European Union: The EU Securitisation Regulation – Where Are We Now?

The EU Securitisation Regulation¹ (the "Securitisation Regulation") has been applicable since 1 January 2019. The purpose of this Legal Update is to summarise the key aspects of the Securitisation Regulation and related developments up to this time.

Overview

The Securitisation Regulation covers two main areas. Firstly, it sets out provisions in relation to all securitisations which are within the scope of the regulation, consolidating and adding to the rules that previously applied to particular types of regulated entities. These provisions include requirements for securitisation special purpose entities ("SSPEs"), due diligence, risk retention and transparency obligations, credit-granting standards and a ban on resecuritisation, together with the relevant definitions. Secondly, the regulation sets out the criteria and other rules for simple, transparent and standardised ("STS") securitisations. In addition, the regulation includes provisions dealing with sanctions and penalties for non-compliance, supervision by regulatory authorities, when securitisations entered into before 1 January 2019 would fall within its scope and transitional arrangements.

Development of the Regulations

The Securitisation Regulation was published at the end of December 2017 after a long period of discussion and consultation. A separate regulation2 (the "CRR Amending Regulation", and together with the Securitisation Regulation, the "EU Securitisation Regulations") amending certain securitisation-related provisions of the EU Capital Requirements Regulation (the "CRR") 3 was also published at the same time. The CRR Amending Regulation amends the CRR in order to implement a revised hierarchy of approaches for EU banks to use in calculating their regulatory capital requirements for credit exposures to securitisations and to provide lower capital requirements for STS securitisations than for non-STS securitisations. Together with the related secondary legislation, the EU Securitisation Regulations represent a comprehensive revision of the regulatory framework for securitisation in the EU.

Below is a summary of some of the key developments leading up to the EU Securitisation Regulations.

In May 2014, the Bank of England and the European Central Bank published a Discussion Paper entitled "The case for a better functioning securitisation market in the European Union".⁴ In November 2014, the European Commission (the "Commission"), in a published communication to other EU authorities on an investment plan for Europe, indicated that it wanted to revive high quality securitisation markets, without repeating mistakes made before the financial crisis, in order to develop the secondary market, attract a wider investor base and improve the allocation of finance; to do so, it envisaged establishing criteria for simple, transparent and consistent securitisation. ⁵ That Commission communication was followed, in February 2015, by a Green Paper on capital markets union, ⁶ in which the Commission stated that it would develop proposals to encourage high-quality securitisation, as part of this project. At the same time, the Commission published a consultation document on establishing a framework for STS securitisation, ⁷ in which it recognised that securitisation had an important role to play as a funding source and as a method of reallocating risk in the financial markets, and raised a number of questions, including with respect to criteria for identifying high quality securitisations, the harmonisation of the securitisation market and making capital requirements for securitisations more risk-sensitive

At the international level, as part of Basel III, the Basel Committee on Banking Supervision ("BCBS") published the revised Basel securitisation framework in December 2014, setting out a revised hierarchy of approaches for the regulatory capital treatment of securitisation transactions, and amended it in July 2016 to include alternative capital treatment for "simple, transparent and comparable" ("STC") securitisations (the "Revised Basel Securitisation Framework"). ⁸ The Revised Basel Securitisation Framework includes preferential capital treatment for securitisations which meet the STC criteria, and was supplemented in May 2018 by papers setting out STC criteria and capital treatment for short-term securitisations (i.e. transactions funded via ABCP conduits). ⁹¹⁰

On 30 September 2015, the Commission published its proposals for the EU Securitisation Regulations. These were followed on 30 November 2015 by revised proposals with amendments from the Council of the European Union (the "Council"). The revised proposals were considered in detail by the European Parliament (the "Parliament") and, following draft reports from parliamentary rapporteurs, further proposed amendments from MEPs and detailed negotiations, the Parliament published reports on 19 December 2016 setting out its compromise amendments to the proposals.

In 2017, the Commission, the Council and the Parliament engaged in a "trilogue" process to agree a common position. Some of the proposed amendments which had caused particular concern for market participants¹¹ were removed or modified and revised draft texts of the EU Securitisation Regulations were agreed in May 2017. Further technical revisions were made during the "juristlinguist process", together with (unusually for this late stage in the process, and following concerns expressed by some market participants) some additional changes to the provisions on creditgranting with respect to self-certified residential mortgage loans, and revised texts were approved by the European Parliament on 26 October 2017 and by the Council on 20 November 2017. The EU Securitisation Regulations were published in the Official Journal on 28 December 2017. They came into force on 17 January and have been applicable since 1 January 2019, subject to certain transitional provisions in the Securitisation Regulation for legacy securitisations, as discussed further below.

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Footnote

1 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, 2009/138/EC and 2011/61/EU and Regulations (EC) No 1060/2009 and (EU) No 648/2012, available at http://eur-lex.europa.eu/legal-content/EN/TXT/ PDF/?uri=CELEX:32017R2402&from=EN (hereinafter cited as "SR").

2 Regulation (EU) 2017/2401 of the European Parliament and of the Council of 12 December 2017 amending Regulation No 575/2013 on prudential requirements for credit institutions and investment firms, available at http://eur-lex.europa.eu/legal-content/EN/TXT/ PDF/?uri=CELEX:32017R2401&from=EN

3 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, available at http://eur-lex.europa.eu/legal-content/EN/ TXT/PDF/?uri=CELEX:32013R0575&from=en.

4 The case for a better functioning securitisation market in the European Union – A Discussion Paper, Bank of England and European Central Bank, May 2014, available at https://www.ecb. europa.eu/pub/pdf/other/ecb-boe_case_better_functioning_ securitisation_marketen.pdf

5 Communication from the Commission to the European Parliament, the Council, the European Central Bank, the European Economic and Social Committee, the Committee of the Regions and the European Investment Bank – An Investment Plan for Europe, 26 November 2014, available at http://eur-lex.europa.eu/legal-content/EN/TXT/ PDF/?uri=CELEX:52014DC0903&from=EN

6 Green Paper – Building a Capital Markets Union, 18 February 2015, available at http://ec.europa.eu/finance/consultations/2015/ capital-markets-union/docs/green-paper_en.pdf.

7 Consultation Document – An EU framework for simple, transparent and standardised securitisation, 18 February 2015, available at http://ec.europa.eu/finance/consultations/2015/securitisation/docs/ consultation-document_en.pdf.

8 Basel III Document – Revisions to the securitisation framework - Amended to include the alternative capital treatment for "simple, transparent and comparable" securitisations, 11 December 2014 (rev. July 2016) ("BCBS 374"), available at https://www.bis.org/bcbs/ publ/d374.pdf.

9 Criteria for identifying short-term "simple, transparent and comparable securitisations", May 2018 (BCBS and IOSCO), available at https://www.bis.org/bcbs/publ/d441.pdf.

10 Standard – Capital treatment for short-term "simple, transparent and comparable" securitisations, May 2018 (BCBS), available at https:// www.bis.org/bcbs/publ/d442.pdf

11 These included increased risk retention requirements, a proposal that investors had to be "institutional investors", i.e. certain kinds of regulated entities, a proposal that at least one of the originator, sponsor or original lender had to be a regulated entity as defined in Article 2(4) of Directive 2002/87/EC (i.e. a credit institution, insurance undertaking or investment firm), requirements for investors to disclose information about the size of their investment and to which tranche of the securitisation it related, and a provision allowing for investigation of improper selection of assets if losses on securitised assets were significantly higher than losses on retained assets, without taking into account of the intent of the originator.

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