The European Banking Authority (the "EBA") has recently provided welcome guidance on the criteria for on-balance-sheet (i.e. synthetic) securitisations to be recognised as simple, transparent and standardised ("STS") securitisations under Section 2 of Chapter 4 of the Securitisation Regulation, as amended. On 27 May 2024, the EBA published its final guidelinesOpens in new window on this criteria (the "Guidelines").
What Is the Relevance of the Guidelines?
One of the key elements of the Securitisation Regulation is the creation of a specific framework for STS securitisation. The Capital Requirements Regulation ("CRR") provides for preferential regulatory capital treatment for exposures to STS securitisations held by credit institutions and investment firms, when compared with exposures to non-STS securitisations. The STS framework was extended to on-balance-sheet securitisations in 2021. The extension of the STS framework to on-balance-sheet securitisations was widely welcomed by the market, with the first transactions to adopt the label closing shortly after the regime came into effect. As of 20 June 2024, 96 such transactions had been notified to the European Securities and Markets Authority ("ESMA").
There are separate sets of criteria for STS asset-backed commercial paper ("ABCP") securitisation, STS non-ABCP traditional securitisation and STS on-balance-sheet securitisation. The requirements for STS on-balance-sheet securitisation include requirements relating to simplicity, standardisation and transparency and, in addition, requirements concerning the credit protection agreement, the third-party verification agent and the synthetic excess spread.
Who Should Be Interested in the Guidelines?
The main objective of the Guidelines is to promote a consistent interpretation of the STS criteria as they relate to on-balance-sheet securitisations and ensure a common understanding of them by originators, original lenders, securitisation special purpose entities, investors, competent authorities and third-party verification agents verifying STS compliance in accordance with the Securitisation Regulation. EBA guidelines are, in theory, non-binding but national competent authorities (including the Central Bank of Ireland) typically follow them closely.
What Do the Guidelines Provide For?
The Guidelines provide guidance on the content of the STS requirements. The EBA has focused on clarifying aspects of those requirements with potential points of ambiguity and developed interpretations of the STS criteria applicable to on-balance-sheet securitisations. The Guidelines contain a range of clarifications and interpretations, including the following among others :
- The Securitisation Regulation specifies the requirements for synthetic excess spread committed by the originator and available as credit enhancement for investors. In this regard, the Guidelines clarify how the 'one-year expected loss' is to be calculated and that the requirement to use the IRB Approach referred to in Article 143 of CRR only applies in those cases where the originator determines own funds requirements for the entire pool of the underlying exposures in accordance with the IRB Approach.
- The Securitisation Regulation requires that the servicer must have expertise in servicing exposures of a similar nature to those securitised and must have well-documented and adequate policies, procedures and risk-management controls relating to the servicing of exposures. The servicer must 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. The Guidelines set out criteria for determining the expertise of the servicer and, separately, conditions for determining whether well-documented and adequate policies, procedures and risk-management controls of the servicer are in place.
- The Securitisation Regulation provides that a sample of the underlying exposures is required to 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. The Guidelines contain several clarifications on how this requirement should be interpreted. These include a clarification that the underlying exposures that should be subject to verification prior to the closing date of the transaction should be a representative sample of the provisional portfolio from which the securitised pool is extracted and which is in a reasonably final form before the closing date of the transaction.
- The Securitisation Regulation also requires that the securitisation documentation must contain a number of specified representations and warranties provided by the originator in respect of the characteristics of the underlying exposures and the accuracy of the information included in the securitisation documentation. A few of these specified representations and warranties are qualified by reference to the originator's knowledge. The Guidelines provide further clarifications on these representations and warranties, including that for representations and warranties qualified by reference to the originator's knowledge the originator is only required to take those steps that the originator usually takes within its activities in terms of origination, servicing, risk management and use of information that is received from third parties in verifying the accuracy of same.
While introducing the Guidelines, the EBA also deemed it necessary to amend its guidelines on STS criteria for ABCP and non-ABCP securitisation. It is making a limited set of targeted amendments to the existing EBA guidelines on non-ABCP and ABCP securitisation respectively to ensure that, where appropriate, the interpretation provided by the EBA is consistent across all three sets of guidelines.
What Happens Next?
The Guidelines are currently being translated into the official EU languages and will enter into force two months after the completion of that work. The EBA will also publish consolidated versions of the amended guidelines for non-ABCP and ABCP securitisation on its website and these amended guidelines will enter into force two months following this publication. We are continuing to keep a close eye on developments in this area and will publish further updates as matters progress.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.