Securitisation reloaded – Simple, Transparent, Standardised – (STS) – The new regulatory framework for securitisations: Regulation (EU) 2017/2402

Co-authors: Dr. Lukas Röper; Mag. Philipp Tagwerker, M.A.; Mag. Michael Fischer

At a glance:

• A new designation of securitisations as simple, transparent, standardised (“STS”) shall give assurance to investors that sufficient information on the underlying exposures is provided.
• A register with the European Securities and Markets Authority (ESMA) will be set up, in which securitisations may be registered as STS. The originator, sponsor or securitisation special purpose entity (“SSPE”) remain responsible for compliance with the STS requirements.
• The securitisation regulation employs five measures to reduce the risks that led to the financial crisis:
  • The originator, sponsor or original lender must remain vested by holding a material net exposure to the underlying risks.
  • Exclusively “True Sale” securitisations– in which the ownership of the underlying exposure is transferred – may be designated as STS. Legal opinions provided by external counsel could confirm the transfer as “true”.
  • The underlying exposures should not include exposures in default or of impaired creditworthiness to the “best knowledge” of the originator or original lender.
  • Prevention of “Originate to Distribute”.
  • Restriction on re-securitisations.

Regulation (EU) 2017/2402 was published on 28 December 2017 by the European Parliament and Council. It shall enter into effect on 1 January 2019 for all participants in a securitisation, namely institutional investors, originators, sponsors, original lenders and SSPEs. Until then, we expect further technical standards and guidelines of the European Bank Authority (EBA). ESMA will play a central role for maintaining transparency: it is responsible for managing the securitisation register, issuing reporting requirements and requirements for information to be provided by the originators, sponsors, original lenders and SSPEs.

Simple, Transparent and Standardised (STS) – Requirements

Securitisation is an important element of well-functioning financial markets by providing a broader spreading of risk and freeing up the originator’s balance sheets. In turn, this can provide additional lending and investment opportunities. The new designation as STS does not imply that the investment in the relevant securitisation provision is free of risks. Rather, it provides an indication that information on the underlying exposures is sufficiently available and that the originators, sponsors and original lenders are also vested in the securitisation.

Simple

To be considered “simple”, ownership of the underlying exposure must be transferred to the SSPE in such a way that it is enforceable against the seller or third parties at any time (so-called “True-Sale Securitisation“). A True-Sale Securitisation can be confirmed as such by external counsel, for example a binding legal opinion by lawyers.

The underlying exposures should, to the “best knowledge” of the originators or original lenders, not be encumbered in such a way that would adversely affect the enforceability of the True Sale Securitisation. The exposures may further not be in default, nor be towards debtors with impaired credit quality.

The underlying exposures of a securitisation shall be backed by a pool of homogenous assets, which comprise only one asset type. For example, exposures from residential loans should not be pooled with auto loans or leases for the same securitisation.

Originators and original lenders must employ the same underwriting standards to exposures that are intended for securitisations as applied to exposures that are not securitised (prevention of “Originate to Distribute strategies”)

Moreover, underlying exposures may not comprise securitisation positions themselves (re-securitisation).

Transparent

Securitisation positions must fulfil a number of requirements to be considered transparent:

• Originator and sponsor shall provide potential investors with data on static and dynamic historical default and loss performance on the underlying exposures.
• Prior to issuance, a sample of the underlying exposures will be subjected to an external verification by an independent party (in respect to whether the data disclosed is accurate).
• Originator and sponsor will make a liability-cashflow-model available to potential investors, which details the contractual relationship and payment between originator, sponsor, the investors, other third parties and the SSPE.
• Information on the underlying exposures and any and all information required to understand the transaction are to be provided in draft form to the potential investors before pricing.

Standardised

Standardised requires the originators, sponsors and original lenders to retain a material net exposure in the underlying exposure to align their interest with the institutional investors. This vestment shall comprise a minimum of 5% of the securitisation. The originator must retain the material net exposure if no other agreement is in place between the originators, sponsors and original lenders.

Interest-rate and currency risks shall be appropriately mitigated and derivative contracts shall be entered into only for the purpose of hedging interest-rate and currency risks. The SSPE shall ensure that the pool of underlying exposures does not include derivatives. Interest-rates are to be based on generally used market interest rates and shall not reference complex formulae or derivatives.

The transaction documentation shall clearly define what constitutes a delay or default in payment by the debtors of the underlying exposures and which remedies are in place regarding negative performance. Priorities in payment, events which trigger changes in such priorities and how these changes are reported to investors must also be clear.

How PwC Legal can support

We will gladly keep you updated on all new developments regarding the securitisation regulation. Visit us on our website or send us a message to receive updated in your inbox.

Are you an investor or (potential) issuer? Our lawyers and experts possess deep knowledge of the industry and provide tailor-made solutions for the individual needs of credit institutions, investment firms and investors, for example:

• Confirmation of the True-Sale Securitisation through binding legal opinions.
• Regulatory advice regarding the treatment of securitisations for own funds’ requirements or as an investment asset for technical provisions.
• Review of documentation for investors and drafting of documentation for the securitisation transaction.
• Advice regarding structuring your securitisation product.