on STS Framework for Synthetic Securitisation" emerged on 24th September 2019, the delay being due to unresolved differences of opinion among EU regulators about whether or not synthetics should be given any favourable capital treatment or not.  The EBA  considered to what extent buying STS protection should give the protection buyer preferential regulatory capital treatment as regards the portion of risk on the portfolio that it continues to hold (which is nowadays usually the least risky portion, with the first loss risk being transferred to a protection seller).   The EBA envisaged qualifying protection coming from either 0% risk-weighted institutions under the CRR, such as the EIB or, if not, then from entities to which the protection buyer's recourse is fully collateralised in cash or risk-free securities.  It was equivocal about whether STS synthetic securitisations should provide favourable capital treatment for the originator credit institution or not.  Its final proposals for developing a STS framework for synthetic securitisation emerged on 5th May 2020, recommended setting up an STS framework but sat on the fence regarding the capital treatment, merely noting the pros and cons of the introduction of more risk-sensitive regulatory treatment of the STS synthetic product.  The EBA’s summary said:

"On the one hand, developments in the last few years have indicated the potential for the continuing growth of the synthetic sector and have confirmed the technical feasibility of the creation of a prudentially sound STS synthetic securitisation product that is comparable to the STS traditional securitisation product.  In addition, the available performance data do not provide any evidence that the performance of the synthetic securitisation instrument is worse than that of the traditional securitisation instrument.  The introduction of potentially limited and clearly defined differentiated regulatory treatment would match the historical performance of the synthetic securitisation, ensure better alignment with the STS traditional securitisation framework and help overcome the constraints of the current limited STS risk-weight treatment of some SME synthetic securitisations.  

On the other hand, there are limitations of the performance data on which the analysis is based, there is limited experience with the STS traditional framework so far, and the risk of potentially overusing synthetic securitisation, which would potentially lead to a large-scale replacement of regulatory capital by risk mitigation strategies, leading to overleveraging of banks, should be duly taken into account. In addition, the preferential regulatory treatment is not included in the international Basel standards.”

On 12th June 2020, the “High Level Forum on the Capital Markets Union” issued a 129-page “final report” on CMU, the recommendations of which included applying the same regulatory treatment to synthetics as to cash securitisations.  

The regime for synthetic securitisation

Against this background, the "quick fix" amendments to the Securitisation Regulation  added a new series of articles (Article 26a et seq.) in “Section 2A” to introduce a new regime for synthetics which apply most of the same STS requirements as apply to cash securitisations, plus some others specific to synthetics e.g. requirements mitigating the counterparty credit risk on the protection seller, and the CRR amendments extend the treatment which Article 270 of the CRR had previously allowed to only a limited sub-set of synthetic securitisations. 

Some aspects of the proposed regime entail additional cost and complexity over and above what the existing market is used to - for example, protection sellers (referred to in the legislation as "investors") are required to have recourse to higher-quality collateral to secure repayment of their "investment" than is usual, and that of course comes at a cost.  Some detail is to be fleshed out in RTS - the EBA published its final draft RTS in April 2023 on "specifying the determination by originator institutions of the exposure value of synthetic excess spread pursuant to Article 248(4) of Regulation (EU) No 575/2013" - and there is scope for some level 3 clarification.  

Synthetic STS in the UK

The EU proposal post-dates Brexit and does not form part of onshored UK law.  The UK had been opposed to the idea of an STS regime for synthetic securitisation, and it was only brought about as a result of Brexit.  A PRA consultation on 31st October 2023 (DP3/23) - primarily about the output floor - did ask about synthetic STS.  The PRA continued to express the view that there is no need for it, on the basis that synthetic securitisations are private, negotiated structures involving sophisticated investors, so it is unclear how amenable they are to standardisation, and doubtful whether the investors would place any value on the “STS” badge.  Some firms in the marketplace have been vocal advocates for synthetic STS, although the main attraction is the reduced capital charge under the current regime, and if the non-neutrality problem is addressed satisfactorily, it is questionable whether there would be much demand for synthetic STS.  The PRA invited feedback by the end of January 2024, and its response is awaited.  

Last update 5/3/2024

The definition of "securitisation"

The essentially-identical definitions of "securitisation" in the EU Securitisation Regulation and the UK Securitisation Regulations 2024 can be traced back to the November 2002 European Commission "Working Document of the Commission Services on Capital Requirements for Credit Institutions and Investment Firms".  That document contained the opening paragraph and sub-paragraph (a)  of the current definition.  Sub-paragraph (b) was added by the time the 2006 Capital Adequacy Directive was enacted, and the Securitisation Regulation took this definition and added sub-paragraph (c) to clarify that specialised lending exposures are not securitisations (see further our commentary on Specialised Lending Exposures). 

