Explanatory Memorandum to COM(2015)472 - Common rules on securitisation and creating a European framework for simple, transparent and standardised securitisation - Main contents
Please note
This page contains a limited version of this dossier in the EU Monitor.
| dossier | COM(2015)472 - Common rules on securitisation and creating a European framework for simple, transparent and standardised securitisation. |
|---|---|
| source | COM(2015)472  |
| date | 30-09-2015 |
CONTEXT OF THE PROPOSAL
Reasons for and objectives of the proposal
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 to support job creation and a return to sustainable growth 1 . A high-quality framework for EU securitisation can promote integration of EU financial markets, help diversify funding sources and unlock capital, making it easier for credit institutions and lenders to lend to households and businesses.
In its Work Programme for 2015 2 , the European Commission set out focused actions with 10 priorities and announced as part of the priority to develop a deeper and fairer Internal Market with a strengthened industrial base that it would put in place an EU framework for simple, transparent and standardised securitisation. In the Investment Plan for Europe presented by the Commission on 26 November 2014, creating a sustainable market for securitisation, without repeating the mistakes made before the crisis, was identified as one of the five areas where short-term action was needed 3 .
Securitisation refers to transactions that enable a lender or other originator of assets – typically a credit institution – to refinance a set of loans or assets (e.g. mortgages, auto leases, consumer loans, credit cards) by converting them into securities. The lender or originator organises a portfolio of its loans into different risk categories, tailored to the risk/reward appetite of investors. Returns to investors are generated from the cash flows of the underlying loans. These markets are not aimed at retail investors.
Securitisation is an important element of well-functioning capital markets. Soundly structured securitisation can be an important channel for diversifying funding sources and allocating risk more efficiently within the EU financial system. It allows for a broader distribution of financial sector risk and can help to free up credit institutions' 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 finance mortgages and credit cards) and provide relevant investors with exposure to asset classes decoupled from the credit risk of the originator.
Following the US subprime crisis in 2007-08, public authorities took a number of steps to make securitisation transactions safer and simpler, and to ensure that appropriate incentives are in place to manage risk – including through higher capital requirements, due diligence and conduct of business requirements as well as and mandatory risk retention requirements to ensure that securitised products are not being created solely for the purpose of distribution to investors, as was prevalent in the run-up to the 2008 financial crisis (a so-called originate to distribute model). 4 These reforms were necessary to ensure financial stability. As a result of these reforms, all securitisations in the EU are now strictly regulated.
Since the beginning of the financial crisis, European securitisation markets have remained subdued. This is in contrast to markets in the US which have recovered. This is despite the fact that unlike the US, EU securitisation markets withstood the crisis relatively well, with realised losses on instruments originated in the EU having been very low compared to the US. For example, AAA-rated US securitisation instruments backed by residential mortgages (RMBS) reached default rates of 16% (subprime) and 3% (prime). By contrast, default rates of EU RMBS never rose above 0.1%. The divergence is even bigger for BBB-rated products where US RMBS' default rates peaked at 62% and 46% (subprime and prime, respectively) while EU products' default rates peaked at 0.2%.
While securitisation markets in the US have different characteristics to those in the EU and the individual national constituent markets, which each have varying degrees of fragmentation and efficiency, their stronger recovery is at least in part due to the role of public sponsorship. Almost 80% of securitisation instruments in the US benefit from public guarantees from the US Government Sponsored Enterprises (e.g. Fannie Mae and Freddy Mac). Banks investing in these products consequently also benefit from lower capital charges under the US regulatory regime.
This proposal is based on what has been put in place in the EU to address the risks inherent in highly complex, opaque and risky securitisation. Focusing on better differentiation and the development of transparent, simple and standardised securitisation is a natural next step to build a sustainable EU market for securitisation, supporting both EU investment and proper risk management. Thus this legislative proposal aims to:
restart markets on a more sustainable basis, so that simple, transparent and standardised securitisation can act as an effective funding channel to the economy;
allow for efficient and effective risk transfers to a broad set of institutional investors as well as banks;
allow securitisation to function as an effective funding mechanism for some longer term investors as well as banks;
protect investors and manage systemic risk by avoiding a recurrence of the flawed 'originate to distribute' models.
In terms of building a market for simple, transparent and standardised securitisation, the first step is to identify sound instruments based on clear eligibility criteria. The second step is to adjust the regulatory framework to allow a more risk-sensitive approach.
There is no intention to undo what has been put in place in the EU to address the risks inherent in highly complex, opaque and risky securitisation. However, this proposal will help to better differentiate simple, transparent and standardised products. This framework should provide confidence to investors and a high standard for the EU, to help parties evaluate the risks relating to securitisation (both within and across products). However, a new EU framework does not replace the need for investors to conduct thorough due diligence. It also does not control for credit risk in the securitised loans – investors have the full range of investment possibilities to suit their risk-reward preferences available to them. The concept of simple, transparent and standardised (STS) refers to the process by which the securitisation is structured and not the underlying credit quality of the assets involved. It therefore does not mean that some non STS securitisations, for instance implying less simple structures, could not be formed of underlying exposures with appropriate credit quality features.
