COMMISSION STAFF WORKING DOCUMENT IMPACT ASSESSMENT Accompanying the document Proposal for a REGULATION laying down common rules on securitisation and creating a European framework for simple and transparent securitisation and amending Directives 2009/65/EC, 2009/138/EC, 2011/61/EU and Regulations (EC) No 1060/2009 and (EU) No 648/2012 and Proposal for a REGULATION amending Regulation (EU) No 575/2013 on prudential requirements for credit institutions and investment firms

EN EN
EUROPEAN
COMMISSION
Brussels, 30.9.2015
SWD(2015) 185 final
COMMISSION STAFF WORKING DOCUMENT
IMPACT ASSESSMENT
Accompanying the document
Proposal for a
REGULATION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL
laying down common rules on securitisation and creating a European framework for
simple and transparent securitisation and amending Directives 2009/65/EC,
2009/138/EC, 2011/61/EU and Regulations (EC) No 1060/2009 and (EU) No 648/2012
and
Proposal for a
REGULATION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL
amending Regulation (EU) No 575/2013 on prudential requirements for credit
institutions and investment firms
{COM(2015) 472 final}
{COM(2015) 473 final}
{SWD(2015) 186 final}
Europaudvalget 2015
KOM (2015) 0473
Offentligt
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Contents
1) INTRODUCTION .......................................................................................................... 4
2) PROCEDURAL ISSUES AND CONSULTATION OF INTERESTED PARTIES ... 10
2.1) Procedural issues........................................................................................................ 10
2.2) External expertise and consultation of interested parties........................................... 10
3) PROBLEM DEFINITION............................................................................................ 11
3.1) Problem drivers.......................................................................................................... 11
3.1.1) Investor stigma........................................................................................................ 11
3.1.2) insufficient risk-sensitivity of the regulatory framework ....................................... 13
3.1.3) Lack of consistency and standardisation................................................................. 17
3.2) Problems 18
3.2.1) Low demand for securitisation products................................................................. 18
3.2.2) Simple and transparent securitisation products disadvantaged............................... 18
3.2.3) High operational costs for investor and issuers ...................................................... 19
3.3) Consequences............................................................................................................. 21
4) OBJECTIVES............................................................................................................... 22
4.1) General, specific and operational objectives ............................................................. 22
4.2) Consistency of the objectives with other EU policies ............................................... 22
4.3) Consistency of the objectives with fundamental rights ............................................. 22
4.4) Subsidiarity and proportionality ................................................................................ 23
5) POLICY OPTIONS ...................................................................................................... 26
6) ANALYSIS OF IMPACTS .......................................................................................... 28
6.1) Section 1 - STS differentiation .................................................................................. 28
6.1.1) Policy option 1.1: No further EU action (baseline scenario).................................. 28
6.1.2) Policy option 1.2: EU soft law................................................................................ 30
6.1.3) Policy option 1.3: EU legislative initiative to specify applicable STS criteria....... 31
6.1.4) Impact summary and conclusion ............................................................................ 32
6.2) Section 2 - Scope of the STS definition..................................................................... 33
6.2.1) Policy option 2.1: Cover only term securitisation .................................................. 34
6.2.2) Policy option 2.2: - cover term and ABCP securitisations ..................................... 36
6.2.3) Policy option 2.3: cover term, ABCP and synthetic securitisations ....................... 38
6.2.4) Impact summary and conclusion ............................................................................ 39
6.3) Section 3 - Ensuring compliance with STS criteria and consistency in
implementation........................................................................................ 41
6.4) Section 4 - Banking and insurance prudential treatment ........................................... 49
6.4.1) Option 4.1: - no change to the existing securitisation framework as set out in the CRR
................................................................................................................... 51
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6.4.2) Option 4.2: - develop a preferential capital treatment for STS securitisations....... 52
6.4.3) Option 4.3 – baseline: no further action.................................................................. 55
6.4.4) Option 4.4 – modify treatment for senior tranches only......................................... 56
6.4.5) Option 4.5 – modify treatment for senior and non-senior tranches ........................ 57
6.4.6) Impact summary and conclusion ............................................................................ 58
6.5) Section 5 - Standardisation and harmonisation.......................................................... 60
6.5.1) Option 5.1 – Baseline - No EU action .................................................................... 60
6.5.2) Option 5.2 – Establishing a single consistent EU securitisation framework and
encouraging market participants to develop further standardisation ........ 61
6.5.3 Option 5.3 – Adopting a comprehensive EU securitisation framework .................. 63
6.5.4) Impact summary and conclusion ............................................................................ 65
7) THE RETAINED POLICY OPTIONS AND INSTRUMENT.................................... 67
8) MONITORING AND EVALUATION ........................................................................ 70
ANNEX 1 – GLOSSARY................................................................................................. 71
ANNEX 2 – STYLISED FACTS ON SECURITISATION MARKETS......................... 73
ANNEX 3 – BCBS-IOSCO SURVEY ON "IMPEDIMENTS TO SUSTAINABLE
SECURITISATION MARKETS" ............................................................ 74
ANNEX 4 – STS CRITERIA IN THE LCR AND SOLVENCY II DELEGATED ACTS75
ANNEX 5 - SYNTHETIC SECURITISATION............................................................... 81
ANNEX 6 - FINANCING SMES WITH THE SECURITISATION TOOL.................... 85
ANNEX 7 – SUMMARY OF RESPONSES TO THE COMMISSION'S PUBLIC
CONSULTATION ON SECURITISATION............................................ 87
ANNEX 8 – FINDINGS FROM THE COM QUESTIONNAIRE TO FSC MEMBERS ON
SECURITISATION ................................................................................ 122
ANNEX 9 – BIBLIOGRAPHICAL REFERENCES...................................................... 130
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1) INTRODUCTION
1.1) Creditless recoveries and the need to repair financial market intermediation
In deep recessions such as the one triggered by the global financial crisis, credit to firms and
households drops steeply. Without credit growth recovering, GDP and employment are also much
less likely to recover (see ECB (2011) and Abiad et al. (2014)). Furthermore, even when such
creditless recoveries do materialize, they tend to be slower and weaker. GDP growth is on
average 30% lower in creditless recoveries than in "normal" ones (i.e. in those where credit growth
goes back to pre-crisis rates quickly). Creditless recoveries tend to follow after credit booms and
banking crises, to depress investment and to affect disproportionally those industries that are more
dependent on external finance. All this suggests that impairment in financial intermediation
contributes to the below-average GDP performance.
Europe's current situation is one of a creditless recovery: six years after the collapse of Lehman
Brothers credit to the private sector and GDP growth are still subdued (see Chart 1) and so is
investment. The percentage of unemployed workers is still higher than before the crisis. Moreover,
all this follows a credit boom and banking crises in various jurisdictions.
Chart 1 – credit to EU non-financial corporations, % year-on-year growth rate
-10%
-5%
0%
5%
10%
15%
20%
2003Q1 2004Q1 2005Q1 2006Q1 2007Q1 2008Q1 2009Q1 2010Q1 2011Q1 2012Q1 2013Q1 2014Q1
Credit to EU non-financial corporations, YoY%
Source: ECB
If employment and growth are to recover, it is thus pivotal to tackle the frictions still present in the
financial system and restart the flow of credit to European firms and households on a sustainable
basis. Much has already been done to strengthen the EU financial system and the recent
improvement in credit dynamics are a testimony to this. Nonetheless, European banks are still
deleveraging and do so by reducing credit to the private sector. With relatively small capital
markets, bank deleveraging is thus slowing recovery in Europe.
5
While deleveraging and negative credit growth do not need to go together (credit to the private
sector represents only 28% of EU banks assets), any mechanism helping banks to deleverage in a
sustainable way without reducing credit provision would help substantially the recovery of credit,
investment and job creation in Europe.
