At the same time as passing the STS Regulation, the European Parliament passed Regulation (EU) 2017/2401 of the European Parliament and of the Council of 12 December 2017 amending Regulation (EU) No 575/2013 on prudential requirements for credit institutions and investment firms (the “CRR Regulation”). Under the CRR Regulation, STS securitisations will benefit from a more favourable capital requirement regime for European banks investing in them.
However, under the CRR Regulation, a transaction will need to meet some additional conditions, above and beyond being STS, to benefit from the more favourable capital treatment. These conditions are four in number and appear in Article 1(9) of the CRR Regulation which creates a new, amended Article 243(2) of the CRR rules.
It should also be noted that, although the CRR Regulation will come into force on January 1, 2019, securitisations issued prior to January 1st 2019 will be able to maintain their current capital requirement until January 1st 2020.
As it may be of interest and value for market participants to determine whether, in addition to the STS status of any transaction, this transaction may also benefit from the more favourable CRR capital requirements, PCS will, upon request, as an addendum to the base STS Report a CRR Report. The CRR Report will provide examine the additional CRR criteria.
The STS Regulation also contains requirements for the grandfathering of securitisations issued before January 1, 2019. These securitisations will be able to use the STS designation provided that they meet all the STS criteria. (Art 43(2) and (3) of the STS Regulation).
However, Art 43(3) makes a crucial distinction between those STS criteria that are required to be met by a securitisation at the time it was issued and those than only need to be met before an issuer requests formally the STS status. Those different criteria are set out explicitly in the STS Regulation.
Therefore, any securitisation that is issued before January 1st 2019 may fall into three categories:
(a) The securitisation may already meet ALL the STS criteria at issuance and may be grandfathered.
(b) The securitisation meets all the STS criteria that are required to be met at issuance but not all the criteria that have to be met prior to formal request of the STS status. The securitisation is therefore potentially STS. It is “grandfatherable”.
(c) The securitisation fails to meet one or more of the STS criteria that are required to be met at issuance and therefore, it may never be grandfathered.
If so requested, PCS will provide a further report, the Grandfathering Report. This Grandfathering Report will be an addendum to the base STS Report and will express a view on whether the securitisation is “grandfathered”, “grandfatherable” or “incapable of grandfathering”, setting out the STS criteria that place it in the relevant category.
As with the STS Report, it should be noted that the STS criteria and the additional CRR criteria used in a CRR Report, as drafted in the STS Regulation and the CRR Regulation, are subject to a potentially wide variety of interpretations. In compiling an STS Report and the addenda CRR Report and Grandfathering Report, PCS uses its discretion to interpret the STS and CRR criteria. Although PCS believes its interpretations reflect a reasonable approach based on PCS’ reading of the text and knowledge of the legislative history, there can be no guarantees that any regulatory authority or any court of law interpreting the STS or CRR criteria will agree with the PCS interpretation.
The key interpretations of the STS criteria currently used by PCS can be found in our “Interpretation” Section. These are essential to understand what an STS Report actually means and we strongly encourage anyone reading a report or thinking of requesting a report to read them.
(For a more detailed understanding of the framework underpinning PCS’ STS Reports, CRR Reports and Grandfathering Reports, we invite all readers to familiarise themselves with our Disclaimer section).
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