The COVID-19 crisis is severely affecting people, companies, health systems and the economies of Member States. In its Communication of 27 May 2020 entitled ‘Europe's Moment: Repair and Prepare for the Next Generation’, the Commission stressed that liquidity and access to finance will continue to be a challenge in the months to come. It is therefore crucial to support the recovery from the severe economic shock caused by the COVID-19 pandemic by introducing targeted amendments to existing pieces of financial legislation.
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The severe economic shock caused by the COVID-19 pandemic and the exceptional containment measures required are having a far-reaching impact on the economy. Businesses are facing disruption to supply chains, temporary closures and reduced demand, while households are confronted with unemployment and a fall in income. Public authorities at Union and Member State level have taken far-reaching action to support households and solvent undertakings in withstanding the severe but temporary slowdown in economic activity and the resulting liquidity shortages.
(3)
It is important that credit institutions and investment firms (institutions) employ their capital where it is most needed and the Union regulatory framework facilitates their doing so while ensuring that institutions act prudently. In addition to the flexibility provided for by the existing rules, targeted changes to Regulation (EU) 2017/2402 of the European Parliament and of the Council (4) would ensure that the Union securitisation framework provides for an additional tool to foster economic recovery in the aftermath of the COVID-19 crisis.
(4)
The extraordinary circumstances of the COVID-19 crisis and the unprecedented magnitude of the attendant challenges triggered a call for immediate action to ensure that institutions have the ability to channel sufficient funds to businesses, so as to help them absorb the economic shock caused by the COVID-19 pandemic.
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The COVID-19 crisis risks increasing the number of non-performing exposures (NPEs), and increases the need for institutions to manage and deal with their NPEs. One way for institutions to do so is to trade their NPEs on the market through securitisation. Additionally, in the current context, it is vital that risks are moved away from the systemically important parts of the financial system and that lenders strengthen their capital positions. Synthetic securitisation is one way of achieving this, as well as, for example, raising new own funds.
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Securitisation special purpose entities (SSPEs) should only be established in third countries that are not listed by the Union (5) on the EU list of non-cooperative jurisdictions for tax purposes, and updates thereto (Annex I), or in the list of high-risk third countries which have strategic deficiencies in their regimes on anti-money laundering and counter terrorist financing. Annex II on the State of play of the cooperation with the EU with respect to commitments taken by cooperative jurisdictions to implement tax good governance principles reports on the state of play of discussions with certain cooperating third countries, some of which currently maintain harmful tax practices. Such discussions should lead to a timely termination of such harmful tax practices to avoid future restrictions on the establishment of SSPEs.
(7)
To reinforce the capability of national authorities in countering tax avoidance, an investor should notify the competent tax authorities of the Member State in which it is resident for tax purposes whenever it is due to invest in an SSPE established, after the date of application of this Regulation, in a jurisdiction mentioned in Annex II for the reason of operating a harmful tax regime. This information may be used to assess whether the investor derives a tax benefit.
(8)
As pointed out by the European Supervisory Authority (European Banking Authority) (EBA), established by Regulation (EU) No 1093/2010 of the European Parliament and of the Council (6), in its Opinion on the Regulatory Treatment of Non-Performing Exposure Securitisation (7), the risks associated with the assets backing NPE securitisations are economically distinct from those of securitisations of performing assets. NPEs are securitised at a discount on their nominal or outstanding value and reflect the market’s assessment of, inter alia, the likelihood of the debt workout generating sufficient cash flow and asset recovery. The risk for investors is, therefore, that the debt workout for the assets does not generate sufficient cash flow and asset recovery to cover the net value at which the NPEs have been purchased. The actual risk of loss for investors does, therefore, not represent the nominal value of the portfolio, but the discounted value, namely, net of the price discount at which the underlying assets are transferred. It is therefore appropriate, in the case of NPE securitisations, to calculate the amount of the risk retention on the basis of that discounted value.
(9)
The risk-retention requirement aligns the interests of originators, sponsors and original lenders that are involved in a securitisation with those of investors. Typically, in securitisations of performing assets, the prevalent interest on the sell-side is that of the originator, who is often also the original lender. In NPE securitisations, however, originators seek to offload the defaulted assets from their balance sheets, as they might no longer wish to be associated with them in any way. In such cases, the servicer of the assets has a greater interest in the debt workout for the assets and in value recovery.