In its conclusions of its meeting of 25 and 26 June 2015, the European Council noted that securitisation can provide an effective mechanism to transfer risk from credit institutions to non- credit institutions, thus increasing the former's capacity to lend, but also to channel non- credit institution financing towards the working capital of companies. The European Council called on the Commission to propose a framework for STS securitisation, building on the numerous ongoing initiatives at European and international levels, as a matter of priority at the latest by the end of 2015.
In its July 2015 Resolution on CMU of the European economy, the European Parliament noted that the development of simple, transparent and standardised securitisation should be exploited better and welcomed the initiative to establish a sustainable, transparent securitisation market by developing a specific regulatory framework with a uniform definition of high-quality securitisation, combined with effective methods for monitoring, measuring and managing risk. This proposed Regulation distinguishes between provisions applicable to STS securitisations and those applicable to STS and non-STS securitisations.
Consistency with existing policy provisions in the policy area
Currently, the framework for EU securitisation is determined by a large number of EU legal acts. These include the Capital Requirements Regulation for banks 5 , the Solvency II Directive 6 for insurers, and the UCITS 7 and AIFMD 8 directives for asset managers. Legal provisions, notably on information disclosure and transparency, are also laid down in the Credit Rating Agency Regulation 9 (CRAIII) and in the Prospectus Directive 10 . There are also elements related to the prudential treatment of securitisation in Commission legislative proposals currently under negotiation (Bank Structural Reform and Money Markets Funds).
Provisions are also included in delegated acts. The EU has already taken steps to create a differentiated regulatory treatment in two delegated acts covering the prudential requirements for insurers (under the Solvency II Directive 11 ), and the liquidity of credit institutions (through the Liquidity Coverage Ratio Regulation 12 ). This approach helps to better differentiate simple, transparent and standardised products from the more opaque and complex. This can make some securitisations more attractive by lowering barriers to the securitisation process and by improving liquidity and market depth. However, this differentiation does not replace the need for investors' due diligence. The adoption of these delegated acts in 2014 were preliminary steps that now need to be complemented by further action, building on the range of EU and international initiatives towards convergence of regulatory standards.
A substantial amount of policy work has recently been devoted to securitisation by a number of international and European public authorities. This proposal builds on those initiatives.
At the global level, the Basel Committee on Banking Supervision (BCBS) and the International Organisation of Securities Commissions (IOSCO) have been jointly leading a cross-sectorial Task Force on the impediments to securitisation. Its main task has been to develop criteria to identify simple, transparent and comparable securitisation instruments. The group issued a set of global criteria on 23 July 2015 13 .
In December 2014, the BCBS published revised standards related to the capital treatment of banks investing in securitisation. The Committee will also consider in the coming months if and how to incorporate the criteria being developed by the BCBS-IOSCO Task Force for simple and transparent securitisation into the securitisation capital framework.
At the EU level, in response to the slow recovery of securitisation markets, a number of public authorities have been looking at the issue. For example, the European Central Bank (ECB) and the Bank of England (BoE) launched a public consultation in May 2014 on the case for a better functioning securitisation market in the European Union.
Following a request from the Commission in January 2014, the European Banking Authority (EBA) finalised on 7 July 2015 an advice to the Commission on a framework for qualifying securitisation. It proposes criteria for defining simple, standard and transparent securitisation transactions including a specific set of elements for short term securitisations, asset backed commercial paper (ABCP). The EBA also suggested a more risk-sensitive prudential treatment for long-term securitisation instruments, as well as for ABCP adjusting the capital charges proposed in the 2014 Basel securitisation framework to recognise the relative lower riskiness of STS securitisation, while keeping regulatory capital within the perimeter of a prudential surcharge.
Finally, the Joint Committee of the European Supervisory Authorities looked at the existing EU framework with respect to disclosure requirements and obligations relating to due diligence, supervisory reporting and risk retention. The Joint Committee also examined possible inconsistencies in the current framework. A detailed report was published on 12 May 2015.
Consistency with other Union policies
This proposed Securitisation Regulation supports the Investment Plan for Europe put forward by the Commission in 2014 and to address the main obstacles to investment. This new approach would help address the current shortage of real economy financing in the EU.
This initiative is part of the CMU action plan adopted by the European Commission today. The CMU is one of the Commission's priorities to ensure that the financial system supports jobs and growth and helps with the demographic challenges that Europe faces. It aims at better link savings with growth and provide more options and better returns for savers and investors. It intends to offer businesses more funding choices at different stages of their development and to channel investment to where it can be used most productively, increasing the opportunities for Europe's companies and infrastructure projects.
The Commission published a Green Paper on Building the CMU consulting from 18 February to 13 May 2015. The feedback of the majority of respondents confirmed the areas identified in the Green Paper for boosting Europe’s capital markets. 14 Developing an EU framework to promote simple and transparent securitisation was also endorsed by stakeholders and detailed views were put forward as part of a separate consultation.
Aside from the Investment Plan for Europe and financial regulatory initiatives, several EU institutions and bodies have taken initiatives to restart securitisation markets and increase confidence from a market functioning perspective. The Commission, in association with the European Investment Bank and the European Investment Fund, is working to help finance SMEs, for example under the COSME programme and the joint Commission-EIB initiatives through the use of securitisation vehicles.