The definition in the Securitisation Regulation is supplemented by recital (1) of the Securitisation Regulation, which describes securitisations as:

“transactions that enable a lender or a creditor – typically a credit institution or a corporation – to refinance a set of loans, exposures or receivables, such as residential loans, auto loans or leases, consumer loans, credit cards or trade receivables, by transforming them into tradable securities. The lender pools and repackages a portfolio of its loans, and organises them into different risk categories for different investors, thus giving investors access to investments in loans and other exposures to which they normally would not have direct access".

The old CRR definition was not significantly changed back in 2017. However, the definition became more significant because of the broadened scope of the Securitisation Regulation, and this created traps for the unwary: whether or not a transaction is a securitisation affects its regulatory capital treatment, and may affect its liquidity; and, if it is classified as a securitisation, then the due diligence, risk retention and transparency provisions of the Securitisation Regulation apply. 

The definition requires a tranching of credit risk (unlike in the US Dodd-Frank Act, where the key requirement is that there must be a "security"); and the definition of "tranche" requires this to be "contractually established".  This definition is therefore capable of applying to structuring arrangements that the parties concerned may not think of as being a securitisation.  The precise wording of the definition, and the related definition of "tranching", can be pored over if the parties are aware of the risk that their deal could accidentally be caught, but not if they are not. 

A frequent question which arises is: when are payments "dependent on the performance" of exposures?  If there is full recourse to the original seller then the performance of the exposures may be incidental.  But what if recourse is partial; or if the credit of the seller is dubious?  It will probably depend on whether it is correct to regard the exposure as being primarily recourse to one or more balance sheets containing income-producing assets which are not immaterial to the credit risk, or whether recourse is primairly dependent on the performance of the underlying assets being financed.

A division of risk between equity and debt, or via structural subordination, is permitted, but a "contractually established" subordination may not be. 

Recital (10) of the Securitisation Regulation states that the retention requirement "should be applicable in all situations where the economic substance of a securitisation is applicable, whatever legal structures or instruments are used", which on its face runs contrary to the definition's requirement for a contractually established subordination, and may suggest that in ambiguous cases, the presumption may be in favour of something being a securitisation rather than not.

A good example is provided by Q&A 6 in the ESAs Q&A (the same Q&A also appears in the EBA single rulebook):

"Can ‘vendor financing’ constitute a synthetic securitisation?"

Q6  A “vendor financing” structure can be described as follows:

A manufacturer sells its products to his own off takers but would like to see its invoices paid at short notice while his off takers need longer payments terms.  The manufacturer and a bank agree that the bank will provide financing to a selected group of these off takers under the condition that the manufacturer provides a 15% first risk guarantee to the bank.  The bank provides the loans directly to the off takers and the bank will take the loans in its lending book.

The definition of synthetic securitisation of Article 2(10) of the SECR states that ‘synthetic securitisation’ means a securitisation where the transfer of risk is achieved by the use of credit derivatives or guarantees, and the exposures being securitised remain exposures of the originator.

In the structure as described above, the bank holds a pool of loans and partial transfer of credit risk is achieved via the guarantee provided by the manufacturer. The first 15% of losses on the pool will be reimbursed by the manufacturer to the bank. Losses above the 15% will be borne by the bank. 

It is unclear whether this kind of structure can be classified as ‘synthetic securitisation under Article 2(10) of the SECR.

A6  The transaction described constitutes a securitisation within the meaning of Article 2(1) of the SECR because the credit risk associated with the pool of exposures held by the institution is tranched, the payments in the transaction are dependent upon the performance of the pool of exposures and because it does not meet the  characteristics listed in Article 147(8) of Regulation (EU) No 575/2013 applicable to specialised lending.

The transaction also constitutes a synthetic securitisation within the meaning of Article 2(10) of the SECR because the tranching is achieved by means of a guarantee under which the manufacturer has to reimburse the first 15% of losses on the pool to the institution and losses above the 15% are borne by the institution."

This answer implicitly seem to suppose that the loan in question is a limited recourse loan, rather than a loan where there is recourse to the wider balance sheet of the borrower; or else, that the borrower has no wider asset base of any significance so that de facto debt service is dependent upon the performance of the pool of loans, because if not, then this would fall outside the definition because the requirement in limb (a) would be absent, and the bank would classify its loan as being corporate credit risk,not as a securitisation.

If a proposed structure has the formal characteristics of a securitisation (and does not come within the definition of specialised lending exposure), it may be possible to arrange it so that payments are not dependent upon the performance of the pool of exposures.

In passing, given the many references to "exposure" in the Regulation, and bearing mind Recital (6) ("it is appropriate to provide definitions of all the key concepts of securitisation") it may be thought surprising that "exposure" is not defined.  The CRR does have a definition of it in article 5, although for the limited purpose of calculating capital requirements for credit risk (articles 107 et seq.) as "an asset or off-balance sheet item".

