STS Report

In December 2017, the European Parliament passed Regulation (EU) 2017/2402 of the European Parliament and of the Council of 12 December 2017 laying down a general framework for securitisation and creating a specific framework for simple, transparent and standardised securitisation, and amending Directives 2009/65/EC, 2009/138/EC and 2011/61/EU and Regulations (EC) No 1060/2009 and (EU) No 648/2012 (the “STS Regulation”).  In addition to setting out new rules applying to all European securitisations (eg on retention and information disclosure), the STS Regulation creates a new category of securitisations: “simple, transparent and standardised securitisations” also known as STS securitisations.

At the same time, 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 banks investing in them provided that they meet some additional criteria (the “CRR criteria”).

This STS Regulation will come into force on January 1, 2019.  The STS Regulation also contains extensive requirements for the grandfathering of securitisations issued before January 1, 2019.

Many issuers have indicated that their current intention is to issue STS securitisations from 2019 onwards and, in the case of some, to issue in 2018 securitisations that are capable of being grandfathered under the STS Regulation.

To be an STS securitisation, a securitisation is required fully to meet an extensive set of criteria set out in the STS Regulation.

PCS has been very closely involved in all the stages of development of the new STS regime from its inception in 2012 through the technical work done by the EBA in 2014, the EU Commission’s proposals in 2015, the amendments of the Council and the EU Parliament in 2016 and the trilogue process in 2017.

In order to assist market participants in transitioning to the new regime, PCS offers STS Reports in which PCS will analyse a securitisation transaction, against the criteria set out in the STS Regulation to determine whether the transaction meets those criteria and, if it does not, what criteria are not met and why.

Together with the STS Report, if requested, PCS will do an analysis of whether a transaction may be grandfathered under the STS Regulation and whether the transaction meets the additional CRR criteria to be able to benefit from the favourable CRR treatment (see our “Grandfathering and CRR” section for more detail).

The benefits of the STS Reports are as follows:

  • For issuers, to identify where their existing structures and practices fall short of the likely STS requirements so as to give them a sense of the additional costs of issuing STS securitisation and the lead time to make any changes that are necessary – including but especially any IT changes – if they wish to issue STS securitisations in 2019.
  • For the legal and compliance teams at the issuers, to get the benefit of PCS’ extensive knowledge of the rules and the rationale behind them and familiarise themselves with the new requirements.
  • Since many issuers have indicated that they will wish to use a third party certification agent and PCS has indicated its intention of requesting authorisation as a third party certification agent, for issuers to familiarise themselves with the requirements of obtaining such third party certification prior to 2019.
  • For issuers who wish their previous issuance (including any 2018 issuance) grandfathered as STS under the STS Regulation, to obtain a sense of whether this is possible and, if it is, what modification will be needed to achieve such grandfathering and when those modifications need to be done.
  • For investors who wish to understand whether their existing book will be grandfathered or may be grandfathered – and if the latter, what will the originators need to do to achieve such grandfathering.
  • For investors who wish to understand, based on actual transactions, rather than technical papers, exactly what the new STS regime means for their holdings.

It should be noted though, that the STS criteria, as drafted in the STS Regulation, are subject to a potentially wide variety of interpretations.  In compiling an STS Report, PCS uses its discretion to interpret the STS 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 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.

Also, during the course of 2018, a dialogue will be taking place between regulatory authorities (especially the European Banking Authority) and the market to refine the regulatory interpretation of the STS criteria.  As this dialogue progresses and greater clarity is provided as to possible regulatory interpretations, PCS may modify its interpretations to better reflect the general direction of regulatory interpretation.  As such, each STS Report will reflect the interpretations used by PCS at that point in time.  From time to time, PCS may update its interpretations to reflect where we believe the final regulatory position may end up.

(For a more detailed understanding of the framework underpinning PCS’ STS Reports, we invite all readers to familiarise themselves with our Disclaimer section).