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.

Monday sees important announcements from the EBA on SRT and the FCA on STS

Monday saw two important announcements from European regulators.

First, the UK Financial Conduct Authority went live with its new STS notification platform. As of 11 pm on 31^st December, UK securitisations will no longer be STS in the hands of UK investors unless they appear in a new publicly available list hosted by the FCA and replacing the ESMA list to which all securitisations were previously notified. To avoid a problematic interregnum between the time the new rules come into force at the end of the year and the time it takes for UK transactions previously notified to ESMA to be published on the new FCA website, the FCA very wisely and helpfully launched their new UK STS platform this Monday. This will allow UK originators and sponsors to “pre-populate” the STS list in anticipation of January 1^st. Please note, though, that it is the responsibility of originators and sponsors to re-notify their transactions. There will be no automatic transcription of the ESMA notifications on to the FCA site. Instructions on how to access the FCA site (called Connect) and the new templates can be found here

In a separate development, the EBA just published its much anticipated report on significant risk transfer.

One of the developments of recent years has been the beginning of a return by securitisation to its roots as a capital management tool for banks. The new legislative proposal on STS for synthetics, currently in trilogue in Brussels, is one part of this. But another necessary component of a regulatory scheme that allows proper capital management by financial institutions is a workable set of rules for significant risk transfer or SRT. These are the rules which must be followed before prudential regulators accept that the risk associated with securitised assets has been transferred to the securitisation investors and the bank can therefore reduce the capital allocated against those assets. The EBA’s report sets out their proposals for the future of these rules. It is essential, if STS synthetic securitisation is to be of any use, that the new SRT rules mesh with the proposed STS requirements to allow safe but sensible capital management. The report is fairly long and will be examined with great care by market participants (including PCS).

Chances of new synthetic STS and NPL rules applying to the United Kingdom recede

Yesterday, the ECON committee of the European Parliament pushed back to November 9^th a key meeting to agree their version of the proposed amendments to the STS Regulation. This delay further reduces the already slim chances of the proposed changes beating the Brexit deadline for incorporation into the UK’s securitisation regime.

For those who are not experts in the intricacies of placing European laws on the statute books, the key is to remember that under the UK Withdrawal Act, only European laws that are “in force” at 11.00pm London time on the 31^st December 2020 will be UK laws going forward.

Between today and year end, the following steps will need to occur before the STS amendment enters “into force”. First, the ECON committee must agree amongst the various political groups a final Parliamentary text. This is what can now occur no earlier than November 9^th. Between then and now, European Parliamentarians need to find a majority on issues including the treatment of synthetic excess spread, the regulatory treatment of NPL securitisations, and possible new ESG disclosure for all securitisations.

Once the Parliamentary text is approved, being different from the Council text, the tripartite process (Commission, Council and Parliament) known as a trilogue takes place where all parties reconcile their versions to produce a final draft law. If Parliament does wrap things up on November 9^th that process will likely only start in the week of November 16^th at the earliest.

Continuing the extremely optimistic assumptions, the trilogue could agree a common text that week. That would mean that the earliest the Parliament could vote on that text becomes either November 19^th or 30^th. But that is only the political agreement. The text must then go for translation into the 24 European languages before it can be formally signed off by EU ministers and approved in a European Parliament virtual session. This is usually a process that takes a few weeks. Finally, once translated and approved, the text must be published in the Official Journal of the European Union. Again, usually a few weeks elapse before this occurs. Once published in the Official Journal, another 21 days must normally elapse before the law comes “into force”.

It is clear that these final processes mathematically cannot occur by January 1^st, unless a political decision is made to expedite translation and publication in the Official Journal and the law is modified explicitly to wave the normal 21 day period. In other words, the only chance for the new law to become part of UK law is for all involved policy makers in Brussels to agree to force this through by the new year by the use of special expedited measures .

Considering the new issues around ESG that require resolution and the fact that the Basel Committee is not expected to publish its updated NPL securitisation rules (which EU legislators would like to include in this law) before end of November and that, other than helping the UK, it is not clear what the reason would be to prioritise this process, it now looks extremely unlikely that the UK will have synthetic STS and NPL rules unless the UK government legislates itself sometime in 2021.

In turn, this suggests that the UK and EU securitisation regimes will start to differ almost immediately after the end of the transition period. This will add to the fragmentation of the previously fairly unified European capital market. It will also potentially leave UK financial institutions at a disadvantage to their continental European competitors in their capacity legitimately to manage their capital requirements and risk profiles.

It would appear that if the ball is not quite yet in the British government’s court it is flying over the net as we write.

United Kingdom FCA publishes a consultation on the end of the Brexit transition period

Last Friday the UK Financial Conduct Authority published a consultation on some of the changes that may be made to their Handbook. Most important for stakeholders are the proposals for what happens at 11.00 pm London time on 31st December as the Brexit transition period comes to an end.

This consultation, which may be found here, covers a number of Brexit topics in paragraph 4. These include (from paragraph 4.17 onwards) securitisation issues, namely data templates, data repositories, STS notifications, counterparty risks and risk retention. The consultation period ends on October 5th. With so many tricky issues of detail plaguing the United Kingdom's exit from the European Union, this consultation is welcome and we would advise all our United Kingdom stakeholders to take a good look at it and, if appropriate, respond.

More about the B-word: the UK FCA puts out a consultation on STS

The UK Financial Conduct Authority has just issued a consultation relating to the format of future STS notifications in a world where the United Kingdom may no longer be part of the European Union. Entitled a “Draft technical standards on the content and format of STS notifications under the onshored Securitisation Regulation”, the consultation is the first to deal with the technical standards to be applied in the UK in the event of a departure by the UK from the EU without some transitional arrangements. Responses are required by August 27^th, so if you had not yet found a good novel to read on the beach, you now know what you can do on holiday.