UK PRA publishes a paper on future capital calibrations

Following publication of HM Treasury’s near final statutory instrument and consultations by the PRA and FCA, all aiming to adapt the inherited EU Securitisation Regulation for a post-Brexit UK, the PRA has now issued a Discussion Paper on the Capital Requirements for Securitisation.

The paper focuses on the consequences for the capital requirements of securitisations of the Basel 3 output floor, the hierarchy of methods for determining these capital requirements and a possible STS for on-balance-sheet (synthetic) securitisations.

The initial suggestions of the PRA in all 3 areas deviate from the current trends in EU regulation and are not altogether cheerful: no halving of the p-factor for the purpose of the output floor calculation, a return to the Basel hierarchy of methods and no synthetic STS. However, the PRA did express strong support for a revisiting of the whole capital requirements calibration of securitisations, so some light at the end of the long tunnel might be discerned by optimists.

Responses are requested by 31 January with a consultation paper planned for the second half of 2024.

UK FCA issues a consultation on proposed new rules for securitisation

As a consequence of the UK leaving the European Union, the shaping of the regulatory landscape for finance, including securitisation, became the responsibility of the British government and British regulatory institutions. Following the publication of HM Treasury's near final statutory instrument modifying the European Securitisation Regulation and the UK PRA's consultation on its proposed changes, it is now the turn of the UK FCA to issue its own consultation on changes it would like to see to the existing rules inherited from the EU.

A quick glance at the just issued document appears to show at attempt at fixing some technical issues and clarifying others rather than any wholesale changes to the structure of the current regulatory architecture: investor due diligence, private vs public deals, retention rules (especially around NPLs), homogeneity and resecuritisations come up.

The consultation runs until October 30th.

UK PRA launches public consultation on proposed reforms

The UK Prudential Regulatory Authority (UK PRA) has taken a significant step forward by launching a public consultation on proposed changes to the retained EU Securitisation Regulation and the accompanying technical standards on risk retention and disclosure. The deadline for submissions is Monday 30 October 2023.

Rather than undertaking a complete overhaul, the UK PRA aims to introduce targeted adjustments to the existing EU securitisation framework with a target to implement the proposed changes by Q2'24.

At headline level, key changes include:

Expanding its scope to one-off securitisation manufacturers¹
More principle-based due diligence obligations for institutional investors
More proportionate risk retention requirements for NPE exposures
Updated approach towards re-securitisation permissions
Tweaks to manufacturer disclosure requirements

While adhering closely to the current technical standards, the UK PRA suggests

Targeted adjustments to risk retention provisions
No changes to disclosure requirements

Finally, the UK PRA seeks insights from stakeholders on possibly recalibrating the definition of public and private securitisations and developing more risk-based disclosure requirements.

UK Treasury publishes near-final draft of the rules replacing the EU Securitisation Regulation

The UK Treasury has published a near final draft of the statutory instrument that will, in due course, fully replace the European Union Securitisation Regulation for the UK market. This draft updates the December 2022 draft on which we commented back then. It comes with a handy and helpful policy note.

This new draft does not substantially alter the December version. To summarise the key points:

The approach, in line with other changes to the legal and regulatory landscape of UK finance, is to remove large parts of the rules from primary law making and the UK Parliament to vest them in the regulatory authorities. As an example, the draft retains the STS category. But, in contrast to the EU Securitisation Regulation, has no STS criteria - leaving those to the FCA to draft at a later stage.

Maybe a relief to UK market participants but the potential huge fines provided for under the EU rules (eg 10% of worldwide turnover) have been replaced by fines to be set by the FCA, subject to FCA policy to be published later.

The SI carves out a set of due diligence rules specifically for small UK alternative fund managers. These rules are, once more, yet to be written by the FCA. But the direction of travel - lightening the due diligence burden on small investors - seems clear.

On STS, the new proposed rules confirms that the special purpose vehicle of an STS securitisation need not be in the UK, although the originator and sponsor still do.

