In December 2017, the European Parliament and Council passed a Regulation creating a new category of securitisations: “simple, transparent and standardised securitisations” also known as STS securitisations. This Regulation will come into force on January 1, 2019.
The STS Regulation [LINK TO THE STS REGULATION] amends the rules for European securitisations generally, especially with regards to the type and extent of information that is required to be disclosed by originators and sponsors and with regard to the type and extent of the due diligence to be performed by investors wishing to purchase securitisations.
But the heart of the STS Regulation is the introduction 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 one needs to be met for a securitisation to be eligible 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 of the ABCP conduit needs for the conduit to meet some additional requirements
For a full list you may go here [LINK TO STS TERM CRITERIA] (for term deals) or here [LINK TO ABCP CRITERIA] (for ABCP conduits). The ABCP STS requirements are broadly similar but not identical to those for term transactions.
Once a securitisation is eligible to be STS, in order to become so, the originator or sponsor must then certify it as such to the European Securities and Markets Authority (ESMA). It should be noted that the ESMA will, in no way, verify whether the securitisation does indeed meet the STS requirements.
Once a securitisation is considered STS, it will benefit from a number of regulatory benefits. Currently, these include lower capital requirements for European banks and European insurance companies holding such securitisations. Additionally and from [date] 2020, STS securitisations will be the only securitisations eligible for inclusion in the liquidity cover ratio (“LCR”) pools of European banks. (These are pools of cash or extremely liquid securities that the European law requires banks to hold to meet unexpected liquidity squeezes). Also, money market funds regulated under the European Money Market Funds Regulation may only hold ten per cent or less of their assets in securitisations. For STS securitisations, such maximum holding is increased to 15%.
As we have seen, in order for a securitisation to be an “STS securitisation”, the originator (or sponsor or SSPE) must publicly certify the STS status of the
Securitisation and send this certification to ESMA. This certification must contain a number of elements required by the regulator.
The STS Regulation also sets out very severe potential sanctions for any originator or sponsor deemed to have mis-certified a securitisation either deliberately or negligently.
The STS Regulation also introduces an innovation in European capital markets by allowing an originator (or sponsor) to hire a new type of market actor to verify publicly their STS certifications: third party verification agents.
Third party verification agents are an entirely new form of entity that will only come into existence when the STS securitisation regime comes into force on 1st January 2019.
Their status, role and the rules governing them are set out in the STS Regulation. 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, in order to perform their verification role, 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.
The use of such verification agents is optional. It is not a requirement of achieving STS status for a transaction. However, only the party certifying the securitisation (originator, sponsor or SSPE) can hire such verification agent.
For a better sense of the benefits to both originators/sponsors and investors of third party certification agents, we invite you to read our short guide: “Third Party Certification Agents” (The booklet refers to “certification” rather than “verification” since, when it was written in June 2018, the nomenclature had not yet been settled by market stakeholders. Ultimately though, the expression “verification agent” won over “certification agent”.)
In line with its mission, PCS has chosen to become a third party verification agent. To this end, both PCS UK and PCS EU have approached the regulatory authorities with a view to becoming authorised. PCS UK has filed a pre-application with the Financial Conduct Authority in the United Kingdom and PCS EU has begun conversations with the Autorité des Marchés Financiers in France.
PLEASE NOTE THAT THIRD PARTY VERIFICATION SERVICES UNDER THE STS REGULATION ARE A REGULATED ACTIVITY. THESE CANNOT BE PROVIDED BY UNREGULATED ENTITIES AND CONSEQUENTLY NEITHER PCS UK AND PCS EU WILL BE PROVIDING ANY SUCH STS VERIFICATIONS UNTIL HAS IT HAS BEEN DULY AUTHORISED BY THE RELEVANT NATIONAL COMPETENT AUTHORITY. CURRENTLY, NEITHER COMPANY POSSESSES THE REQUISITE AUTHORISATION.
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