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Originally published February 2016,Most recently updated May 2018. STS easy as STC easy as 1 2 3 Or is it, Operational efforts to revive the securitisation market. Executive summary, Certification Ambiguity and Operational readiness are the key challenges of the. published criteria for STS securitisation,On 30 September 2015 the European Commission EC. published its initial draft Regulation for common rules. on securitisation and creating a European framework for. simple transparent and standardised securitisation A. revised compromise draft was published in December. 2016 If passed this legislation would supersede all. other European regulations and directives concerning. securitisation This single regulation would bring an. end to the current piecemeal approach to regulating. securitisation transactions and markets in the European. Union The momentum behind this regulatory initiative to. revive the securitisation market could see the regulation. being implemented in H2 2017 This would be ahead of. Basel requirements to implement the revised capital. framework for securitisation by January 2018, It is our view that implementation of the STS criteria.
As part of our review each of the 24 criterion are. in the context of a single regulation for securitisation. classified as either high medium or low impact reflecting. could have a significant positive effect on reviving the. the extent to which current business as usual practices. market through addressing longstanding concerns about. may need to be adjusted or could be affected by the. regulatory uncertainty In their efforts to rejuvenate. implementation of each criteria, securitisation markets European and Global regulators. need to be mindful of balancing desires to encourage a. Nine of the criteria are identified as having a high impact. market only for more standardised transactions against. and a further nine as having a medium impact to the. the innovation necessary to fund certain real economy. existing practices of issuers and investors should they. assets such as SME lending, wish to participate in the STS securitisation market. We anticipate changes arising from these criteria will. This paper reviews Articles 8 9 10 of the recent draft. cover aspects such as adjustments to the typical, Securitisation Regulation published by the European. structures and structural features used in securitisation. Commission and identifies some of the challenges posed. transactions the scope of potentially increased, by the regulation of simple transparent and standardised. liability for issuers and how changes in origination and. securitisations These include,underwriting procedures are communicated to and.
appraised by potential investors, Certification The potential evolution of self attestation. requirements into calls for 3rd party certification. Focussing on the criteria classified as potentially having. Ambiguity Where aspects of the criteria are open a high or medium impact the discussion outlines. to interpretation we consider what if any steps challenges posed and what market participants may. stakeholders could take prior to any regulatory efforts wish to consider when approaching simple transparent. to provide clearer guidance and standardised securitisations The paper goes on. to identify the next steps in the regulatory agenda and. Operational readiness Many parts of the criteria are suggests what next steps market participants could take. clear and require operational improvements to be, made by issuers and investors Market participants As well as discussing the key points of the draft. may wish to take steps to begin making these Securitisation Regulation in order of impact for market. improvements in advance of all ambiguities in the participants this paper provides some background on. criteria being addressed the movement of international regulatory bodies with. regards to securitisation post crisis, 9 of the 24 criteria are identified as having a high impact on BAU. practices of securitisation originators,STS easy as STC easy as 1 2 3 Or is it. Operational efforts to revive the securitisation market. Introduction, During the 2007 financial crisis securitisations In May 2014 the Bank of England BoE and ECB.
underpinned by sub prime US mortgages released a joint discussion paper2 around what might. gained a tarnished status within the eyes of many constitute such a qualifying securitisation Arguably. Rightly or wrongly this spread beyond its origins of this paper signalled the first public move by central. securitisations backed by US sub prime and negatively banks to consider differentiating between securitisation. affected opinions and attitudes towards all types of transactions that met certain qualifying criteria In. securitisations globally October 2014 the European Banking Authority EBA. also published a discussion paper3 on what were, This resulted in securitisation transactions more then dubbed Simple Standard and Transparent. generally falling out of favour with investors and a securitisations. hardening regulatory stance around the world towards. this market This has manifested itself through the This was then followed by the Basel Committee. combination of the redrafted Basel III regulatory capital on Banking Supervision BCBS and International. treatment and heightened regulatory supervision of Organization of Securities Commissions IOSCO jointly. exposure to securitisations transactions and issuance producing a paper in December 2014 on Simple. programmes Transparent and Comparable STC securitisations4. This paper touched many of the same topics as the, Post crisis a new question arose at many central banks ECB BoE paper of six months earlier but it also drew. how can lending to the real economy be increased together some of the wider thinking that had gone on. In this context securitisation was no longer viewed as globally. part of the problem but was in fact seen as part of the. solution In 2015 the Junker commission identified the creation. of a Capital Markets Union5 CMU as one of its major. In 2010 the European Central Bank ECB began priorities during the next European Parliament. working on its Loan level Data LLD initiative1 One The flagship policy within CMU is the Securitisation. objective of this was to introduce transparency to what Regulation6 which seeks to define what Simple. some considered an opaque market LLD launched in Transparent and Standard STS securitisations look like. January 2013 and while this alone was not a panacea and gives them differential capital treatment to regular. for securitisation markets it was a first step towards securitisations. rehabilitation of the asset class through giving, investors the ability to see loan by loan data on the Over the past ten years the regulatory stance on. exposures underlying a securitisation securitisation markets seems to have come full circle. Having been considered one of the root causes of the. Also at this time work had begun among various crisis in 2007 certain securitisations specifically good. industry groups examining what they could usefully ones such as STS might be considered are now seen as. do to restart the market themselves This generated just what the EU needs to get credit flowing and boost. discussion around what might constitute high quality growth in the European economy. or qualifying securitisation which would help to, rehabilitate the asset class in the eyes of investors. 1 ECB Loan Level Data Initiative, 2 The case for a better functioning securitisation market in the European Union May 2014.