Potentially more interesting for overseas issuers, the draft provides the UK Treasury with the power to designate other jurisdictions as "equivalent" to the UK when it comes to STS. Once designated, securitisations meeting the STS rules from those jurisdictions will be able to be treated as STS by UK investors. The text deliberately uses the expression "simple, transparent and comparable" derived from the Basel rules so one assumes that equivalence may be available to those countries that have adopted STC. How this will work in practice is another issue.

The Treasury has indicated that it intends to bring this statutory instrument into law by year end and that this is a very much a final draft. They will entertain comments until 21st August though.

Overall, this seems a decent attempt at onshoring the European rules but, with so much rule making now delegated to the FCA and the PRA, the final state of the post Brexit UK securitisation landscape remains very much to be defined.

UK publishes proposed amendments to the Securitisation Regulation

At the end of last week, the Chancellor of the Exchequer unveiled the government’s roadmap to a new regulatory framework for British finance.

Although overlooked by most commentators, the announcement contained detailed proposals to revise the Securitisation Regulation inherited from the EU. These proposals may be found in a draft statutory instrument.

There are quite a few highly technical drafting changes the implications of which are still somewhat unclear. But here are the highlights.

The definition of “securitisation” remains unchanged.

The STS regime remains in place. However, the STS criteria have disappeared from the legislative text altogether and are now entirely delegated to the FCA. Presumably, the FCA will have a consultation to determine what these should be.

Intriguingly enough, with the criteria for STS having disappeared from the draft legislation and, in the absence of a definition of “non-ABCP securitisation”, the proposed text appears to leave open the possibility of synthetic securitisations being STS. This seems now to be in the gift of the FCA.

The third-party verification and data repositories regimes are kept broadly unchanged.

In line with the free-trade approach of the Treasury, an equivalence regime for STS is set out, with the Treasury to decide which jurisdictions will be so treated. This was explicitly rejected by the European Commission in their recent report.

In a similar vein, the removal of the requirement for the special purpose vehicle having to be in the UK is maintained. The originator and sponsor though need to be UK located. (However, the concession that allows EU STS to be treated as STS in the UK until December 2024 remains in place.)

The text allows for re-securitisations – which are banned in the EU. However, any re-securitisation transaction will need to be pre-approved by the regulatory authorities on a deal-by-deal basis.

Retention and disclosure requirements are still in place but the text seems to allow non-UK issuers to sell to UK investors provided they comply with substantially the same standards. The total identity of standards required by the EU has been abandoned.

This is merely a summary of the high points and it should be noted the document is still only a draft.

The AMF publishes its investigation of STS practices by French banks – it was not impressed

The French AMF, in its capacity as national competent authority under the Securitisation Regulation, did a spot check of five unnamed financial institutions issuing STS securitisations. The regulator looked at the institutions’ procedures around the issuance of STS securitisations generally, then examined in detail a number of transactions. Their conclusions are now published in the form of a report (in English)

It would be fair to say that the regulator was deeply unimpressed by what it found in a number of cases. They expressed the view that, for several institutions (unnamed to spare blushes), the processes around the due diligences of the STS nature of a transaction were weak to barely existent. They also concluded that some transactions failed to meet one of the criteria regarding SPVs.

We would be superhumanly modest if we did not draw attention to a strong recommendation made by the AMF to French originators to mandate a third party verification agent. Something they describe as a “good practice”. We are grateful to the AMF, as an impartial and knowledgeable actor, for their recognition of the added value that we bring to the STS process.

PCS welcomes both the spot checking and the report as visible evidence of a phenomenon that we are witnessing across many European jurisdictions: national competent authorities have begun to examine with care the practices and criteria around STS issuance. When we see the complexities and subtleties our analysts wrestle with each day, we can but conclude the risk of an originator without a thorough understanding of the rules being caught on the wrong side of the STS line have considerably increased.

UK Treasury publishes report on the review of the securitisation regime

The UK Treasury just released its report on the review of the securitisation regime.

The overall impression is that the UK government is broadly happy with the current regime and is certainly not evincing any wish to tear up the rule book or effect radical changes to the regime inherited from the EU Securitisation Regulation. This report is about tweaking not transforming.