1.2) The role of securitisation
Securitisation, a mechanism by which credit institutions package loans they have granted into a
security and sell this to investors, can provide a useful tool to transfer risk to other institutions
and raise cheaper funding. By allowing banks to sell some of their assets to investors,
securitisation provides them with a tool to deleverage (i.e. reduce their balance sheets) without
cutting credit provision to the private sector. Since banks provide the overwhelming majority of
credit to EU firms and households, securitisation could help break the link between deleveraging
and credit decline in a material way. Securitisation could thus support bank credit provision
and allow for a faster recovery.
Chart 2 – Issuance of securitised products in the EU – placed and retained
Source: SIFMA/AFME quoted in EBA 2014
Since 2008, the issuance of securitised product in Europe has fallen by 88% (see Fig.2).
Outstanding amounts have declined accordingly (see Fig.3). This notwithstanding the fact that
European securitised products have proven remarkably safe during the crisis, generating near-zero
losses (Fig. 5 and 6, see also EBA 2014 and BoE-ECB 2014). It was the exposure to US securitised
product that caused significant losses to European banks1
. However, unrelated products such as
securitisations based on EU SME loans and residential mortgages suffered significant declines in
issuance.
1
US issuance has instead restarted growing after a substantial drop in 2008. US 2014 issuance was still less than half
than in 2007 but a positive trend is clearly visible. This is mostly ascribable to public guarantees from state agencies
(Fannie Mae, Freddie Mac and Ginnie Mae), which cover the vast majority of the market.
6
Chart 3 –Outstanding amounts of securitised products in the EU
Source: SIFMA/AFME
Securitisation can also provide important benefits to investors, giving them access to assets they
could not otherwise access. This is particularly beneficial for institutional investors such as
pension funds and insurance companies that have long-term liabilities and are therefore natural
buyers of long-term assets such as mortgages. The majority of institutional investors cannot
underwrite mortgages directly but they could gain access to them buying securitised mortgages.
Greater investment opportunities would be particularly beneficial in the EU context, where high
GDP per capita and relatively small capital markets imply high demand but limited supply of long
term assets.
It is not easy to provide a reliable estimate on the additional provision of loans a revival of the
securitisation market could provide. This depends indeed on a multitude of factors: a) monetary
policy, b) demand for credit, c) developments in alternative funding channels (covered bonds,
unsecured credit to name a few). All of these are likely to change through time, affecting the final
outcome. With these caveats in mind, one can say however that, all things equal, if the securitisation
market would go back to pre-crisis average issuance levels, banks would be able to provide an
additional €157bn of credit to the private sector (see issuance data graphed in Figure 2). This would
represent a 1.6% increase in credit to EU firms and households. The latter is still 4.7% below its
peak. Therefore, while one must be realistic and recognise a revival in the securitisation market
would not by itself solve all problems in the EU financial markets, it could provide a material
contribution in improving the banking sector ability to provide credit and help alleviating the
negative effects of the credit less recovery on jobs and growth.
Additional to these short-term benefits, restarting a safe securitisation market could have
further long term benefits. The macroeconomic scenario currently prevailing in the EU hinders
securitisation activity in various ways: by reducing credit activity and thus the need to fund it; by
delivering an environment of abundant and cheap central bank funding and finally by lowering the
best credit rating achievable by securitisation deals in many EU jurisdictions because of sovereign
rating caps (discussed in section 3.2.2). All these factors constitute powerful disincentives to
0
500
1000
1500
2000
2500
7
securitisation activities that will weigh on the sector until the situation normalises. Nonetheless,
once the macro situation normalises and the above impediments subside, having a safe and thriving
securitisation market already in place will allow it to reach its full potential. This could lead to
more balanced funding structure for the EU economy, with both banking and non-banking
credit stably available for borrowers. This is therefore both a short term and a long term project.
The revival of a safe securitisation market could have different effects across Member States. On
the one hand, countries with more developed securitisation markets would be more likely to benefit
from it. As the chart below shows2
, the United Kingdom and the Netherlands are the biggest
markets as of today, representing half of the outstanding securitisations. On the other hand, the
countries where the funding of banks and the credit provision in general tends to be more
problematic could also benefit from a revived funding channel. Italy, Spain, Ireland, Portugal and
Greece would fall under this category. Also, a single and harmonised framework for EU
securitisation could lay the foundations for developing securitisation markets where these are
currently not developed, like for instance in Member States in Central and Eastern Europe.
Chart 4 – Outstanding amounts of EU securitised products by country – end 2014
Source: SIFMA/AFME
2
The chart shows outstanding balances by country of collateral. This is a proxy for country of issuance. Precise and
complete data on the latter are unfortunately not available.
0.01% 0.03% 0.06% 0.09% 0.16% 0.16%
1.91%
2.67% 2.78%
5.44% 5.50% 5.67%
12.26%
13.42%
19.38%
30.45%
0%
5%
10%
15%
20%
25%
30%
35%
8
1.3) The need to avoid past errors
The financial crisis showed also how, if not properly structured, securitisation can magnify financial
instability and inflict serious damage to the wider economy. Unsoundly structured securitisation
products were central in transforming a relatively local problem such as the slowdown in US
housing prices into a near-meltdown of the global financial system in 2008 (see, among others,
BCBS-IOSCO (2009), Gorton (2008), Shin (2009), Coval et al. (2009)). The box below provides a
summary of what went wrong in securitisation markets during and before the global financial crisis
(see next page).
In order to avoid the errors of the past, it is thus paramount to foster only a well-functioning
securitisation market whose features are conductive to financial stability, healthy
intermediation and growth. To do so, the Commission can rely also on the substantial amount of
work that EU and international organisations have already invested in identifying the characteristics
associated with safe and performing securitisations.
1.4) International dimension/relation with previous work
A substantial amount of work has already been devoted to such a goal by a number of
European and international institutions. The European Commission has already introduced
incentives for properly structured securitisation in the Delegated Regulations for Solvency II
(2015/35) and the Liquidity Coverage Ratio (henceforth LCR - 2015/62), adopted in October 2014.
The ECB and the BoE have carried out work on the topic. International standards to identify simple,
transparent and comparable securitisations are being developed by a Task Force led by the BCBS
and IOSCO, while the European Banking Association (EBA) has carried out a similar exercise for
European banking standards.
Fostering the market for simple, transparent and standardised securitisation is also a central part of
the wider effort launched by the Commission to support investment and growth in Europe. As
such it is a continuation of the work started with the Communication on long-term financing
published in March 2014 and it is a central element of the Capital Markets Union project and the
Investment Plan for Europe launched in November 2014. This impact assessment draws on this
work and assesses the different options available to support the re-emergence of a securitisation
market conductive to growth and stability.
9
Role of Securitisation in the 2007-2008 financial crisis
Securitisation played a role in amplifying systemic risk by facilitating excessive leverage and
risk concentration across the financial sector. The chart below presents a stylized model of the
four key elements of the self-reinforcing securitisation chain:
i) poor underlying loan origination practices;
ii) unprecedented issuance of complex and opaque securitised products;
iii) over-reliance on credit rating agencies,
iv) leveraged and unleveraged investors.
10
2) PROCEDURAL ISSUES AND CONSULTATION OF
INTERESTED PARTIES
2.1) Procedural issues
The first meeting of the impact assessment steering group took place on 10 April 2015. The second
meeting took place on 19 May 2015 and the third one on 8 June 2015. DGs involved in the steering
group were ECFIN, GROW, SG, LS, JUST and COMP. The meeting of the Regulatory Scrutiny
Board (RSB) took place on 15 July 2015.