In the second half of 2014, the ECB launched an Asset-Backed Securities Purchase Programme (ABSPP) that aims to further enhance the transmission of monetary policy. Taken together with other monetary measures (Targeted Longer-Term Refinancing Operations (TLTRO), Covered Bond Purchasing Programme (CBPP), the Public Sector Purchase Programme (PSPP) intends to facilitate credit provision to the euro area economy. The operational details of the programme, adopted on 2 October 2014, set out what ABS the ECB can buy. The criteria mainly reflect the ECB's existing collateral framework for refinancing operations. They are broadly consistent with the current criteria of the Commission delegated acts, and with this proposal.
2. LEGAL BASIS, SUBSIDIARITY AND PROPORTIONALITY
Legal basis
This proposal is based on Article 114 of the Treaty on the Functioning of the European Union (TFEU) which is the legal basis for measures for the approximation of provisions laid down by law, regulation or administrative action in Member States which have their object the establishment and functioning of the internal market.
This legal basis has also been used by the EU legislator for the adoption of the Capital Requirements Regulation (CRR) (Regulation (EU) No 575/2013), the Credit Rating Agencies Regulation (CRAIII) (Regulation (EU) 1060/2009), and Regulation (EU) 648/2012 (on OTC derivatives, central counterparties and trade repositories), the provisions of which are included in or amended by this Regulation.
This proposal also amends certain provisions of the Solvency II Directive and repeals provisions of the UCITS and the AIFM Directives. These Directives are based on Article 53 in combination with Article 62 of the Treaty. Although the legal basis of these provisions is not, as for this proposal, Article 114 of the Treaty, if the provisions at stake would have been adopted separate from these Directive, their legal basis would have been Article 114 TFEU. Their main object is the etablishment and functioning of the internal market, in particular by ensuring a level playing field in the internal market for investors and issuers dealing with securitisation.
Subsidiarity (for non-exclusive competence)
The objective of this proposal is to restart a sustainable securitisation market that will improve the financing of the EU economy, while ensuring financial stability and investor protection. To do this the market the proposal aims to provide a regulatory platform upon which investor confidence can be built, to create more consistency and standardisation in the market and to put in place a more risk-sensitive regulatory framework (via amendment of the CRR and the Solvency II delegated act).
Securitisation products are part of EU financial markets that are open and integrated. Securitisation links financial institutions from different Member States and non-Member States: often banks originate the loans that are securitised, while financial institutions such as insurers and investment funds invest in these products and they do so across European borders, but also globally. The securitisation market is therefore international in nature.
Member States cannot by themselves take action sufficient to restart securitisation markets. The EU has advocated for standards at international level to identify simple, transparent and standardised (STS) securitisation. Such standards will help investors to identify categories of securitisations whose underlying risks can more easily and transparently be analysed.
Implementation of these international standards by Member States could lead to divergent approaches, creating a de facto barrier for cross-border investors and undermine investor confidence in the STS standard. Moreover, a more risk-sensitive prudential framework for STS securitisation requires the EU to define what STS securitisation is, since otherwise the more risk sensitive regulatory treatment for banks and insurance companies could be available for different types of securitisations in different Member States. This would lead to an un-level playing field and to regulatory arbitrage. As regards the lack of consistency and standardisation EU law has already harmonised a number of elements on securitisation, in particular definitions, rules on disclosure, due diligence, risk retention and prudential treatment for regulated entities investing in these products. Those provisions have been developed in the framework of different legal acts (CRR, Solvency II, UCITS, CRA Regulation, and AIFMD) which has led to certain discrepancies in the requirements that apply to different investors. Increasing their consistency and further standardisation of these provisions can only be achieved at Union level.
The action sends a clear and consistent signal throughout the EU that certain securitisations performed well even during the financial crisis, that they can be useful investments for different types of professional investors for which regulatory barriers (lack of an appropriate prudential treatment, inconsistent treatment across financial sectors) should be removed. Action at national level cannot effectively create a more risk-sensitive treatment for securitisations, since the prudential treatment is already laid down in EU law, nor can it ensure consistency and standardisation of those provisions that are currently covered by different EU legal acts such as those regarding disclosure, due diligence and risk retention.
Proportionality
The policy options chosen are the introduction of criteria for STS securitisation that apply to long and short term (including ABCP) securitisation. The responsibility for ensuring compliance with these criteria lies primarily with originators and sponsors who should ensure that an STS securitisation meets the STS criteria notified to ESMA. Investors should perform appropriate due diligence before investing in STS securitisations, placing appropriate reliance on the STS notification and on the information disclosed by the originator, sponsor and the Securitisation Special Purpose Entity (SSPE). The approach is reinforced by supervisory oversight, cross border supervisory coordination and a sanctioning mechanism. The EU framework will provide rules on transparency, due diligence and risk retention rules.
At the same time, market participants are not obliged to issue and invest in STS securitisations: originators can still create non-STS securitisations or securitisations that are more simple, transparent and standardised then the STS criteria require. The drafting of the STS criteria has sought to align them with the existing criteria in the Liquidity Coverage Ratio (LCR) and the Solvency II delegated acts 15 and that of the BCBS/IOSCO and EBA.