(10)
Before the 2008 financial crisis, some securitisation activities followed an ‘originate to distribute’ model. In that model, assets of inferior quality were selected for securitisation to the detriment of investors, who ended up with more risk then they might have intended to undertake. The requirement to verify the credit granting standards used in the creation of securitised assets was introduced to prevent such practices in the future. For NPE securitisations, however, the credit granting standards applicable at the origination of the securitised assets are of minor importance due to the specific circumstances including the purchase of those non-performing assets and the type of securitisation. Instead, the application of sound standards in the selection and pricing of the exposures is a more important factor with respect to investments in NPE securitisations. It is therefore necessary to amend the verification of credit granting standards to enable the investor to carry out a due diligence on the quality and performance of the non-performing assets in order to make a sensible and well-informed investment decision, while ensuring that the derogation is not abused. Therefore, for NPE securitisation, the competent authorities should review the application of sound standards for selection and pricing of the exposures.
(11)
Synthetic securitisations involve transferring the credit risk of a set of loans, typically large corporate loans or loans to small and medium-sized enterprises (SMEs), by means of a credit protection agreement where the originator buys credit protection from the investor. Such credit protection is achieved by the use of financial guarantees or credit derivatives while the ownership of the assets remains with the originator and is not transferred to a SSPE, as is the case in traditional securitisations. The originator, as protection buyer, commits to pay a credit protection premium, which generates the return for investors. In turn, the investor, as protection seller, commits to a specified credit protection payment when a pre-determined credit event occurs.
(12)
The overall complexity of the securitisation structures and associated risks should be appropriately mitigated and no regulatory incentives should be provided to originators which would cause them to prefer synthetic securitisations over traditional securitisations. The requirements for simple, transparent and standardised (STS) on-balance-sheet securitisations should therefore be highly consistent with the STS criteria for traditional true sale securitisations.
(13)
There are certain requirements for STS traditional securitisations that are not appropriate for STS on-balance-sheet securitisations due to inherent differences between both types of securitisation, in particular due to the fact that, in synthetic securitisations, the risk transfer is achieved via a credit protection agreement instead of a sale of the underlying assets. Therefore, the STS criteria should be adapted, where necessary, in order to take those differences into account. Furthermore, it is necessary to introduce a set of new requirements, specific to synthetic securitisations, to ensure that the STS framework targets only on-balance-sheet synthetic securitisations and that the credit protection agreement is structured to adequately protect the position of both the originator and the investor. That new set of requirements should seek to address counterparty credit risk for both the originator and the investor.
(14)
The object of a credit risk transfer should be exposures originated or purchased by a Union regulated institution within its core lending business activity and held on its balance sheet or, in the case of a group structure, on its consolidated balance sheet at the closing date of the transaction. The requirement for an originator to hold the securitised exposures on the balance sheet should exclude arbitrage securitisations from the scope of the STS label.
(15)
It is important that the interests of originators, sponsors, and original lenders that are involved in a securitisation are aligned. The risk-retention requirement set out in Regulation (EU) 2017/2402, which applies to all types of securitisations, works to align those interests. Such a requirement should also apply to STS on-balance-sheet securitisations. As a minimum, the originator, sponsor or original lender should retain, on an ongoing basis, a material net economic interest in the securitisation of not less than 5 %. Higher risk retention ratios might be justifiable and have already been observed in the market.
(16)
The originator should make sure that it does not hedge the same credit risk more than once by obtaining credit protection in addition to the credit protection provided by the STS on-balance-sheet securitisation. In order to ensure the robustness of the credit protection agreement, it should meet the credit risk mitigation requirements laid down in Article 249 of Regulation (EU) No 575/2013 of the European Parliament and of the Council (8) that have to be met by institutions seeking significant risk transfer through a synthetic securitisation.
(17)
STS on-balance-sheet securitisation might feature non-sequential amortisation in order to avoid disproportionate costs for protecting the underlying exposures and the evolution of the portfolio. Certain performance-related triggers should determine the application of sequential amortisation in order to ensure that tranches providing credit protection have not already been amortised when significant losses occur at the end of the transaction, thereby ensuring that significant risk transfer is not undermined.