The RSB gave a positive opinion and recommended the following changes:
 The report should go beyond the EU level to also explain the situation in the Member States. In
particular, it should provide an overview of the situation of loan and securitisation markets
across Member States and their likely evolution in the absence of EU intervention. Moreover, it
should show the differentiated impact of the policy options in Member States.
 The report should clearly link the objectives of the initiative with the identified problems. To this
end, the report should describe the larger macroeconomic context and indicate the relative
importance of a revival of the securitisation market as one of the instruments to improve the
situation of the banking sector, increase the provision of bank credit and prop-up economic
activity.
 The analysis of the impacts should provide a balanced overview of the pros and cons of each
policy option and discuss possible risks that may prevent the attainment of the objectives. It
should also describe existing and future risk mitigation instruments.
These comments have been addressed and incorporated in this final version.
2.2) External expertise and consultation of interested parties
Stakeholder consultation
A public consultation on a possible EU framework for simple, transparent and standardised
securitisation was carried out between 18 February and 13 May 2015. 121 replies were received. On
the whole, the consultation indicated that the priority should be to develop an EU-wide framework
for simple, transparent and standardised securitisation (see summary of replies in Annex 7).
Respondents generally agreed that the much stronger performance of EU securitisations during the
crisis compared to US ones needs to be recognised and that the current regulatory framework, needs
modification. This would help the recovery of the European securitisation market in a sustainable
way providing an additional channel of financing for the EU economy while ensuring financial
stability.
External expertise
The Commission has gained valuable insights through its participation in the discussions and
exchange of views informing the BCBS-IOSCO joint task force on securitisation markets. The
11
Commission has also attentively followed the work relating to key aspects of securitisation carried
out by the Joint Committee of the European Supervisory Authorities (ESAs) as well as by its
members separately (EBA, ESMA, EIOPA). Three public consultations, carried out in 2014 by
ECB-Bank of England (BoE), Basel Committee for Banking Supervision (BCBS) - International
Organisation of Securities Commissions (IOSCO) and EBA respectively, have gathered valuable
information on stakeholders' views on securitisation markets. In its own consultation, the
Commission has built on these, focusing on gathering further details on key issues. Fruitful
meetings and exchange of ideas with European central banks and the IMF have enriched the debate
and understanding of the issues at stake. On the whole, these international level consultations
confirm the views expressed in the Commission’s own consultation, and provide some additional
feedback on the relative merits of some of the proposed policy options.
3) PROBLEM DEFINITION
3.1) Problem drivers
3.1.1) Investor stigma
A comparison between default rates in securitised products issued in the US and in the EU shows
immediately the different performance of the two asset classes during the crisis. Looking at AAA-
rated securities, US products backed by residential mortgages (RMBS) reached default rates of 16%
(subprime) and 3% (prime). By contrast, default rates of EU RMBS never rose above 0.1% (see
chart 5).
Chart 5 – Default rates of AAA-rated securitised products, EU vs. US3
Source: EBA – See glossary annex for acronyms explanation
3
The chart shows all data provided in the EBA study, which covers the 2001-2010 period. Throughout the impact
assessment the full time-span of data available has been shown.
12
The divergence is even bigger for BBB-rated products where US RMBS' default rates peaked at
62% and 46% (subprime and prime, respectively) while EU products' default rates peaked at 0.2%
(see Chart 6). Consequently, as noted in the introduction, losses generated by US products are a
multiple of those generated by EU securitisations (see Chart 7).
Notwithstanding their strong performance during the crisis, EU securitisation markets have suffered
a significant reduction in issuance since 2008 and have not recovered yet. Furthermore, a much
higher part of this issuance is still not being placed to investors, but retained by issuers instead.
There is a strong consensus among European and international supervisors, regulators, central banks
and market participants that the post-crisis reputation of securitised products issued in Europe was
severely tarnished by practices and events taking place in the US. In the summer of 2014, the
BCBS-IOSCO task force in charge of reviewing developments in securitisation markets conducted
a survey among market participants. The survey asked contributors which were, in their views, the
factors determining market developments since the crisis. The most common factor mentioned was
investor perception (see Annex 3). This led BCBS-IOSCO to conclude: "investors' confidence in
securitisation has eroded. From the onset of the crisis, securitisations were perceived as too
complex and subject to too many conflicts of interest and asymmetry of information among
securitisers, originators and investors".
Chart 6 - Default rates of BBB-rated securitised products, EU vs. US
Source: EBA – See glossary annex for acronyms explanation
In a similar fashion, the first impediment to EU securitisation markets listed by EBA is "post-crisis
stigma" (see EBA 2014). The regulatory authority points out that high level of defaults and losses in
US markets have contributed "to the spreading of the stigma attached to bad performing asset
classes also on those instruments that passed the test of the crisis with relatively good
performances"
The same issues are highlighted by the ECB and the Bank of England: "Potential impediments to its
[the securitisation market's] revival include a mix of temporary factors, such as the current interest
rate environment and the stigma attached to securitisation, and more structural factors" (see ECB-
BoE 2014). The two central banks also notice how the EU securitisations' reputation has been
tarnished by practices mostly prevalent in the US (poor underwriting standards, complex
structures).
13
3.1.2) insufficient risk-sensitivity of the regulatory framework
Set in the wake of the US securitisation markets crash, capital requirements for exposures to
securitisation have been calibrated on such markets' performance. These have however been the
worst performers in terms of default and losses generation. Indeed, as shown by Chart 7, the vast
majority of losses in securitisation markets globally arose in US subprime mortgage-backed
securities and collateralised debt obligations (CDOs).
Chart 7 – Losses generated in 2000-2013 by securitised products, by geographical area
Source: Fitch quoted by EBA – See glossary annex for acronyms explanation
The implications of this regulatory approach are stated clearly by EBA in its latest assessment of the
capital treatment of securitised products in Europe: "Calibrating capital requirements following a
one-size-fits-all approach led to a focus on the crisis performance of the worst segments of the
market (US Subprime and CDOs). The consequence is an unduly conservative treatment of
relatively less risky securitisations, showing a very good historical performance during the crisis
years, in terms of both observed defaults and losses. […] the substantially different performance
across jurisdictions and asset classes has led the current framework to be less risk sensitive". (EBA
2015)
The limited risk sensitivity of the current regulatory capital framework (i.e. the detachment between
the risk profile of a securitisation deal and the capital charges imposed on it) comes from the fact
that the framework differentiates among securitised products almost exclusively on their credit
rating4
. In other words, two AAA-rated securitisation deals will generate the same capital
requirements irrespective of key characteristics such as the homogeneity of the assets underlying
4
One of the weaknesses of the securitisation framework revealed during the global financial crisis is the fact that the capital
requirements framework for securitisation places undue mechanistic reliance on external ratings. The G20 Leaders called on
jurisdictions to address adverse incentives arising from the use of credit rating agency (CRA) ratings in the regulatory capital
framework (communiqué available at www.g20.utoronto.ca/2010/to-communique.html)
14
the deal, the transparency and completeness of the underlying assets' credit history and the
simplicity of the deal's structure5
.
These characteristics have however determined the performance of securitisation deals during the
crisis, with simpler and more transparent products generating losses substantially smaller than more
complex and opaque products. The difference is shown neatly in a recent study of the EBA, who
split the securitisation universe in two (see EBA 2014). On one side the products that applied
principles of alignment of interest between originators of the loans and investors (i.e. risk retention),
simple structures (no re-securitisation such as CDO-squared) and no maturity transformation (i.e.
EU RMBS or auto loans ABS); on the other side the rest. EBA has then compared the default rate
of securitisations with the same credit rating but belonging to the two groups.