As regards compliance with the STS requirements the most suitable mechanism identified is to ensure responsibility rests with originators and investors, kept in check by supervisory oversight. The latter are able to monitor market developments and check that a transaction fulfils all STS requirements and impose sanctions, where needed. On the one hand the financial crisis has shown that in the past investors have relied too much on third parties, such as credit rating agencies. This overreliance on third parties weakened due diligence by investors. This was also partially the result of regulatory reference to third parties (‘hardwiring’), which should therefore be avoided. In this proposal, although third parties can on a voluntary basis still play an important role, the onus of due diligence remains on originators and investors. On the other hand, an ex-ante regulatory involvement of supervisors stating that a securitisation meets the STS requirements would shift the responsibility to public authorities leading to moral hazard risks, whereas originators, sponsors and SSPEs should take the responsibility.
Finally, the EU securitisation framework is drafted where relevant in line with the existing definitions and provisions in Union law on disclosure, due diligence and risk retention. This will ensure that the market can continue to function on the basis of the existing legal framework where that framework is not amended, so to not unnecessarily increase costs and create regulatory disruption. It will also continue to ensure investor protection, financial stability, while contributing to the maximum extent possible to the financing of the EU economy. Where necessary for the purpose of creating a harmonised EU framework changes have been made.
The harmonisation of the existing legal framework at EU level cannot by itself standardise all processes and practises in securitisation markets. For that reason the proposal calls upon market participants to work on further standardisation of market practices. For example, the public consultation revealed that further standardisation of documentation of securitisations by market participants themselves, as for instance done by the Dutch Securitisation Association (DSA), is promising. This approach could be extended to other Member States and asset classes in order to further standardise securitisation practices and thus decrease costs for all market participants as well as facilitate investments in securitisations. The Commission calls on market participants and their professional associations to start work on further standardisation and it will monitor and provide assistance where necessary.
In the Impact assessment proportionality is further discussed in particular in section 4.4.
Choice of the instrument
This proposal aims at creating a sustainable market for STS securitisation. To this end the proposal stipulates the criteria to be met by securitisations and provides the necessary supervisory framework and brings together the existing provisions in EU law on securitisation related to risk retention, disclosure and due diligence.
The STS criteria should be uniform across the EU. Comparable criteria with a more limited scope are currently in place in two delegated regulations adopted by the Commission (the LCR and Solvency II delegated acts). In addition, the substantial rules on disclosure, risk retention and due diligence are laid down in a number of different EU regulations (CRR, Solvency II delegated act, the CRA delegated Regulation and the AIFM delegated Regulation).
Article 114 i TFEU provides the legal basis for a Regulation creating uniform provisions aimed at improving the functioning of the internal market. The criteria for STS securitisation and the harmonisation of the existing provisions in EU law on securitisation related to risk retention, disclosure and due diligence will underpin the correct and safe functioning of the internal market. A directive would not lead to the same results, as implementation of a Directive might lead to divergent measures being adopted at national level, which could lead to distortion of competition and regulatory arbitrage. Moreover, the majority of EU provisions already in place in this area have been adopted in the form of Regulations.
The creation of this legal framework requires the adoption of a number of legal acts. First, a Securitisation Regulation that creates uniform definitions and rules across financial sectors, harmonising rules on risk retention, due diligence and disclosure. The same regulation stipulates the criteria for STS securitisation for all financial sectors, eligible asset classes and transaction structures as well as relevant market participants across sectors. This regulation should also repeal provisions in sectoral legislation that will become superfluous. Secondly, legal acts for a more risk-sensitive prudential treatment of securitisation for credit institutions are also proposed. For credit institutions the current prudential framework is laid down in CRR and for insurers in the Solvency II delegated act. A proposal for amending CRR should thus be adopted, while the Solvency II delegated act should also be amended once the legal framework for securitisation is adopted.
As regards the timing of these instruments, the different legal acts constitute one interlinked package, since for STS securitisation there will be a specific tailor-made prudential treatment. It is thus important that the Commission produces a comprehensive package that contains all relevant elements.
In order to ensure that the insurance regulatory framework for securitisation is compatible with the contents of this Regulation, a number of amendments to the Commission Delegated Regulation (EU) 2015/35 (Solvency II delegated act) are necessary. Firstly, its definitions regarding securitisation would have to be aligned with those in the present proposal. Secondly, due to the direct applicability of the risk retention and the due diligence requirements in the present proposal for a Regulation, the similar requirements from the Solvency II Delegated Regulation can be repealed after entry into force of this proposal. Finally, considering the broad support in the public consultation on the CMU Green Paper that the non-senior tranches of STS securitisation should also benefit from an adapted capital charge under Solvency II, with improved risk-sensitivity, the Commission will develop a new calibration. The methodology would follow a look-through approach based on the capital charge for the underlying exposures, increased by a non-neutrality factor to capture the model risk of the securitisation. The capital charges of the underlying exposures would be based on the current calibrations in the Commission delegated act (EU) 2015/35 and the non-neutrality factor would be aligned with the average factors contained in advice given by EBA on 7 July 2015 16 . The methodology would result in a significant reduction of the capital charge for non-senior tranches of STS securitisation. Technical improvements will also be made to the methodology of calculation of the calibrations for the senior tranches. These changes to the calibrations will take the form of an amendment to the Commission delegated act (EU) 2015/35.