The wording of part (b) of the definition of "securitisation" should not be overlooked.  It requires that the subordination of tranches should determine the distribution of losses "during the ongoing life of the transaction or scheme".  A structure in which the prioritisation of the tranches were only to occur at the end of the scheme would not be one where the prioritisation determined losses during the life of the scheme.  

Finally, recital (1) (which is broadly in alignmentwith the wording of recital (57) of the CRR) is worth noting.  It refers to securitisation as being a transaction, pursuant to which a lender or creditor may "refinance" a set of loans, exposures or receivables, and by which it "pools and repackages a portfolio of its loans, and organises them into different risk categories".  Loan structures which, in themselves, have tiered exposures are not being "re"-financed nor are they in themselves being "re-"packaged.  If the proceeds of a capital markets issue are used to make loans, this could be argued not to constitute a “securitisation” because the underlying loans were not existing credit risks: this argument has been relied on in at least one public issuance in recent years (although it was not the only argument used on that occasion).

Last update 3/7/2024

The EU and UK regimes - a gradual divergence

What kind of divergence have we seen between the EU and UK securitisation regimes since Brexit, and what can we expect over the next couple of years?

Brexit and beyond

On 1st January 2021, the UK became a "third country" as regards the EU (and indeed vice versa). The UK adopted the EU Securitisation Regulation as it then existed, with only some minor but benign tweaks, and the first major divergence was when the EUSR was amended by the "quick fix" (Regulation (EU) 2021/557 of the European Parliament and of the Council of 31st March 2021). We have since had the parallel Article 46 reports from H.M. Treasury and the European Commission, and now, with the passing of the UK Securitisation Regulations 2024 and the adoption of new rules in the PRA and FCA rulebooks, the repeal of the onshored UK Securitisation Regulation, which has involved some degree of divergence between the UK and EU positions, although for the most part the regimes remain broadly comparable and appear to be going in the same direction (for example, as regards private issues and NPL securitisations), and there is little to suggest that any major schisms are imminent, and the UK divergence to date is more in the nature of fine-tuning and correcting obvious deficiencies – such as regarding the due diligence requirement for non-UK issues. The main EU divergence is probably introducing an STS label for synthetic securitisation.

UK investors' ability to invest in non-UK issues

A major uncertainty about the EUSR since its inception has been about what transparency it (indirectly) requires non-EU issuers to provide to potential EU investors so that they can do their due diligence under Article 5(1)(e). For EU investors, that uncertainty was largely resolved - but in an unhelpful way - by the European Commission's Article 46 review issued on 11th October 2022 and, unless and until some kind of satisfactory direction is issued by ESMA and other relevant regulators requiring national competent authorities to de-prioritise enforcement action, most EU investors will consider that they are unwilling to invest in non-EU issues unless those issues comply with the EUSR Article 7 disclosure standards, including loan-level data (which many most non-EU issuers are probably unwilling or unable to do).

In the medium term, we should see an end to this stand-off as regards private issues because the EC has asked ESMA to work on revised disclosure ITS (with a substantially simplified disclosure template for private securitisations) which, once in force, should significantly reduce the disclosure requirements for private issues; and even before that there is the prospect of what we might loosely call a no-action letter from the European supervisory authorities, which would probably be enough for some EU investors to carry on investing in such issues in the interim.

For UK investors, as from 1st January 2021 the problem diminished so far as EU issues were concerned, because the Securitisation (Amendment) (EU Exit) Regulations 2019 created a new Article 5(1)(f) which applies in relation to originators, sponsors and SPPEs established outside the UK, and which requires only "substantially" the same information as Article 7 requires, and as from 1st November 2024, the new rules-based regime will replace Article 5(1)(e) and (f) with a more principles-based requirement to obtain “sufficient information to enable the institutional investor independently to assess the risks”. There is a detailed list of disclosure items but crucially there is no longer any requirement to use any particular template.

For a longer discussion on this, see "Do EU investors need loan level data to invest in non-EU issues".

Foreign "investment firms" holding the risk retention as "sponsors"

A non-EU investment firm which wants to hold the risk retention as a "sponsor" in a securitisation to which the EUSR applies is currently on uncertain ground. It is clear that an “originator” or “original lender” can be established in the EU or outside it, and it is equally clear that any credit institution, whether located in the EU or not, is within the definition of “sponsor”. However, what about non-EU investment firms? The phrase “whether located in the Union or not” appears after "credit institution" but before "investment firm". This (further considered in "Brexit - impacts and changes for securitisations in the UK and Europe") remains ambiguous in the EU. The corresponding definition in the Securitisation Regulations 2024 has no ambiguity: non-UK investment firms which qualify as a "sponsor" may hold the risk retention in that capacity (and so need not try to fit themselves into the "originator" definition).