Looking at AAA-rated deals, while those applying the above principles of simplicity and
transparency never showed on average a default rate higher than 0.1%, the others' default rate
peaked at 11.8%. The difference was even bigger among BBB-rated deals, where "principled"
securitisations' default rates peaked at around 1% while the others peaked at 42% (see charts 8-9).
The very different default performance of these securitisation groups is reflected in the losses they
generated. Asset classes following the principles above (EU RMBS and ABS) generated
respectively 0.2% and 0.1% losses in 2000-2013. In the same period, the other assets such as US
RMBS and CMBS6
generated losses in the 6-10% range. More complex, structured credit products
such as US CDOs and CDO-squared7
generated 28.2% losses (see structured credit "SC category"
in Chart 7 above).
Even leaving out the most complex structures (such as CDOs) and focusing on some of the most
common mortgages backed securities (e.g. RMBS), requiring the same capital charges for investing
in an RMBS respecting the principles of simplicity and transparency and another not fulfilling them
would be an insufficiently risk sensitive approach.
Chart 8 – Default rates of AAA-rated securitised products, qualifying vs. non-qualifying
Source: EBA
5
The only key exception being re-securitised products (such as CDOs, CDO-squares), which have higher capital requirements due to
their more complex structure.
6
Commercial Mortgage-Backed Securities (ABS backed by commercial mortgages)
7
CDO stands for Collateral Debt Obligations; "CDO-squared" are CDOs of CDOs
15
The current capital prudential framework is however mostly based on the securitisation rating.
Investing in an AAA-rated RMBS will require today a capital allocation of 0.56% to 1.7%,
depending on the approach followed in the Capital Requirement Regulation (CRR) (575/2013) used
by the issuing bank (standardised and internal-rating based) and the seniority of the tranche bought.
These charges are a multiple of the losses generated by EU RMBS throughout the crisis, whatever
their rating. Similar arguments can be applied on BBB-rated deals, where the same capital charges
are currently imposed on EU products with an historical 1% default rate and US products with a
default rate 42 times higher. The "one-size-fits-all" approach to capital requirements implies that
charges are quite disconnected from the risk profile of the products they are imposed on.
Chart 9 – Default rates of BBB-rated securitised products, qualifying vs. non-qualifying
Source: EBA
Supporting this statement, the ECB and BoE have run an exercise similar to EBA's with a different
procedure and reached the same conclusions. The central banks have compared the risk weights
proposed in the new (Basel III) framework for senior tranches of securitisations (light blue columns
in Fig. 9) with the weights that would have covered the losses generated during the crisis
securitisations (dark blue columns in Fig. 9). They found that the proposed weights are a multiple of
those sufficient to cover losses generated by EU products but are still considerably lower than the
weights needed to cover US-generated losses.
16
Chart 10 – Risk weights covering losses and risk weights proposed by Basel Committee
Source: ECB-BoE
Low risk sensitivity appears also in other aspects of the capital regulatory framework. Comparing
the charges imposed on a securitisation deal with those imposed on the assets underlying such
product, if held directly, shows that the former is a multiple of the latter. In other words, the
prudential capital a bank will be required to hold for a portfolio of its loans is a fraction of the
capital that will be required to investors in a securitisation of the same portfolio of loans. This is
termed "non-neutrality" of the capital treatment.
As securitisation adds a layer of risk in the form of complexity and model uncertainty, the capital
charges for a securitised product should be higher than for its underlying assets (i.e. neutrality is not
justified). Nevertheless, the degree of non-neutrality (i.e. the additional capital requirements
imposed on the securitisation deal) does not appear fully proportionate by the increase in risk
introduced by the securitisation process. EBA calculates, for example, that the capital imposed on a
representative EU RMBS is between 1.7 and 2.4 times higher than the capital required to hold the
same portfolio of mortgages unsecuritised (see EBA 2014).
The multiple becomes even higher for RMBS or SME loans-backed securitisations issued in
countries with low sovereign credit ratings. The EBA has calculated that holding the representative
Spanish and Portuguese RMBS requires more than 5 times the capital required to hold the
underlying portfolios directly (see Fig. 10 below – pink columns represent capital requirements for
holding the mortgages directly, the multi-coloured columns represent capital requirements for
holding the same mortgages securitised; the square represent the ratio between the two). Similarly,
holding the representative Spanish and Italian securitisation backed by SME loans requires more
than 3 times the capital required to hold the underlying SME loans directly. Additional risks
introduced by securitisation's complexity and model uncertainty are unlikely to multiply potential
losses by a factor of 3 or even 5. While the presence of non-neutrality is justified, it is thus the
degree of it that does not seems so. The consequence is, again, a lack of proportionality in the
relationship between the riskiness of the securitisation bought and the capital charges required to do
so.
17
Chart 11 – Capital charges on residential mortgages pools – securitised vs. underlying
Source: EBA
One last consideration to be made is on the consistency of capital charges required for different
types of investors being exposed to the same product. Substantial differences (between the capital
treatment of banks and insurance companies investing in the same product) have been documented.
In a comparative study of the current Basel 2.5 and Solvency II frameworks for banks and insurance
prudential capital regulations, the authors conclude that there exists "considerable differences in
required capital for the same type and amount of asset risk, burdening insurers with almost twice as
high capital requirements than banks." (see Laas and Siegle, 2014).
3.1.3) Lack of consistency and standardisation
In recent months the Joint Committee of the European Supervisory Authorities carried out an
assessment of the existing EU framework regarding the requirements relating to disclosure, due
diligence, supervisory reporting and risk retention. The Committee's objective was to assess
whether the existing framework has been set up in a consistent manner across the many pieces of
legislation regarding securitisation introduced after the crisis. The Committee's work highlighted
how current due diligence requirements show substantial differences depending on the investors
involved (banks, insurers, alternative investment funds, etc.) while common requirements can be
justified for some investor types (see JC 2015). It also highlighted the importance of accompanying
due diligence requirements with disclosure requirements that render the due diligence feasible and
not too onerous for investors. The importance of giving investors access to standardised loan-by-
loan data is another area where further work is necessary. Finally, on top of differences and
inconsistencies in the EU regulatory framework, there are national differences in a variety of key
aspects affecting securitisation.
Limited standardisation of information is particularly detrimental to the securitisation of SME
loans. It makes it harder for prospective investors to conduct risk assessments, compare the risk-
return characteristics between comparable products, making them less attractive. In addition, credit
rating agencies typically require 3-5 years of financial performance and credit history when rating a
securitised product. This includes information on outstanding balances, collections, collateral,
delinquencies, write-offs, recoveries, to estimate the probability distribution of losses that may be
generated by the pool. If information is missing or inadequate, as is often the case for small and new
companies, this probability distribution cannot be reliably estimated and credit rating agencies may
18
refrain from providing a rating. This immediately excludes potential investors constrained by
mandates to only invest in rated products.
3.2) Problems
3.2.1) Low demand for securitisation products
As noticed above, issuance of securitised products in the EU has dropped 88% since the crisis
began. While in 2007 70% of the issuance volume was publicly placed to investors, only a year
later that percentage had dropped to 13% (see AFME 2014). The subprime crisis had changed
drastically investor perception of securitised products and issuers were unable to place most of it,
being thus forced to retain it. While some improvement has taken place since, the situation is still
far from normalisation. Notwithstanding the reduction in issuance seen since 2008, its vast majority
(67% in 2014) is still retained by issuers and used for central bank refinancing operations. Demand
for EU securitisation products is thus a fraction of what it used to be before the crisis. Yet this has
little to do with the performance of EU securitisation itself. The events in the US (and their
damaging effects on EU investors) have altered the perception of the latter with regard to all
securitisation products, without geographical or asset class distinctions. This is in line with the
BCBS-IOSCO questionnaire ranking investor perception as the most important factor contributing
to the decline of securitisation markets since the crisis.