The Commission is empowered to already adopt at this moment these changes to the Solvency II Delegated Regulation. However, since the new calibrations will have to refer to this proposal and in particular the STS requirements, the necessary changes can only be adopted after adoption of this proposal. The Commission intends to ensure that the new calibrations in the insurance and banking sectors will apply as from the same data.
Finally, the current proposal will be followed at a later stage by a proposal to amend the LCR delegated act in order to align it with this Regulation. In particular the eligibility criteria for securitisations as Level 2B assets in Article 13 of that delegated act will be amended to make it consistent with the general STS criteria as laid down in this Regulation. Amendments of these delegated acts are not proposed at this stage. They follow a different procedure and depend on the outcome of the legislative negotiations on this package.
3. RESULTS OF STAKEHOLDER CONSULTATIONS AND IMPACT ASSESSMENTS
Stakeholder consultations
A public consultation on a possible EU framework for simple, transparent and standardised securitisation was carried out between 18 February and 13 May 2015. 120 replies were received 17 . On the whole, the consultation indicated that the priority should be to develop an EU-wide framework for simple, transparent and standardised securitisation (see summary of replies in Annex 10 of the Impact Assessment referred to below).
Respondents generally agreed that the much stronger performance of EU securitisations during the crisis compared to US ones needs to be recognised and that the current regulatory framework needs modification. This would help the recovery of the European securitisation market in a sustainable way providing an additional channel of financing for the EU economy while ensuring financial stability.
The input from stakeholders was taken into account. A number of market participants expressed a preference for the establishment of private bodies to act as 'certifiers' or 'control bodies' for STS securitisations. They argued that the mandatory recourse to external parties could contribute to overcome the current stigma attached to securitisations and to build investors' confidence in STS securitisations. The optional involvement of third parties with an expertise in STS securitisation in helping to check compliance of a securitisation with the STS requirements may help both investors and originators in forming their opinion. However, as underlined by the majority of supervisory authorities in the public consultation, it is essential that investors continue to perform their own assessment as they are eventually responsible for their investment decisions. The Commission also believes that the more beneficial prudential treatment in banking and insurance will give investors sufficient incentives to invest in STS securitisations.
Collection and use of expertise
The Commission has gained valuable insights through its participation in the discussions and exchange of views informing the BCBS-IOSCO joint task force on securitisation markets and through its involvement in the BCBS work on the review of the capital treatment. The Commission has also followed the work relating to key aspects of securitisation carried out by the Joint Committee of the European Supervisory Authorities (ESAs) as well as by its members separately (EBA, ESMA, EIOPA). Three public consultations, carried out in 2014 by ECB-BoE, BCBS-IOSCO and EBA respectively, have gathered valuable information on stakeholders' views on securitisation markets. In its own public consultation, the Commission has built on these, focusing on gathering further details on key issues. The Commission has met with public authorities, central banks, private sector representatives and the IMF. On the whole, these international level consultations confirm the views expressed in the Commission’s own consultation, and provide some additional feedback on the relative merits of some of the proposed policy options.
Impact assessment
For the preparation of this proposal an Impact Assessment was prepared and discussed with an Interservice Steering Group. The Impact Assessment report was submitted to the Regulatory Scrutiny Board on 17 June 2015. The board meeting took place on 15 July 2015. The Board gave a positive opinion and called for changes and additional input in the following areas: current state of the securitisation market in the different Member States and likely effects of the initiative at this level; description of the link between identified problems and objectives of the initiative as well as its targets that can be realistically achieved; and overview of pros and cons in options' impact analysis. These issues have been addressed and incorporated in the final version which is available on the Commission website.Regulatory fitness and simplification
This proposal simplifies and harmonises the existing legal provisions applying to securitisations. It is not easy to provide reliable estimates on the additional financing an increase in securitisation markets could provide since it depends on a multitude of factors such as macroeconomic conditions and monetary policy, aggregated demand for credit, or developments in alternative funding channels. All of these are likely to change through time, affecting the final outcome. As an example, if the securitisation market would return to pre-crisis average issuance levels and new issuance would be used by credit institutions to provide new credit, these would be able to provide an additional amount of credit to the private sector ranging between €100-150bn. This would represent a 1.6% increase in credit to EU firms and households.
These financial instruments are not appropriate for retail investors due to the level of risks and inherent complexity. The policy options taken in this proposal should have several positive effects on SME financing (see annex 6 of the Impact Assessment report). First of all, it should help SME financing through two specific channels: SME lending, through SME ABS, and short-term lending, through simple and transparent ABCP conduits. Secondly, the initiative should provide banks with a tool for transferring risk off their balance sheets. This in turn means that banks should free up more capital that can then be used to grant new credit including SMEs. Finally, by introducing a single and consistent EU securitisation framework and encouraging market participants to develop further standardisation, the initiative should reduce operational costs for securitisations. Since these costs are higher than average for the securitisation of SME loans, this decrease should have an especially beneficial effect on the cost of credit to SMEs.