The EUSR quick fix amendments

The first major divergence between the UK and EU positions came about when the EU introduced its "quick fix" post-pandemic amendments to the EUSR by enacting Regulation (EU) 2021/557 on 31st March 2021. This, in particular:

  • corrected some flaws as regards the securitisation of non-performing exposures - such as in relation to risk retention - which had made the original EUSR regime unworkable for NPL securitisations (and which has since been partly followed, but only to a degree, in the UK);
  • introduced an STS regime for synthetic securitisations. This is a world first, and it does not seem to be a priority for H.M. Treasury to make any equivalent change in the UK;
  • took tentative steps to increase the required environmental disclosures via a tweak to Article 22(4) and the inclusion of a new Article 46(f), which required the EC to consider, in its Article 46 report, whether to go further "with a view to mainstreaming environmental, social and governance disclosure" (which we examine further in our commentary about environmental disclosures). Again, this does not seem to be a priority for H.M. Treasury.

The Article 46 reports

H.M. Treasury's Article 46 report, and subsequent developments

In December 2021 we had the H.M. Treasury Article 46 report, which rather pulled its punches, but the follow-up publication in December 2022 of the H.M. Treasury policy note announced that it was “committed” to bring forward, “where appropriate”, reforms in the following areas:

  • risk retention, e.g. in relation to (i) transferring the retention (of interest to CLO managers) and (ii) NPLs (as the EUSR had done in 2020);
  • definitions of public and private securitisation (see further above);
  • disclosure requirements for private securitisations (more detail in this commentary);
  • due diligence requirements for UK institutional investors when investing in non-UK securitisations (such as US CLOs), “to provide greater clarity on what is required” – see further above; and
  • the definition of “institutional investor”, so as to take unauthorised non-UK AIFMs which manage or merely market AIFs in the UK out of scope of the UKSR Article 5 due diligence requirements. The EC had no doubt in its Article 46 review that non-EU AIFMs marketing or managing funds in the EU were “institutional investors”, and that they should be, because Article 5 is there to protect EU investors, so no EU movement seems likely here.

At the same time, the draft UK Securitisation Regulations 2023 were published, setting out an equivalence regime that would specify the due diligence that a UK investor would be required to carry out regard to an STS equivalent non-UK securitisation, and this now appears in regulation 13 of the Securitisation Regulations 2024. There is of course no EUSR equivalent, and any such regime would require level 1 changes to the EUSR, which do not seem to be a priority for the EC.

Meanwhile, the UK regulatory structure has altered, with much of it being subsumed into the PRA and FCA rulebooks. This should permit future changes to be made more quickly, without UK parliamentary involvement, and may suggest a potentially more independent, and less dirigiste, UK approach compared to that of the EU.

For the time being, the UK regime retains the existing onshored laws, other than the few sensible “targeted adjustments” mentioned above. There are no really radical changes as yet: for example, the definitions of “securitisation” and “originator” are retained, and both the UK and the EU await changes regarding disclosures for private securitisations.

The European Commission's Article 46 report

On 10th October 2022, the European Commission Article 46 report was published. Reading between the lines, the EC may have concluded that seeking to amend the level 1 text of the EUSR is unrealistic at present, and so it concluded that it was limited to doing what could be done by way of level 2 revisions - such as the revised disclosure ITS which ESMA has been asked to bring forward, further level 3 Q&A. It had been hoped that there could be an EU-style no-action letter to bridge the period until the revised ITS come into force, which would permit (although in a not particularly satisfactory sense) EU investors to invest in non-EU issues which do not provide the level of detail which Article 7 currently requires, but as of March 2024 this has not emerged. Strictly speaking of course, it is not a no-action letter because there is no EU legal basis for no-action letters: it would have to be a letter suggesting that NCAs do not prioritise the enforcement of the rule in question.

The main change heralded by the EC was as regards the disclosure templates. ESMA had originally concluded that its mandate did not permit it to produce a different and simpler template for private securitisations, but the EC in effect overruled ESMA, concluding that having different templates for private and public securitisations was legally possible, on the basis that Article 7(3) of the EUSR allowed for the development of templates “taking into account the usefulness of the information for the holder of the securitisation position”.

Equivalence?

Mutually-equivalent UK and EU STS regimes seem as far away as ever. The UK's approach is open, whereas the EU's remains closed.

At the time of Brexit, ESMA wasted no time in amending its list of STS deals to exclude 81 UK-related issues, whereas the UK FCA grandfathered all EU-STS securitisations which had been notified to ESMA, and announced it would accept any more that were notified to ESMA in the fir