EBA Publishes Its Report On The Creation Of An STS Framework For Synthetic Securitisations - Commodities/Derivatives/Stock Exchanges

Introduction

The European Banking Authority (the "EBA") has recently published its report on the feasibility of a framework for simple, transparent and standardised ("STS") synthetic securitisations (the "EBA Report")¹ . The EBA Report follows a discussion paper published by the EBA on 24 September 2019 (the "EBA Discussion Paper")² . We considered some of the key aspects of the Discussion Paper in a previous legal update³ .

The EBA has reaffirmed its recommendations in the EBA Discussion Paper for the establishment of a cross-sectoral framework for STS synthetic securitisation, limited to balance-sheet securitisations, and that for any synthetic securitisation to be STS, it should meet the specified STS criteria for such securitisations. In addition, the EBA has given further consideration to whether STS synthetic securitisations could benefit from differentiated regulatory treatment and has concluded that this could be justified for senior tranches subject to certain conditions.

In this Legal Update, we consider the proposals contained in the EBA Report, including the extent to which they diverge from the draft proposals in the EBA Discussion Paper.

Synthetic securitisations are used by banks to hedge the credit risk on portfolios of loans where those loans cannot easily be sold or if the bank otherwise wishes to retain an interest. In contrast to a true sale transaction, in a synthetic securitisation the loans being securitised are not sold and remain on the bank's balance sheet. Instead, the bank buys credit protection on the loans from investors by means of either a financial guarantee or credit derivative which references the portfolio. The financial guarantee or credit derivative is entered into with an investor directly or with a special purpose vehicle which issues securities, the proceeds of which are used to collateralise the risk. If loans in the portfolio default, the bank is reimbursed for the losses incurred on those defaulted loans up to a maximum of the total amount invested. This way, the bank reduces the credit risk on the securitised loans while remaining in charge of managing the loans and the lending relationship with the borrowers.⁴

Background to STS for Synthetic Securitisations

The EBA Report has been published pursuant to a mandate under Article 45 of the EU Securitisation Regulation⁵ (the "Securitisation Regulation" or "SR") which required the EBA, in close cooperation with ESMA⁶ and EIOPA⁷ , to report on the feasibility of a framework for STS synthetic securitisations.

The Securitisation Regulation has been applicable to all securitisations (as defined therein)⁸ from 1 January 2019, other than securitisations existing prior to that date if they are grandfathered. It includes requirements for securitisation special purpose entities ("SSPEs"), due diligence, risk retention, transparency and credit-granting standards and a ban on resecuritisation. It also established a framework for STS securitisation, which currently only applies to traditional securitisations⁹ as opposed to synthetic securitisations.

One of the aims of the STS regime is to foster the growth of the securitisation market. There is a separate set of STS criteria in the Securitisation Regulation for non-ABCP securitisations and ABCP securitisations (although many of the criteria are similar at transaction level).¹⁰ The EBA has published helpful guidance on the existing STS criteria.¹¹

Securitisations which meet the applicable STS criteria may benefit from relatively favourable regulatory treatment compared with non-STS securitisations. For example, if a securitisation is designated as STS and also meets various additional requirements under the Capital Requirements Regulation (as amended, the "CRR"), pursuant to the EU Regulation which was introduced at the same time as the Securitisation Regulation and which amended the CRR¹² (the "CRR Amending Regulation"), an EU regulated bank that invests in or otherwise takes credit exposure to that securitisation will have a lower capital charge for that exposure than would otherwise apply under the CRR.¹³ In addition, a transaction which qualifies as STS will also benefit from lower capital requirements for insurance and reinsurance undertakings subject to regulation under Solvency II¹⁴ and will be eligible for inclusion in high quality liquid assets by banks for the purposes of the Liquidity Coverage Ratio (subject in each case to meeting certain additional criteria).¹⁵

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Footnotes

1. Report on STS Framework for Synthetic Securitisation Under Art. 45 of Regulation (EU) 2017/2402, published on 6 May 2020 and available at https://eba.europa.eu/sites/default/documents/files/document_ library/News%20and%20Press/Press%20Room/Press%20 Releases/2020/EBA%20proposes%20Framework%20for%20STS%20 Synthetic%20Securitisation/883430/Report%20on%20framework%20 for%20STS%20syntetic%20securitisation.pdf.

2. Draft Report on STS Framework for Synthetic Securitisation Under Art. 45 of Regulation (EU) 2017/2402, published on 24 September 2019 and available at https://eba.europa.eu/regulation-and-policy/ securitisation-and-covered-bonds/ discussion-paper-on-sts-framework-for-syntheticsecuritisationunder-art.-45-of-regulation-eu-2017/2402.

3. Mayer Brown - Legal Update: EBA consults on the creation of an STS framework for synthetic securitisations, October 2019, available at https://www.mayerbrown.com/en/perspectives-events/ publications/2019/10/ eba-consults-on-the-creation-of-an-sts-framework-for-syntheticsecuritisations.

4. "synthetic securitisation" is defined in Article 2(10) SR as "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".

5. 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/EC and Regulations (EC) No 1060/2009 and (EU) No 648/2012, available at https://eur-lex.europa.eu/legal-content/EN/TXT/%20%20 PDF/?uri=CELEX:32017R2402&from=EN.

6. The European Securities and Markets Association.

7. The European Insurance and Occupational Pensions Authority.

8. Under Article 2(1) SR, "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".

9. "traditional securitisation" is defined in Article 2(9) SR as "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. In addition, there are separate criteria for ABCP transactions, which need to meet certain transaction-level requirements, and ABCP programmes, which need to meet certain sponsor requirements and programme-level requirements, including that (except for certain limited temporary exceptions) all transactions in the ABCP programme are STS.

11. Final Guidelines on STS criteria for non-ABCP securitisation and Final Guidelines on STS criteria for ABCP securitisation, available at https://eba.europa.eu/regulation-and-policy/ securitisation-and-covered-bonds/.

12. Regulation (EU) 2017/2401 of the European Parliament and of the Council of 12 December 2017 amending Regulation (EU) No 575/2013 on prudential requirements for credit institutions and investment firms, available at https://eur-lex.europa.eu/legalcontent/EN/TXT/?uri=CELEX%3A32017R2401.

13. Articles 260, 262 and 264 of the CRR.

14. Pursuant to the terms of Commission Delegated Regulation (EU) 2018/1221 of 1 June 2018 amending Delegated Regulation (EU) 2015/35 as regards the calculation of regulatory capital requirements for securitisations and simple, transparent and standardised securitisations held by insurance and reinsurance undertakings.

15. Pursuant to the terms of Commission Delegated Regulation (EU) 2018/1620 of 13 July 2018 amending Delegated Regulation (EU) 2015/61 to supplement Regulation (EU) No 575/2013 of the European Parliament and the Council with regard to liquidity coverage requirement for credit institutions, Article 1(8) (amending Article 13 of Delegated Regulation 2015/61).

Originally published 3 June, 2020

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