Fundamental rights
Only the protection of personal data (Article 8), the freedom to conduct a business (Art. 16) and consumer protection (Art. 38) of the EU Charter of Fundamental Rights are to some extent relevant for this proposal. Limitations on these rights and freedoms are allowed under Article 52 of the Charter.
For this proposal, the general interest objective which justifies certain limitations of fundamental rights is the objective of ensuring market integrity and financial stability. The freedom to conduct a business may be impacted by the necessity to follow certain risk retention and due diligence requirements in order to ensure an alignment of interest in the investment chain and to ensure that potential investors act in a prudent manner. As regards protection of personal data the disclosure of certain loan level information may be necessary to ensure that investors are able to conduct their due diligence. It is however noted that these provisions are currently already in place in EU law. This proposal should not impact on consumers, since securitisations are not intended for consumers. However, for all classes of investors STS securitisation would enable better analysis of the risks involved which contributes to investor protection.
4. BUDGETARY IMPLICATIONS
This legislative proposal would have limited consequences on the EU budget. It will imply further policy development within the Commission and in the three ESAs. In addition specific coordination tasks with be assigned to the ESAs in ensuring a consistent implementation of the STS framework in the EU. A financial fiche is provided as an annex hereto.
5. OTHER ELEMENTS
• Implementation plans and monitoring, evaluation and reporting arrangements
Since the instrument proposed is a Regulation that is based to a significant extent on existing EU law, there is no need to prepare an implementation plan.
The Regulation includes monitoring and evaluation by the ESAs and by the Commission. First, EBA, in close cooperation with ESMA and EIOPA should publish a report on the implementation of the STS requirements, on the actions that supervisors have undertaken and on the material risks and new vulnerabilities which may have materialised during implementation and finally on the initiatives taken by market participants to foster standardisation in the EU securitisation market. In addition ESMA, in close cooperation with the two other ESAs, shall three years after the entry into force of this Regulation publish a report on the functioning of the transparency requirements and the level of transparency of the securitisation market in the EU.
Secondly, the Commission will review and report on the functioning of this Regulation four years after its entry into force and shall submit that report to the European Parliament and the Council together with a legislative proposal, where appropriate.
The Regulation will thus be subject to a complete evaluation in order to assess, among other things, how effective and efficient it has been in terms of achieving its objectives.
The degree of achievement of the first objective (Differentiate simple, transparent and standardised securitisation products from other types of securitisation) will be measured as a function of STS products prices and levels of issuance. An increase in both, relative to non-STS products, will be a sign of differentiation and thus of achievement of the first objective.
The second objective (Foster the spread of standardisation of processes and practises in securitisation markets, tackle regulatory inconsistencies) will be measured against three criteria: 1) STS products' price and issuance growth (e.g. since a decline in operational costs should translate into higher levels of issuance), 2) The degree of standardisation of marketing and reporting material and finally 3) feedback from market practitioners on operational costs' evolution (hard data on this may not be publicly available).
Detailed explanation of the specific provisions of the proposal
This proposal contains two main parts. The first part is devoted to rules that apply to all securitisation, whilst the second part focuses only on STS Securitisation.
The first part provides a common core of rules that apply to all securitisations, including STS securitisation. Whereas existing EU law provides in the credit institutions, asset management and insurance sector already for certain rules, these are scattered amongst different legal acts and they are not always consistent. The first part of the proposal therefore puts the rules in one legal act, thus ensuring consistency and convergence across sectors, while streamlining and simplifying the existing rules. As a consequence the sector-specific provisions on the same topic would be repealed.
The second part contains the criteria that define STS securitisation. In the LCR Regulation and the Solvency II Regulation the Commission has already laid down, for specific purposes, criteria similar to those in this proposal, but the Securitisation Regulation will create a general and cross-sectoral regime. The revision of the CRR Regulation and the future amendment of the Solvency II delegated act will provide for a more risk-sensitive prudential treatment for banks and insurers investing in STS securitisation. The LCR delegated act will also be amended to refer to this legislative act and in particular to the set of STS criteria. Specific criteria related to liquidity features of securitisation will be specified in the amended delegated act.
Contents
- Definitions (Article 2)
- Due diligence rules for investors (Article 3)
- Risk retention (Article 4)
- Transparency rules (Article 5)
- STS securitisation (Article 6 to 13)
- STS notification and disclosure (Article 14)
- Supervision (Article 15-22)
- Amendments to other legal acts (Article 23 to 27)
- Third country dimension
The definitions in the proposal are to a large extent taken over from CRR and ensure that the same definitions apply across financial sectors, including those not covered by the CRR.
Since securitisations are not always the simplest and most transparent financial products and can involve higher risks than other financial instruments, institutional investors are subject to due diligence rules.
The existing rules are laid down in the CRR, the Solvency II delegated act and the Commission Delegated Regulation 231/2013 (the AIFM Regulation). These rules will be repealed and replaced by a single Article that provides for all types of regulated institutional investors engaging in business in or through the EU identical and streamlined due diligence provisions. For UCITS no due diligence rules apply so far: the Commission is however empowered to adopt such rules (Article 50a of the UCITS Directive). It has not done so yet, due to the intention to cover UCITS in this initiative. For that reason, the proposal creates requirements for UCITS. In the proposal IORP's are also covered by the due diligence requirements. These have not been subject to these rules until now, but to do so it would fit well with the objective of improving risk management in the IORP2 proposal and the objective to create a harmonised framework for institutional investors.