(18)
To avoid conflicts between the originator and the investor, and to ensure legal certainty in terms of the scope of the credit protection purchased for underlying exposures, such credit protection should reference clearly identified reference obligations, giving rise to the underlying exposures, of clearly identified entities or obligors. Therefore, the reference obligations on which protection is purchased should be clearly identified at all times, via a reference register, and kept up to date. That requirement should also be indirectly part of the criteria defining the STS on-balance-sheet securitisation and excluding arbitrage securitisation from the STS framework.
(19)
Credit events that trigger payments under the credit protection agreement should include at least those referred to in Chapter 4 of Title II of Part Three of Regulation (EU) No 575/2013. Such events are well-known and recognisable from a market perspective and should serve to ensure consistency with the prudential framework. Forbearance measures, which consist of concessions towards a debtor that is experiencing or about to experience difficulties in meeting its financial commitments, should not preclude the triggering of the credit event.
(20)
The right of the originator, as protection buyer, to receive timely payments on actual losses, should be adequately protected. Accordingly, the transaction documentation should provide for a sound and transparent settlement process for the determination of actual losses in the reference portfolio, to prevent the originator from being underpaid. As working out the losses might be a lengthy process and to ensure timely payments to the originator, interim payments should be made at the latest six months after a credit event has occurred. Furthermore, there should be a final adjustment mechanism to ensure that interim payments cover actual losses and to prevent those interim losses from overpaying, which would be to the detriment of investors. The loss settlement mechanism should also clearly specify the maximum extension period that should apply to the workout process for those exposures and such extension period should be no longer than two years. That loss settlement mechanism should ensure the effectiveness of the credit protection agreement from the originator’s perspective, and give investors legal certainty on the termination date of their obligation to make payments, and therefore contribute to a well-functioning market.
(21)
Having a third-party verification agent is a widespread market practice that enhances legal certainty for all parties involved in a transaction, thereby decreasing the likelihood of disputes and litigation that could arise as a result of the loss allocation process. To enhance the soundness of the transaction’s loss settlement mechanism, a third-party verification agent should be appointed to carry out a review of the correctness and accuracy of certain aspects of the credit protection when a credit event has been triggered.
(22)
Credit protection premiums should depend only on the outstanding size and credit risk of the protected tranche. Non-contingent premiums should not be permitted in STS on-balance-sheet securitisations as they could be used to undermine the effective risk transfer from the originator as protection buyer to the protection sellers. Other arrangements, such as upfront premium payments, rebate mechanisms or overly complex premium structures, should also be prohibited for STS on-balance-sheet securitisations.
(23)
To ensure the stability and continuity of credit protection, the early termination of an STS on-balance-sheet securitisation by the originator should only be possible in certain limited, well-defined circumstances. Although the originator should be entitled to close out the credit protection early upon the occurrence of certain specified regulatory events, those events should involve actual changes in legislation or taxation that could not have been reasonably anticipated at the time of entering into the transaction and that have a material adverse effect on the originator’s capital requirements or the economics of the transaction relative to the parties’ expectations at that time. STS on-balance-sheet securitisations should not feature complex call clauses for the originator, in particular very short-dated time calls with the aim of temporarily changing the representation of their capital position on a case-by-case basis.
(24)
Synthetic excess spread is widely present in certain types of transactions and is a helpful mechanism for both investors and originators, in order to reduce the cost of the credit protection and the exposure at risk respectively. In that regard, synthetic excess spread is essential for some specific retail asset classes, such as SMEs and consumer lending, that show both higher yield and credit losses than other asset classes, and for which the securitised exposures generate excess spread to cover those losses. However, where the amount of synthetic excess spread subordinated to the investor position is too high, it is possible that there is no realistic scenario in which the investor in the securitisation positions will experience any losses, resulting in no effective risk transfer. To mitigate supervisory concerns and further standardise that structural feature, it is important to specify strict criteria for STS on-balance-sheet securitisations and to ensure full disclosure on the use of synthetic excess spread.
(25)
Only high quality credit protection agreements should be eligible for STS on-balance-sheet securitisations. Unfunded credit protection should be ensured by restricting the scope of eligible protection providers to those entities that are eligible providers in accordance with Regulation (EU) No 575/2013 and are recognised as counterparties with a 0 % risk-weight in accordance with Chapter 2 of Title II of Part Three of that Regulation. In the case of funded credit protection, the originator as protection buyer and the investors as protection sellers should have recourse to high quality collateral, which should refer to collateral of any form which may be assigned a 0 % risk weight under that Chapter, subject to appropriate deposit or custody arrangements. When the collateral provided is in the form of cash, it should be held either with a third-party credit institution or on deposit with the protection buyer, subject in both cases to a minimum credit quality standing.