3.2.2) Simple and transparent securitisation products disadvantaged
EBA, BoE and ECB work shows that the capital charges in the current regulatory framework are
multiples of those that would have covered the losses generated by EU securitised products during
the global financial crisis. It is clear that these products are being disadvantaged by the regulatory
framework. This is one of the key reasons behind the persistent subdued state of EU securitisation
issuance. As EBA put it, the consequence of the capital regulation's scarce differentiation among
securitised products is "an unduly conservative treatment of relatively less risky securitisations,
showing a very good historical performance during the crisis years, in terms of both observed
defaults and losses."
The negative effects of the scarce risk-sensitivity in the regulatory treatment are exacerbated by its
interaction with sovereign caps employed by some credit rating agencies. The conservative
regulatory framework, combined with its mechanistic reliance on credit ratings, interacts with
sovereign rating caps and renders the regulatory treatment of securitised products issued in low-
rated countries punitive and sometimes disconnected from the product's risk profile. This is because
securitisation products can have higher credit rating than that of the country the issuer resides in.
The difference is however "capped" (i.e. it cannot be more than a certain number of steps). It
follows that securitisation products issued in countries with low sovereign ratings are bound to have
low ratings and punitive capital charges, no matter how safe, simple and transparent these products
may be (see Chart 12). This puts all securitisations issued in the periphery at huge disadvantage,
irrespective of their risk profile, as discussed in section 3.1.2.
19
Chart 12 – Country sovereign ratings and maximum achievable securitisation ratings
Source: Barclays – See glossary annex for acronyms explanation
Credit rating reliance also introduces "cliff edge" risks as downgrades may translate into substantial
harshening of the regulatory treatment of a securitisation deal. This results from the overreliance on
external credit ratings in the capital treatment of securitisations, leading to fire-sales and such
instruments by financial market participants to pre-empt higher capital charges in the case of a
downgrade. Again, this is particularly damaging when a securitisation deal has its rating capped by
a sovereign rating. In this case, a downgrade of the sovereign translates in a securitisation
downgrade and thus a substantial tightening of the regulatory treatment. Furthermore, credit rating
agencies link the securitisation rating with that of the many agents present in the securitisation deal
(the so-called "ancillary services", for example providers of interest rate swaps or guaranteed
investment accounts). This implies that the tightening of the regulatory treatment can be triggered
by a downgrade of an ancillary service as well.
3.2.3) High operational costs for investor and issuers
The availability of data on underlying assets and monitoring metrics varies considerably between
securitisation deals. This lack of standardisation is also reflected in different structures, availability
and form of legal documentation, reporting practices and types of assets. The lack of standardisation
increases the costs of implementing due diligence and credit analysis for investors. These costs may
also be unnecessarily increased by the implementation mechanism currently envisaged for risk
retention rules. These risk retention rules hold investors responsible for ensuring the issuer complies
with the rules but do not ensure the data necessary to prove compliance are disclosed to the investor
in a standardised and consistent way.
On top of this, not always justified differences in disclosure and due diligence requirements have
been identified across different parts of the EU legislation on securitisation (as discussed in section
3.1.3 above). The situation is further complicated by the specific European context, where
substantial differences across jurisdictions exist on all these aspects and on others such as the tax
and accounting treatment of securitised products, as well as the legal frameworks. This lack of
standardisation increases the costs of due diligence for investors. These in turn reduce the
attractiveness of cross-border investment in securitisation, limiting the scope for EU market
integration and economies of scale. Issuers face additional set-up and disclosure costs because of
the need to adapt these differences. This argument is put forward by the ECB and the BoE in their
joint paper quoted above (see ECB-BoE 2014).
20
All these considerations are even more important in the context of SME loans securitisation. This is
generally more expensive than securitising other more standard types of loans such as mortgages. In
order to be pooled, a portfolio of loans must indeed satisfy some key conditions such as a credit
history, clarity on collateral and its availability, and sectoral diversification. From a bank’s
perspective, building a portfolio with such characteristics is more difficult with SME loans than
with residential mortgages, where there is more uniformity of loans, longer maturity tenors, and
regularity of payment streams due to amortisation (see IMF 2014b). Once a suitable portfolio of
SME loans is built, the bank faces also higher than average costs of setting up and operating the
securitisation structure. For example, the granular information and variety of collateral related to
SME loan portfolios require the creation of expensive IT systems and these are then used for
portfolios that tend to be smaller in SME than in other securitisations. The same is true for legal
costs and documentation.
While these characteristics are intrinsic to SME loans securitisation and thus unavoidable, their
negative effect is exacerbated by limited standardisation or outright lack of data on SME loans. As
the IMF notes: "operational constraints, such as a lack of uniform reporting standards and credit
scoring, make securitization of SME-related claims more costly than, for example, mortgages" (see
IMF 2014b). From an investor point of view, the lack of data and the heterogeneity of the
underlying loans make it at best time-consuming and costly and at worst impossible to carry out
own credit analysis and due diligence. This view is shared by the ECB and BoE who affirm in their
joint paper: "facilitating investors’ access to credit data could be especially beneficial for
securitisations of asset classes such as SME loans where the level of historical performance
information available between incumbents and new entrants is most obviously uneven and generally
lacking" (see ECB-BoE 2014).
With set-up and operational costs higher than for other types of securitisations and generally lower
returns on the underlying assets8
, structuring an SME securitisation that is profitable for the issuer
and at the same time guarantees a satisfactory return to the investor is often unfeasible. This is
shown by an IMF study estimating the return an investor (bank or insurance company) would obtain
at different market return rates by investing in a securitised SME deal or holding the portfolio of
SME loans directly. The Fund finds that "investment in highly rated senior [SME ABS] bonds
would result in a Return on equity (RoE) of about 11.5 percent for banks and 4.5 percent for
insurers. This is well below the RoE that banks and insurers would earn by simply holding the SME
loan on their books (14.5 percent and 7.5 percent, respectively)". In jurisdictions where the
sovereign rating cap binds securitised product into low credit ratings, the disadvantage in investing
in SME securitisation is even bigger, rendering SME securitisation even more uneconomical.
The specificity of SME loans has been dealt with by market participants developing dedicated
instruments (such as ABCP – asset-backed commercial papers) and structuring techniques (so
called "synthetic" securitisations). While these instruments or techniques may be better suited to
certain types of SME loans securitisation, their specificities do not fit in the current regulatory
framework, impacting on operational costs and limiting the products' attractiveness (please see
Annex 5 for a detailed analysis of synthetic securitisation. Annex 6 provides a detailed analysis of
the problems affecting SME loans' securitisations and the solutions proposed within this initiative.
8
SME loans tend to have lower returns than, for example, credit card receivables.
21
3.3) Consequences
Before the crisis the securitisation market was a growing channel of alternative funding to banks
and the European economy. In addition its loss performance during the crisis showed good
resilience. As a consequence of the problems highlighted in this chapter, as well as the subdued
macroeconomic environment described in the introduction, this market is now moribund. A
financing channel for the EU economy is impaired, with substantial detriment to potential
contribution to growth and employment. Without securitisation, banks' ability to reduce their
balance sheet by selling assets is indeed constrained. As a consequence, the current need for
deleveraging imposes banks to shrink their balance sheets by reducing credit provision. In the
European context, where 80% of financial intermediation takes place through banks, the
implications for growth are relevant.
From a long term perspective, the moribund state of the securitisation market deprives the EU
economy of a capital market that could provide additional funding when the banking channel cannot
because of its own dynamics.