For STS securitisations, investors should also perform a due diligence on the compliance with STS requirements. As the STS requirements are not an indicator of the risk features of the securitisation, investors remain responsible for assessing risks inherent to their exposure to the securitisation position and whether the securitisation is suitable and appropriate for the needs of the investor.
Risk retention by originators, sponsors or original lenders of securitisations ensures alignment of interest between such actors and investors.
Existing sector-specific regulations (CRR, Solvency II Directive and AIFM Regulation) already establish risk retention requirements, but use the so-called 'indirect approach': the originators, sponsors or original lenders are not directly subject to such requirements, but the investor should check whether the originator, sponsor or original lender has retained risk. This however places a burden on the investor, which has no direct access to the information necessary to perform such check.
The current proposal thus imposes a direct risk retention requirement and a reporting obligation on the originator, sponsor or the original lenders. Investors will thus in a simple manner be able to check whether these entities have retained risk. For securitisations notably in situations where the originator, sponsor nor original lender is not established in the EU the indirect approach will continue to fully apply. This existing approach ensures a level-playing field at global level. In accordance with existing EU law, certain exceptions should be made for cases when securitised exposures are fully, unconditionally and irrevocably guaranteed by in particular public authorities. In case support from public resources provided in the form of guarantees or by other means, any provisions in this Regulation are without prejudice to State aid rules.
This proposal also takes into account the EBA recommendation to close a potential loophole in the implementation of the risk retention regime whereby the requirements could be circumvented by an extensive interpretation of the originator definition. To this aim, it is specified that for the purposes of Article 4 an entity established as a dedicated shelf for the sole purpose of securitising exposures and without a broad business purpose cannot be considered as an originator. For instance, 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.
Transparency requirements on securitisations and underlying exposures allows investors to understand, assess and compare securitisation transactions and not to rely solely on third parties, such as credit rating agencies. They allow investors to act as prudent investors and do their due diligence.
This proposal ensures that investors will have all the relevant information on securitisations at their disposal. It covers all types of securitisations and applies across sectors. To facilitate both the use of the information by investors and the disclosure by originators, sponsors and SSPEs the proposal assumes the existing acquis, including standardised disclosure templates. As the latter do not currently cover all securitisation segments, the development of additional templates is necessary (e.g. for ABCP). In doing so, there is a need to find a right balance between the level of details and the proportionality of the disclosure requirements.
Originators, sponsors and SSPE's should make freely available the information to investors, via standardised templates, on a website that meets certain criteria such as control of data quality and business continuity. In practice this could allow reporting of this information to a data repository such as the 'European Datawarehouse', where much of this type of information is already collected for eligibility purposes in Eurosystem refinancing operations. Reporting of the information will be done via standardised templates, which could also be used for reporting under this Regulation and, pending completion thereof, to the SFI website, under Article 8b of the CRAIII Regulation. In any case, competent authorities will have the responsibility to ensure that information is properly provided to investors and that the website responds to the required characteristics. ESMA, in close cooperation with EBA and EIOPA, should specify in a draft regulatory technical standards specifying the requirements to be met by the website on which the information shall be made available to holders of securitisation positions. In particular, these requirements will cover the governance structure including independence of the website, the modalities to access information, the internal procedures to ensure the well-functioning, operational robustness and integrity of the website and the procedures in place in order to ensure quality and accuracy of the information.
Articles 6 to 13 contain the requirements for Simple, Transparent and Standardised ("STS") Securitisation.
The 'STS standard' does not mean that the securitisation concerned is free of risks, but means that the product respects a number of criteria and that a prudent and diligent investor will be able to analyse the risk involved.
There will be two types of STS requirements: one for long-term securitisations and one for short-term securitisations (ABCP). To a large extent the requirements are however similar. The requirements are developed on the basis of existing requirements in the Liquidity Coverage Ratio and Solvency II delegated acts, on the EBA advice and on the BCBS-IOSCO standard. The requirements will be applicable for all financial sectors.
This proposal only allows true sale securitisation to become STS. In a true sale securitisation the ownership of the underlying exposures is transferred or effectively assigned to a securitisation special purpose entity. In synthetic securitisations the underlying exposures are not transferred to such an entity, but the credit risk related to the underlying exposures is transferred by means of a guarantee or derivative contract. This introduces an additional counterparty credit risk and potential complexity related in particular to the content of the contract. Until now neither on an international level (BCBS-IOSCO), nor on a European level (EBA), have STS criteria been developed for synthetic securitisation. Thus at this moment there is insufficient clarity on which synthetic securitisations should be considered STS and under which conditions. The Commission will further consider this issue and follow the work of international and European bodies on this topic. It will assess whether some synthetic securitisations that have performed well during the financial crisis and that are simple, transparent and standardised should be able to meet the STS requirements. Future input from in particular the EBA could inform the Commission in its future policy proposals. However, a specific category of SME transactions undertaken alongside public authorities or public guarantee schemes (i.e. ‘tranched cover’) has been singled out and will be granted the STS prudential treatment in the CRR under specific conditions.
