The STS Regulation sets out the rules for European securitisations generally, especially with regards to the type and extent of information that is required to be disclosed by originators or sponsors and with regard to the type and extent of the due diligence to be performed by investors wishing to purchase securitisations.
At the heart of the STS Regulation is the definition of a new type of securitisation: “simple, transparent and standardised” securitisations (or “STS securitisations”, for short).
To be an STS securitisation, a securitisation must fully meet an extensive and specified set of criteria laid out in the regulation. These criteria go up to over one hundred individual requirements. Each criterion needs to be met for a securitisation to be designated to become an STS securitisation.
In the case of asset-backed commercial paper conduits (“ABCP conduits”), either individual transactions within the conduit can be declared to be STS or, in addition to individual transactions, the entire conduit can be declared to meet the STS requirement. To be able to do so, the sponsor would need to ensure the ABCP conduit meets some additional requirements.
Once a European Union securitisation is eligible to be STS, the originator or sponsor must then notify it as such to the European Securities and Markets Authority (ESMA). It should be noted that the ESMA will, in no way, certify whether the securitisation does indeed meet the STS requirements.
Once a securitisation is considered STS, it will benefit from a number of regulatory benefits. These include lower capital requirements for European banks and European insurance companies holding such securitisations. Additionally, STS securitisations are the only securitisations eligible for inclusion in the liquidity cover ratio (“LCR”) pools of European banks.
Upon the end of the Brexit transition period, on 1st January 2021, the STS regime was on-shored to the UK and operates in the same way for UK originators and investors, with the FCA playing the role played by ESMA in the European Union.
In order for a securitisation to be an “STS securitisation”, the originator (or sponsor or SSPE) must notify compliance of the transaction with the STS criteria to either ESMA or, for UK transactions, the FCA.
The STS Regulation also sets out severe potential sanctions for any originator or sponsor deemed to have mis-certified a securitisation either deliberately or negligently.
The STS Regulation also introduced an innovation in European capital markets by allowing an originator (or sponsor) to hire a new type of market actor to verify publicly their compliance with the STS criteria: third party verification agents.
The status, role and the rules governing third party verification agents are set out in the STS Regulation (as, in the case of the UK, on-shored). In particular, third party verification agents must be entirely independent from originators and sponsor and must strictly manage any conflicts of interest that could arise in their fulfilment of their verification role.
They must be authorised by a national competent authority within the European Union. Once so authorised though, they may verify the STS nature of securitisations across the Union. In other words, authorisation in one European Union jurisdiction provides a passport to operate within all other European Union jurisdictions. In the United Kingdom, they must be authorised by the Financial Conduct Authority.
In line with its mission, PCS elected to seek the status of third party verification agent.
Accordingly, both PCS UK and PCS EU have become authorised, in the case of PCS UK, by the United Kingdom Financial Conduct Authority and, in the case of PCS EU, the French Autorité des Marchés Financiers.
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