These dynamics are less relevant in the US where issuance has restarted growing after a substantial
drop in 2008. US 2014 issuance was still less than half than in 2007 but a positive trend is clearly
visible. This is however mostly ascribable to public guarantees from state agencies (Fannie Mae,
Freddie Mac and Ginnie Mae), which cover the vast majority of the market. Such guarantees are
however not feasible in Europe where an EU-level shared guarantee fund many times the size of
currently existing supranational guarantors would be needed. It would also not be advisable as such
schemes transfer risk from mortgage markets to the public sector, as recently highlighted by the
IMF (see IMF 2014).
Chart 13 - Drivers, problems and consequences chart
A financing channel and
risk transfer tool for the
EU economy is lost, in
particular for SMEs,
leading to slower credit
recovery, growth and
job creation
Investor stigma
Insufficient risk-
sensitivity in the
regulatory framework
Lack of consistency and
standardisation
Low demand for
securitisation products
Simple and transparent
securitisation products
disadvantaged
High operational costs
for investors and issuers
22
4) OBJECTIVES
4.1) General, specific and operational objectives
In light of the analysis of the problems above, the general objective is to revive a safer securitisation
market that will improve the financing of the EU economy, weakening the link between banks
deleveraging needs and credit tightening in the short run, and creating a more balanced and stable
funding structure of the EU economy in the long run. This should in turn benefit end users of credit
intermediation: households, SMEs and larger corporations.
Reaching these general objectives requires the achievement of the following more specific policy
objectives:
Remove stigma from investors and regulatory disadvantages for simple and transparent securitisation
products (tackling problems 1 and 2 described in sections 3.1.1 and 3.1.2)
Reduce/eliminate unduly high operational costs for issuers and investors (tackling problem 3 described in
section 3.1.3)
These in turn require the attainment of the following operational objectives:
Differentiate simple, transparent and standardised securitisation ('STS' henceforth) products from more
opaque and complex ones. This objective will be measured against the difference in price of STS versus
non-STS products. If this objective is achieved, this difference should increase. This should also trigger an
increase in the supply of STS products, reason for which the achievement of this objective will also be
measured with the growth in issuance of STS products versus non-STS ones.
Support the standardisation of processes and practises in securitisation markets and tackle regulatory
inconsistencies. This objective will be measured against: 1) STS products' price and issuance, 2) The degree
of standardisation of marketing and reporting material and 3) feedback from market practitioners on
operational costs' evolution.
4.2) Consistency of the objectives with other EU policies
The identified objectives are coherent with the EU's fundamental goals of promoting a harmonised
and sustainable development of economic activities, a high degree of competitiveness, and a high
level of consumer protection, which includes safety and economic interests of citizens (Article 169
TFEU).
4.3) Consistency of the objectives with fundamental rights
Future legislative measures on securitisation, including appropriate sanctions, need to be in
compliance with relevant fundamental rights embodied in the EU Charter of Fundamental Rights
("EU CFR"), and particular attention should be given to the necessity and proportionality of the
legislative measures. Only the protection of personal data (Article 8), the freedom to conduct a
23
business (Art. 16) and consumer protection (Art. 38) of the EU Charter of Fundamental Rights are
to some extent relevant. Limitations on these rights and freedoms are allowed under Article 52 of
the Charter. The objectives as defined above are consistent with the EU's obligations to respect
fundamental rights. However, any limitation on the exercise of these rights and freedoms must be
provided for by the law and respect the essence of these rights and freedoms. Subject to the
principle of proportionality, limitations may be made only if they are necessary and genuinely meet
the objectives of general interest recognised by the Union or the need to protect the rights and
freedoms of others.
In the case of the securitisation legislation, the general interest objective which justifies certain
limitations of fundamental rights is the objective of ensuring the market integrity and financial
stability. The freedom to conduct a business may be impacted by the necessity to follow certain risk
retention and due diligence requirements in order to ensure an alignment of interest in the
investment chain and to ensure that potential investors act in a prudent manner. As regards
protection of personal data the disclosure of certain loan level information may be necessary to
ensure that investors are able to conduct their due diligence. It is however noted that these
provisions are currently already in place in EU law. As regards the new securitisation legislation it
should not impact on consumers, since the instrument are not intended for consumers. However, for
all classes of investors STS securitisation would enable better analyse the risks for the products
which contributes to investor protection. We have focused our assessment on the options which
might limit these rights and freedoms
4.4) Subsidiarity and proportionality
According to the principle of subsidiarity (Article 5 (3) of the TEU), action on EU level should be
taken only when the objectives of the proposed action cannot be achieved sufficiently by Member
States alone and can therefore, by reason of the scale or effects of the proposed action, be better
achieved by the EU. The objective of the initiative is to revive a safe securitisation market that will
improve the financing of the EU economy and ensures financial stability and investor protection.
Securitisation products are part of EU financial markets which are open and integrated.
Securitisation links different financial institutions from different Member States and non-Member
States: often banks originate the loans that are securitised, while financial institutions such as
insurers and investment funds invest in these products and they do so across European borders, but
also across the Atlantic. The securitisation market is therefore European/international in nature.
Individual Member State action will not be able to remove the stigma. The EU has advocated at
international level for standards to identify simple, transparent and standardised (STS) securitisation
that performed well during the financial crisis. Such standards will help investors to identify
categories of securitisations that have performed well during the financial crisis and which allow
them to analyse the risks involved.
Although implementation of these international standards could be done by Member States, it could
lead to divergent approaches in Member States, which would hamper the removal of the stigma and
would create a de facto barrier for investors which would have to enter into the details of the each
Member State's framework. As regards the insufficient risk-sensitivity of the regulatory framework,
the relevant framework is currently laid down in EU law, in particular the Capital Requirements
24
Regulation for banks and in the Solvency II Directive for insurers9
. Making the regulatory
framework more risk-sensitive can thus only be achieved by amending these EU legal acts and thus
only by EU action. It should also be noted that to be able to define a more risk-sensitive regulatory
treatment for STS securitisation requires the EU to define what STS securitisation is, since
otherwise the more beneficial regulatory treatment would in different Member States be available
for different types of securitisations. This would lead to an un-level playing field, to regulatory
arbitrage which in the end could work against the objective to remove the stigma attached to
securitisation. As regards the lack of consistency and standardization EU law has already
harmonised a number of elements on securitisation, in particular rules on disclosure, due diligence,
supervisory reporting and risk retention. Those provisions have been developed in the framework of
different legal acts (CRR, Solvency II, UCITS, CRA Regulation, and AIFMD) which has led to
certain discrepancies in the requirements that apply to different investors. Increasing their
consistency and further standardisation of these provisions can only be done by EU action.
The action proposed would give a clear and consistent signal throughout the EU that certain
securitisations performed well even during the financial crisis, that they can be useful investments
for different types of professional investors for which regulatory barriers (lack of an appropriate
prudential treatment, inconsistent treatment across financial sectors) will be taken away.
Therefore, the objectives of the proposed action cannot be achieved by action of the Member States
and can be better achieved by action by the Union.
The options analysed below will take full account of the principle of proportionality, being adequate
to reach the objectives and not going beyond what is necessary in doing. The retained policy
options are compatible with the proportionality principle, taking into account the right balance of
public interest at stake and the cost-efficiency of the measure. The proposed action will create a
simple, clear and consistent framework for investments in securitisation based on uniform
definitions, including of simple, transparent and standardised securitisation. The prudential
treatment will be carefully calibrated on the basis of extensive historical data, so to ensure that the
treatment is proportionate to the risks involved and neither over- nor underestimates the risks of
securitisation.
The options retained will be implemented by as closely as possible alignment with the existing EU
definitions and provisions on disclosure, due diligence, risk retention and definition of STS
securitisation in the LCR and Solvency 2 delegated acts. This will ensure that the market can
continue to function as much as possible on the basis of the existing legal framework, so to not
unnecessarily increase costs and create regulatory disruption, thereby also continuing to ensure
investor protection, financial stability, while contributing to the maximum extent possible to the
financing of the EU economy.