A number of technical issues are broached, some small – but not insignificant – changes are mooted but the report is light on concrete proposals or time frames. On many of the issues where the report does suggest change may be welcome, the report states more work will need to be done before specifics can be considered.

This is the case, for example, on disclosure requirements for private transactions. Changes to the current set-up would be good, but what changes will have to wait for careful consideration.

The report also indicates some ambivalence on the idea of an equivalence regime: in principle favourable but acknowledging it to be tricky in practice. There is a commitment to set one up…sometime later.

On some topics, HMT tentatively indicates a willingness to consider doing something but with no promises. This is the case on modifying some details of the retention rules, with which it is otherwise generally happy.

Equally, on the proposals for a green securitisation framework and sustainability disclosure, the response can be summarized as “not now, maybe soon, it depends, can we get back to you on that…”.

PCS noted that the report indicated broad satisfaction with the current third-party verification system and acknowledged the added value it provided.

In some parts, the report was more categorical. To no one’s surprise, the report indicated that the current use of special purpose vehicles needed no reform, and especially not along the lines of the creation of special limited purpose banks.

Also, and more unfortunately, on the inclusion of synthetics securitisation in the STS framework, without closing the door entirely, the report made it clear that neither HMT nor the UK regulatory community had any interest in such a development. This looks like a very high mountain to climb if stakeholders wish to see the changes already introduced in the EU apply to British banks. On the capital treatment of securitisations for bank and insurance investors, the tone is also very downbeat.

In conclusion, the report indicates that the British government is willing to tweak regulation onshored from the EU but no more. Whether that is reflective of a broad political decision at the highest levels on the future of the City of London or merely treading water until such a decision is made or even just the reflection of the fact that, as far as HMT is concerned, this particular piece of the financial regulatory machinery does not need to be amended in depth is impossible to tell at this stage.

Final pieces of the puzzle fall into place - Data Repositories

On Friday 25th, the final pieces of the STS regulatory puzzle fell into place when ESMA registered two securitisation repositories.

The registrations of both the European Datawarehouse GmbH, based in Frankfurt, and Secrep B.V. , based in Rotterdam, were announced on the same day.

Both firms have long experience in the field, Secrep B.V. having been set up by the founders of Euro-ABS. Both will be able to operate throughout the EU.

Following this registration, originators of European Union securitisations will - as of 30th June 2021 - mandatorily have to report their data through one of these repositories.

This announcement means that the last piece of the securitisation regime that came into force on 1st January 2019 is now in place, at least in the European Union. In the UK, the FCA is expected to follow soon.

FCA STS list up and running

First, PCS wishes for all a new year more serene than the one just ended and hopes that the holiday season proved to be a source of joy and rest notwithstanding the various restrictions imposed by the pandemic.

As they had promised, the UK FCA set up their website list for UK transactions wishing to be treated as STS in the hands of UK investors. As our attentive readers will recall, this was a necessary step for the STS regime to come into force in the United Kingdom on January 1st. It has been done.

To save you from having to search for it and so you may bookmark it with ease, it can be found here

We have to say, we are particularly taken by the handy search function provided by the FCA.

A new ESAs statement and Brexit - Chronicles of a Death Foretold

The Joint Committee of the European Supervisory Authorities (ESAs) has issued a statement clarifying the impact of Brexit on STS.

It just confirms what we knew: existing STS transactions with a UK originator or sponsor or special purpose vehicle will cease to be STS in the hands of European Union investors.

The only small additional point is timing.

The rules grant CRR and LCR benefits to STS transactions. An STS transaction is a transaction that meets the requirements and appears on the ESMA list. Therefore, there was the possibility of a short grace period between 1st January 2021 and the time it took for originators to notify ESMA and ESMA to remove a transaction from the list.

This announcement indicates that ESMA will seek to remove all those deals by 1st January irrespective of whether originators notify them. So there will be no technical grace period unless a bank can negotiate one with its national prudential regulator.