3 EBA Discussion paper on simple standard and transparent securitisations October 2014. 4 Criteria for identifying simple transparent and comparable securitisations December 2014. 5 Action Plan on Building a Capital Markets Union September 2015. 6 Proposal for a regulation laying down common rules on securitisation and creating a European framework for simple transparent and. standardised securitisation September 2015,STS easy as STC easy as 1 2 3 Or is it. Operational efforts to revive the securitisation market. Simplicity, Prioritisation of criteria considering impact and preparedness Criteria. Medium 1 2 4 7 9 9a 9b,Low 1 a 1 b 1 c 3 5 8, The nine criteria under the initial S of Simplicity of STS encourage focus on the simplicity of assets structures and investors ability to enforce. on either the assets or the securitisation vehicle In large part these criteria are straightforwardly satisfied. Criterion 6 This criterion tackles a number of regulatory considerations including the originate to distribute business model the associated weakening of. underwriting standards as well as ensuring the ability of investors to analyse the credit quality of underlying asset pools is not hindered by having pools. of mixed credit qualities Originators are encouraged to communicate clearly to investors any material changes to underwriting criteria but there is no. guidance as to what constitutes a material change This aspect of ambiguity on materiality of changes in underwriting standards is the most significant. ambiguity affecting not only securitised assets but potentially also the ability to securitise new assets underwritten with a materially less stringent. underwriting standard, Through clear communication between originators and investors of changes in underwriting standards market practices and conventions may evolve. to enhance investor and market confidence with respect to their securitisation exposures Requirements for originators to have expertise in originating. exposures similar those securitised should also address concerns of investor confidence For established lenders this is of little consequence if they wish. to securitise long originated assets However new lenders and existing lenders originating new asset types should carefully consider if they intend to issue. securitisation to fund or transfer the risk of such assets and how they will aim to meet STS requirements In considering how to satisfy the requirement to. have sufficient experience originators may wish to consider how they reflect the industry experience of key individuals in management teams and how their. experience skills have been embedded in the operations and governance of the new lending activity. Of lesser significance to originators but still noteworthy are criteria the definition of homogeneity has become broader more diverse. 1 2 4 7 and 9 and arguably less transparent, Criterion 1 Severe clawback provisions need to be considered Criterion 7 Default credit impaired at the time of the transfer.
in order to establish if any such clawback provisions exist and not the time of origination may prove to be an issue for originators. critically what the acceptable level of severity is with seasoned portfolios who are not monitoring the credit. quality of borrowers on an on going basis The application of. Criterion 2 Not encumbered or foreseen to adversely affect sub criterion 7 c raises interesting questions with respect to what. enforceability may be difficult to cover if commenting on assets the appropriate benchmark loan type should be for determining. which have not been through a sufficiently long performance significantly higher default rates As with many of the other criteria. period for all enforceability issues to have been identified the detailed disclosure of how the criteria are met will be critical. Originators may find it difficult to comment on future enforceability. but have historically borne this risk Criterion 9 That repayment shall not depend predominantly on. the sale of an asset requires consideration of asset types such as. Criterion 4 Homogeneity relates to the age old consideration of interest only mortgages or residual value auto loan lease transactions. the degrees of similarity of assets and how far this extends to where noteholders are exposed to the market value of the asset. securitisations of mixed pools of assets such as auto loans. commercial loans leasing etc in the same transaction On initial Criterion 9a The latest draft states that arbitrage synthetic. reading the regulatory text appears to be clear that homogeneity securitisations cannot be part of STS securitisations In addition. with respect to asset type is a key consideration and therefore the wording leaves open the prospect of balance sheet synthetic. mixed pools are not expected to meet with STS requirements With securitisations being permitted where assets are either. respect to pools of assets of the same type regulatory expectations retained on the originator s balance sheet or are transferred to a. outline that the credit quality of assets within the pool should fall Securitisation Special Purpose Entity SSPE through a true sale. within a defined band possibly a tight band of credit risk metrics. in line with market conventions It may be the case this is addressed Criterion 9b Identifies ESMA taking the lead on developing the. by amongst other things a clear definition of portfolio eligibility regulatory technical standards RTS which will underpin criterion. criteria However in a recent effort to increase clarity by further 4 on homogeneity The requirement for the RTS on homogeneity. defining homogeneous the draft regulations introduce ambiguity results in continued uncertainty over how homogeneity will be. by suggesting grouping certain types of assets which would typically established These RTS will be submitte. On 30 September 2015 the European Commission EC published its initial draft Regulation for common rules on securitisation and creating a European framework for simple transparent and standardised securitisation A revised compromise draft was published in December 2016 If passed this legislation would supersede all other European regulations and directives concerning securitisation This

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