9
Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential
requirements for credit institutions and investment firms and amending Regulation (EU) No 648/2012 (1): OJ L 176,
27.6.2013 and Directive 2009/138/EC of the European Parliament and of the Council of 25 November 2009 on the
taking-up and pursuit of the business of Insurance and Reinsurance (Solvency II) (1): OJ L 335,17.12.2009
25
26
5) POLICY OPTIONS
In order to meet the first operational objective, this impact assessment analyses 14 different policy
options. For ease of reference, these options have been grouped into different headings, such as
options on product differentiation, scope of the differentiation, compliance mechanism and the
prudential treatment (see table below).
Option Description
Simple Transparent and Standardised criteria
1.1
No action on
differentiation
Take no further action at EU level to introduce STS criteria
1.2
Soft law by EU Codes of conduct, guidelines or recommendations to encourage
Member States to set up specific provisions for STS products
and/or endorsement or support to private initiatives
1.3
EU legislative initiative
to specify STS criteria
Introduction of a legal instrument specifying a set of criteria for
STS securitisation products
Scope of differentiation
2.1
Same scope as LCR and
S2
The scope of STS securitisations would only cover 'term'
securitisation (ABS with medium to long term maturity)
2.2
2.1 + ABCP Additional criteria for identifying STS types of short term
securitisations
2.3
2.2 + synthetics Introduce criteria for both ABCP and synthetic securitisations
Compliance mechanism
3.1
Introduce a self-
attestation mechanism
Responsibility for compliance with the criteria will lie with the
originator of the securitisation
3.2
3.1 + 3rd party
assessment
Self-attestation by the originator complemented by assessment
provided by an independent third-party
3.3
3.1 + ex-ante supervisory
approval
Self-attestation by the originator complemented by ex-ante
supervisory approval.
Prudential treatment
Banking prudential treatment
4.1
No change to the
existing securitisation
framework
All securitisations (both STS and non-STS) continue to be subject
to the same prudential treatment set out in CRR
4.2
Develop a preferential
capital treatment for STS
securitisations
Amend the existing requirements in the CRR with a new
framework that would differentiate between STS and non-STS
securitisations with a preferential treatment for the former
27
Insurance prudential treatment
4.3
No further action on
Insurance prudential
treatment
Solvency 2 standard formula for capital charges unchanged
4.4
Modify treatment for
senior tranches of STS
products
Refine existing approach - without changing the scope of the
differentiated approach (i.e. improve the risk-sensitivity of the
calibrations for senior tranches only).
4.5
Modify treatment for all
tranches of STS products
Extend the differentiated approach to insurers' investments in non-
senior tranches of STS securitisation deals and refine the existing
approach
In order to meet the second operational objective, a total of three different policy options has been
analysed in this impact assessment (see table below). Notice that, while options aiming at the
achievement of the first objective refer to the regulation of STS products, options aiming at the
achievement of the second objective aim at setting the optimal provisions that will apply onto all
securitisation products, STS and non-STS alike.
B) Options aiming at fostering the standardisation of processes and practises and tackling
regulatory inconsistencies
5.1 No further action at EU level Finalise implementation of agreed reforms and address some
remaining issues
5.2 Establish a single EU
securitisation framework and
encourage market participants
to develop standardisation
Establish a single EU securitisation legislative framework
defining securitisation, transparency, disclosure, due diligence
and risk retention rules.
5.3 Adopt a comprehensive EU
securitisation framework
Complementing option 5.2 with an EU securitisation
framework harmonising Member States' legal frameworks for
securitisation vehicles
28
6) ANALYSIS OF IMPACTS
This section assesses the impacts of each of the policy options, measured against the criteria of their
effectiveness in achieving the specific objectives (differentiating STS deals from more opaque and
complex ones; fostering standardisation of processes and practises and tackling regulatory
inconsistencies) and their efficiency in terms of achieving these objectives for a given level of
resources or at lowest cost. Impacts on relevant stakeholders and the coherence of the options with
EU policies are also considered. The retained policy options should be those scoring the highest for
the relevant specific objective while imposing the smallest costs and impacts on stakeholders. At
the end of each section of options assessment and before the impact summary the views of
respondents to the public consultation are presented in the "Stakeholder View" boxes.
6.1) Section 1 - STS differentiation
6.1.1) Policy option 1.1: No further EU action (baseline scenario)
This option would imply no further EU action aimed at defining criteria to identify STS products
and distinguish them from other securitisation products. A distinction between the two is however
already included in the provisions of the LCR and the Solvency 2 EU delegated acts.
Box 1: What is simple, transparent and standardised securitisation?
The discussions on setting criteria to distinguish between different types of securitisation
start with the principles of simplicity, transparency and standardisation. These features are
relevant across the whole financial system and form the foundation criteria (see footnote 9,
page 30 for links to the criteria list of BCBS-IOSCO and EBA). As a second step, these
features can be supplemented with additional criteria based on specific risks and for
specific prudential requirements in a given sector. By taking a 'modular approach', this
allows for increased consistency across the system and, at the same time, can help address
sector specific risks.
Foundation
criteria
Simple Transparent
Standardised/
Comparable
Top
up
modules
Risk Factors
29
Box 2: The current differentiation between STS and non-STS securitisation
The LCR delegated act requires all EU banks to hold at any point in time liquid assets enough to
cover the cash outflows the bank can suffer in a stressed situation lasting 30 days. "Liquid assets"
are defined as assets that that can be sold on private markets with no or little loss of value even in
stressed conditions.
The LCR delegated act specifies what types of assets can be considered "highly liquid" and be
included on the banks liquidity buffer. To be eligible in the buffer (as "Level 2B" instruments),
these instruments have to meet certain criteria (cf. annex 4). All securitisation products not
satisfying the criteria are instead excluded and cannot be accounted as cover for the LCR. Similar
criteria identify securitisations that enjoy lower prudential requirements under Solvency 2
delegated acts for insurance companies' exposures. Notably, these lower prudential requirements
are achievable only by the most senior tranche of a qualifying securitisation deal.
Furthermore, some EU jurisdictions have national legislative frameworks dedicated to securitisation
and some of these frameworks include provisions aimed indirectly at promoting the development of
simple and transparent instruments.
Finally, the market has started to independently develop differentiation mechanisms. The Prime
Collateralised Securities (PCS), for example, aims at defining standards of transparency, simplicity
and liquidity in the securitisation market. It does so with the PCS Label, which can be awarded to
securitisation deals meeting certain criteria. These criteria have similarities to those identifying STS
securitisation in the LCR and Solvency 2 delegated acts. The PCS Label is designed to assist
investors and market participants in understanding key aspects of the labelled securities that make
them simple, transparent and standardised: the simplicity of the structure, the homogeneity of the
assets packaged in the security, the rules incentivising proper underwriting standards and so on. A
similar initiative, True Sale International, has developed in Germany.
(a) Effectiveness - ensuring differentiation of STS deals from more opaque and complex ones
Recognising the specific features of STS securitisation instruments and adjusting accordingly the
prudential treatment these instruments are subject to, the two delegated acts introduce an important
differentiation in the market. However, beyond banks' liquidity and insurance companies' capital
charges, STS and non-STS securitisations are indistinct. Therefore, the current differentiation is a
preferential treatment granted to some qualifying products in some limited and specific aspects,
rather than the existence of a product immediately recognisable by all types of investors (banks,
insurance companies, pension funds, UCITS, AIFs). It follows that the problem of stigma would not
be efficiently tackled.
On top of this, the regulatory disincentives currently hindering securitisation (see introduction and
section 6.4) would not be removed.
