European Supervisory Authorities report on the implementation and functioning of the Securitisation Regulation

On 17 May 2021, the Joint Committee of the European Supervisory Authorities (EBA, ESMA & EIOPA) published its Report on the Implementation and Functioning of the Securitisation Regulation.

The Report aims to identify the status of the application of the Securitisation Regulation (SECR) as well as some initial inconsistencies and challenges that occurred in the first years of implementation of the SECR and which may affect the overall efficiency and consistency of the new securitisation regime. Based on evidence collected from market participants and competent authorities, the Report also identifies possible solutions, recommendations and key messages to address them.

The Report makes a number of recommendations on the implementation of the general requirements applicable to all securitisations, including the Risk Retention, Due-Diligence and Transparency Requirements as well as on the specific requirements related to simple, transparent and standardised (STS) securitisations. These recommendations include:

  • Jurisdictional Scope: in recognition of the legal uncertainty as to the application of Due Diligence & Risk Retention Requirements to transaction parties located outside the EU, the Report recommends that the European Commission should specify in the SECR (or provide interpretative guidance) the jurisdictional scope of application of the SECR and of the related Due Diligence & Risk Retention Requirements. These specifications should follow the proposals made by the Joint Committee of the ESAs in its Opinion on the jurisdictional scope of application of the SECR. Broadly speaking, that Opinion suggests that SECR shall not be directly applicable to parties outside of the EU however such parties may nevertheless be indirectly required to comply with SECR in connection with the implementation of the transaction e.g. EU institutional investors would still be required to verify that an originator, sponsor or original lender satisfies the Risk Retention Requirements.
  • Transparency Requirements:
    • definition of private securitisation: the Report acknowledges that the current definition of private securitisation (a securitisation where no prospectus has to be drawn up in compliance with the Prospectus Regulation) may be too far reaching such that the Transparency Requirements extend to transactions which do not necessarily further the SECR's goals of access to information and investor protection e.g. these concerns may be less relevant in private securitisations not involving third party investors. The Report recommends that the European Commission considers a narrower definition of 'private securitisation' taking into account these SECR objectives.
    • private securitisation reporting – securitisation repository: given the trend in increasing issuance of private securitisations and to ensure consistent reporting requirements across all securitisations the Report recommends that SECR be updated to provide that reporting entities should also report to a securitisation repository in respect of a private securitisation. This will also facilitate competent authority access to information.
  • Due Diligence: the Report recommends additional guidance specifying (i) how adequacy and proportionality could be achieved in the context of due-diligence (in particular for STS transactions); and (ii) how investors are expected to perform due-diligence at loan-level.
  • Risk Retention: the Report notes that the Risk Retention RTS have not yet been adopted by the European Commission and that the EBA are now mandated to deliver updated Risk Retention RTS in connection with the EU Capital Markets Recovery Package. The Report considers it "essential that the Commission closely follows the development of these updated RTS to facilitate and accelerate the final adoption process" in order to support market participants' confidence in the risk retention regime.
  • STS Criteria – Asset Backed Commercial Paper Programmes: the Report recognises that the existing STS requirements set out in Article 26.1 (which requires that all ABCP transactions within an ABCP program must be STS compliant) and Article 26.2 (which requires that the remaining average life of the underlying exposures of an ABCP program should not be more than two years) of the SECR have proven to be particularly difficult for sponsors to meet. As a result, the STS label have not been used in practice for ABCP programmes as no sponsor has notified STS at programme level to ESMA. The Report does not, however, recommend any specific changes and instead suggests that the legislator may want to consider introducing some targeted adjustments to SECR.

Securitisation continues to have an important role to play in combatting the economic fallout of the Covid-19 pandemic. It is a vital tool for freeing up bank capital that can then be utilised for much needed lending to SMEs and households while attracting a diverse range of investors to share the risk of funding a sustainable economic recovery across Europe. As such, it is regrettable that the Report did not expressly address some of the recommendations made by the High Level Forum on the Capital Markets aimed at broadening and deepening the market. These included recommendations to improve the high-quality asset (HQLA) recognition for STS compliant deals, recalibration of securitisation capital charges for banks under CRR so that STS compliant deals would receive better treatment more commensurate with the risks and addressing the Solvency II capital charges that can make the product less attractive than other investment opportunities for insurance investors. That said, many of the Report's proposals are welcome and should be helpful in the further development the European Securitisation framework and transition to a green, sustainable and digital economy in accordance with the European Green Deal and Digital Finance Package.

The Report will now be considered by the European Commission as part of its comprehensive review of the current framework due by Q4 2021 and industry hopes that the Commission will also take the High Level Forum's recommendations into account.

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