(26)
Member States should designate the competent authorities responsible for supervising the requirements that the synthetic securitisation has to meet in order to qualify for the STS designation. The competent authority could be the same as the one designated to supervise the compliance of originators, sponsors and SSPEs with the requirements that traditional securitisations have to meet in order to acquire the STS designation. As in the case of traditional securitisations, such competent authority could be different from the competent authority responsible for supervising the compliance of originators, original lenders, SSPEs, sponsors and investors with the prudential obligations laid down in Articles 5 to 9 of Regulation (EU) 2017/2402, the compliance with which was specifically entrusted to the competent authorities in charge of the prudential supervision of the relevant financial institutions, due to the prudential dimension of those obligations.
(27)
In order to avoid negative consequences for financial stability, the introduction of a specific framework for STS on-balance-sheet securitisations should be accompanied by an appropriate macroprudential oversight. In particular, the European Systemic Risk Board (ESRB), established by Regulation (EU) No 1092/2010 of the European Parliament and of the Council (9) should monitor macroprudential risks associated with synthetic securitisation and assess whether they are sufficiently removed from the systemic part of the financial system.
(28)
For the purpose of integrating sustainability-related transparency requirements in Regulation (EU) 2017/2402, EBA, in close cooperation with the European Supervisory Authority (European Securities and Markets Authority) (ESMA), established by Regulation (EU) No 1095/2010 of the European Parliament and of the Council (10), and the European Supervisory Authority (European Insurance and Occupational Pensions Authority) (EIOPA), established by Regulation (EU) No 1094/2010 of the European Parliament and of the Council (11), should be mandated to publish a report on developing a specific sustainable securitisation framework. That report should duly assess, in particular, the introduction of sustainability factors, the implementation of proportionate disclosure and due diligence requirements, the content, methodologies and presentation of information in relation to environmental, social and governance-related adverse impacts, and any potential effects on financial stability and on the scaling up of the Union securitisation market and of bank lending capacity. Based on that report, the Commission should submit a report to the European Parliament and to the Council on the creation of a specific sustainable securitisation framework, together with a legislative proposal, if appropriate.
(29)
Disclosures of the integration of sustainability risks and the consideration of adverse sustainability impacts on investment decision-making to investors are insufficiently developed because such disclosures are not yet subject to harmonised requirements. Pursuant to Regulation (EU) 2019/2088 of the European Parliament and of the Council (12), manufacturers of financial products and financial advisers to end-investors are obliged to consider the principal adverse impacts of investment decisions on sustainability factors, and to disclose how their due diligence policies take those principal adverse impacts into account. The disclosures of adverse sustainability impacts are accompanied by regulatory technical standards, which are jointly developed by EBA, ESMA and EIOPA (collectively, the ‘European Supervisory Authorities’) on the content, methodologies and presentation of the relevant information to be disclosed under Regulation (EU) 2019/2088. Originators of STS securitisations should also have the option to disclose specific information regarding the consideration of adverse impacts on sustainability factors, giving particular attention to climate and other environmental, social and governance-related impacts. To harmonise information disclosure and to ensure consistency between Regulation (EU) 2019/2088 and Regulation (EU) 2017/2402, the Joint Committee of the European Supervisory Authorities should develop regulatory technical standards, building as much as possible on their work in the context of Regulation (EU) 2019/2088 and adapting it, where necessary and relevant, to the specificities of securitisations.
(30)
Since the objectives of this Regulation, namely to extend the STS securitisation framework to synthetic securitisation and to remove regulatory obstacles to securitisation of NPEs to further increase lending capacities without lowering the prudential standards for bank lending, cannot be sufficiently achieved by the Member States but can rather, by reason of their scale and effects, be better achieved at Union level, the Union may adopt measures, in accordance with the principle of subsidiarity set out in Article 5 of the Treaty on European Union. In accordance with the principle of proportionality as set out in that Article, this Regulation does not go beyond what is necessary in order to achieve those objectives.
(31)
Regulation (EU) 2017/2402 should therefore be amended accordingly.
(32)
In view of the need to introduce targeted measures to support economic recovery from the COVID-19 crisis as quickly as possible, this Regulation should enter into force as a matter of urgency on the third day following that of its publication in the Official Journal of the European Union,