Originators, sponsors and SSPE's should be jointly responsible for the compliance with the STS requirements and for the notification to ESMA which will publish it on its website. This will ensure that originators, sponsors and SSPE's take responsibility for their claim that the securitisation is STS and that there is transparency on the market. Originators and sponsors shall be liable for any loss or damage resulting from incorrect or misleading notifications under the conditions stipulated by national law. Investors will however still have to perform due diligence, but may place appropriate reliance on the STS notification and the information disclosed by the originator, sponsor and SSPE on STS compliance. To facilitate the process for investors and originators, sponsors and SSPE's, a template will be developed by the European Supervisory Authorities for the STS assessment.
To safeguard financial stability, ensure investors' confidence and promote liquidity, a proper and effective supervision of securitisation markets is essential. To this aim, the proposal requires Member States to designate competent authorities in accordance with existing EU legal acts in the area of financial services. As is currently the case under existing provisions of EU law, for the supervision of compliance with the article on due diligence Member States should designate the competent authority of the relevant institutional investor. This supervisor should have the powers that are granted to it under the relevant financial services legislation. For the supervision of Articles 4 to 14 of the proposal, when the parties involved are regulated under the EU financial services legislation, the competent authority for the relevant regulated entity should be designated by Member States. For instance, when the entity concerned is a credit institution the relevant banking supervisor should be designated by Member States, In case the credit institution is a significant credit institution under Regulation (EU) No 1024/2013 the Single Supervisory Mechanism should be designated. Where the party concerned is not a regulated entity under EU financial services legislation, for instance a SSPE, Member States may decide which authority should be the competent authority. In this manner the supervisory arrangements for this proposal are as much as possible aligned with the existing arrangements. For entities that are currently not regulated by EU law Member States must designate one or more competent authorities.
Member States should provide the competent authorities with the supervisory, investigatory and sanctioning powers that are normally available under EU financial services legislation.
In view of the cross-border nature of the securitisation market cooperation between competent authorities and the ESAs is crucial. Information exchange, cooperation in supervisory activities and investigations and coordination of decision-taking is a basic requirement.
To ensure a consistent interpretation and common understanding of the STS requirements by competent authorities, EBA, ESMA and EIOPA should coordinate the work of competent authorities across financial sectors and assess practical issues which may arise with regards to STS securitisations. They may in particular coordinate their work in the framework of the joint-committee of the European Supervisory Authorities. A Q&A process could facilitate the implementation of this Regulation by market participants and competent authorities.
In view of the impact of the STS classification on, for instance, the capital treatment of such products, some specific rules are necessary. For instance, two insurers from two different Member States could invest in the same STS securitisation from another Member State. The competent authority with oversight on the first insurer could come to the conclusion that the securitisation instrument does not satisfy the STS requirements, while the competent authority with oversight on the second insurer might conclude it does satisfy the STS requirements. Persistent use of different approaches could negatively impact the credibility of the STS approach and lead to regulatory arbitrage.
To ensure a credible approach for STS securitisation, some specific rules have therefore been introduced in the proposal. Where a competent authority has evidence that originators, sponsors and SSPE's have made an materially incorrect or misleading STS notification, it should immediately inform ESMA, EBA or EIOPA and the competent authorities of the Member States concerned to discuss its findings. Where they cannot come to an agreement, there should be binding mediation in accordance with the ESMA Regulation.
Articles 24 to 27 amend a number of articles of other legal acts, in particular the UCITS Directive, the Solvency II Directive, the CRAIII Regulation, the AIFM Directive and EMIR. These changes are necessary to reflect the creation of a harmonised securitisation framework in this proposal. Therefore, a number of the provisions have to be repealed or amended. Until the (relevant provisions in the) delegated acts based on these Directives and Regulations are repealed they will remain applicable. This is in particular the case for the provisions of Commission Delegated Regulation (EU) No 625/2014 18 , Articles 254 to 257 of the Solvency II Delegated Act, Articles 50 to 56 of the AIFM Regulation 19 and the provisions of Commission Delegated Regulation (EU) No 2015/3. 20 The Commission will adopt the necessary changes to these delegated acts on the basis of the adopted Securitisation Regulation.
The amendments to EMIR provide that OTC derivative contracts entered into by Covered Bond Entities and Securitisation Special Purpose Entities should not be subject to the clearing obligation provided that certain conditions are met. The exemption is justified by that fact that counterparties to OTC derivative contracts are secured creditors under covered bond and securitisation arrangements and adequate protection against counterparty credit risk may already be provided for. In such cases, an obligation to centrally clear could therefore imposes unnecessary duplication of risk mitigation techniques and would interfere with the structure of the asset. These provisions are intended to allow the ESA's to provide, for issuers of STS securitisations, the situations and conditions justifying exclusions from the EMIR clearing and margining requirements.
This proposal provides essentially for a system that is open to third country securitisations. EU institutional investors can invest in non-EU securitisations and will have to perform the same due diligence as for EU securitisations, which includes a check whether the risk is retained and whether the originator, sponsor and SSPE make available all the relevant information. Moreover, non-EU securitisations can also meet the STS requirements and the originator, sponsor and SSPE may also submit an STS notification to ESMA pursuant to Article 8. There is also no requirement that the underlying exposures are located in the EU.