Market-developed differentiating mechanisms such as PCS and TSI are unlikely to fight stigma as
they would rely on market associations' opinions that have not been tested by events (i.e. PCS-
labelled securitisation were never tested in a stressed scenario). More importantly, even if these
differentiating mechanisms between securitisation products would be successful in achieving
differentiation and fighting stigma, they could not adjust the prudential treatment attached to
30
securitisations and thus improve the economics of EU deals. Furthermore, the current
inconsistencies in EU legislation would continue to affect these markets.
In absence of any EU intervention, deals are thus likely to remain uneconomical and the current
state of the securitisation market would be unlikely to be reversed: low issuance and fragmentation
would persist.
The absence of macroeconomic factors currently hindering securitisation (see introduction) may be
a necessary condition for the full development of the securitisation markets potential but it hardly is
a sufficient condition. When the macroeconomic environment will improve, without a more risk
sensitive prudential framework banks will cover their increasing funding needs with other
sources/channels such as covered bonds or subordinated debt that will remain cheaper than
securitisation. Also, non-bank investors such as insurance companies will not find attractive to
invest in securitisation markets as current capital charges for them, compared with other available
investments, are very onerous. As a consequence, a funding and investment diversification
opportunity will not be exploited.
(b) Efficiency and impact on stakeholders
A recognisable product, guaranteeing a high level of simplicity, transparency and standardisation of
the securitisation structure and its underlying assets, and allowing for a clear understanding of the
risks intrinsic in the transaction, is however what is needed to overcome stigma and inspire investor
confidence. Such a product must be recognisable and relevant for all investors beyond banks and
insurance companies (e.g. UCITS, AIFM...) and across the European Union, reason for which the
limited and differing differentiation incorporated in some national legislative frameworks are
unlikely to be an efficient means to the end of rebuilding trust and fighting stigma.
Similar considerations hold for market-led initiatives. While beneficial in rebuilding trust and
fighting stigma, they are unlikely to be sufficient because, without the involvement of supervision,
investors are unlikely to trust privately-awarded labels. Alone, the LCR and Solvency 2 delegated
acts, national frameworks and private initiatives are thus unlikely to lead to the emergence of a
clearly identifiable STS product for EU investors and issuers, able to overcome the stigma against
securitisations.
6.1.2) Policy option 1.2: EU soft law
The Commission could use soft-law instruments such as codes of conduct, guidelines or
recommendations to Member States in order to build on the existing delegated acts, national
frameworks and market initiatives (PCS, TSI, DSA). These soft law instruments could encourage
Member States to set up specific provisions or to encourage STS within their securitisation
frameworks. They could also be used to foster further differentiation via endorsement or support to
private initiatives such as the PCS and TSI labels and other initiatives to raise awareness of STS
products.
(a) Effectiveness - ensuring differentiation of STS deals from more opaque and complex ones
An advantage of this option is that it could be implemented quickly so that the international
consensus on STS criteria could be swiftly promoted among Member States and market
participants. In a creditless recovery, such as the one currently experienced by the EU, where there
31
is urgency to restart credit flows to firms and households, this would certainly be an important
advantage.
Offsetting the advantage of speed there is, however, a major drawback: limited coordination. It
would be up to Member States and market organisations to decide whether and how to implement
the recommendation/guidelines. Without a coordinated effort, national initiatives are more likely to
develop in different ways, potentially creating a set of different provisions and STS standards across
the EU. This would change little from the current situation, falling short of introducing the
recognisable STS product needed. Timing would also potentially be an issue. Until the number of
countries with a differentiating securitisation framework has reached a critical mass, the effect on
the market will be negligible. This could take years. Choosing this option would then most likely
lead to the creation of different STS products, implemented at different times or not even
implemented. The same stands true for market–led initiatives, which could create a set of similar
and overlapping STS labels. Finally, the limitations of market-led initiatives highlighted in the
previous section are equally valid under this option.
(b) Efficiency and impact on stakeholders
Soft law would entail small costs in terms of administrative burden for EU authorities and market
participants alike. However, low costs would be accompanied by low effectiveness in achieving the
differentiation objective, thereby suggesting this option would be scarcely efficient. Even if
Member States were to react quickly and introduce national legislation identifying STS deals, a soft
law action would limit considerably the scope and depth of the initiative. This would impact market
participants depriving them of a recognisable STS product, thus changing little from the current
situation. The change would be even more negligible in the event of slow and non-harmonised
implementation of STS product introduction by Member States.
6.1.3) Policy option 1.3: EU legislative initiative to specify applicable STS criteria
Under this option, a harmonised legal framework specifying a set of criteria for STS products
generally applicable across financial sectors would be established. Extensive work to identify what
features render a securitisation and the risks it entails clearly understandable and, furthermore, what
features have empirically been associated with smaller losses during the crisis has been carried out
by a host of authorities and organisations (EBA, BCBS-IOSCO). An international consensus has
been reached and a set of agreed key criteria has been identified10
. The STS definition would
therefore be based on this set.
(a) Effectiveness - ensuring differentiation of STS deals from more opaque and complex ones
With the introduction of a single legal instrument defining STS products, two important goals
would be achieved that would otherwise not be not achievable by the status quo or via soft law.
First, it would provide a STS product that, accompanied by an appropriate level of supervision,
could be relevant and trusted for all categories of investors, thereby overcoming stigma and
fostering a finer distinction among securitised products than the one currently prevalent in the
10
BCBS-IOSCO criteria are available at http://www.bis.org/bcbs/publ/d304.pdf; EBA criteria at
https://www.eba.europa.eu/documents/10180/950548/EBA+report+on+qualifying+securitisation.pdf
32
market. Investors would not, however, be relieved from their responsibility to conduct due diligence
and credit risk analysis for STS products (cf. chapter 4). Secondly, it would provide a harmonised
definition of STS products applicable across all EU jurisdictions and financial sectors, thereby
fostering cross-border harmonisation without conflicting with national frameworks, which would
not be impaired/hindered.
(b) Efficiency and impact for stakeholders
The single legal instrument envisaged in this option would have limited costs. These consist of a
longer EU legislative procedure (compared to a soft law initiative) and the need to revisit various
pieces of legislation and technical standards, some only recently adopted. Market participants would
also incur administrative costs in adapting to the new legislation. These would, however, be more
than offset by the advantages of creating a more transparent and sustainable market for securitised
products, giving market participants another source of funding and investment and, in so doing,
creating another safe channel of financing for the European economy.
6.1.4) Impact summary and conclusion
Options 1.1 and 1.2 fall short of the need to introduce a recognisable product. Differentiation would
be limited to that existing in current EU legislation or, in the case of option 1.2 being chosen, to that
eventually introduced by Member States and/or market participants. No guarantee of a standardised
EU product setting unified criteria for simple, transparent and comparable criteria that are relevant
and recognised by all types of investors would be there. As such, the incentive to issue and invest in
STS products would remain limited to certain banks and insurance companies.
By contrast, introducing an STS product that is relevant and, with effective supervision, trusted by
all categories of investors is achievable under option 1.3. The STS products should create a
harmonised definition of securitisation products whose intrinsic risks can be appropriately analysed,
understood and priced by investors. Such a definition would be applicable across all EU
jurisdictions and financial sectors. In this way, investors should be able to recognise simple,
transparent and standardised products and the indiscriminate stigma against all securitisations
should be reduced. Fostering the development of simpler, more transparent and standardised
structures, option 1.3 would allow investors, credit rating agencies and supervisors to assess with
more precision the risk involved in the assets contained in a securitisations, thereby reducing
mechanistic reliance on credit rating to evaluate a deal's riskiness.
Stakeholders' view - Respondents to the Commission's public consultation support strongly
the introduction of a differentiation instrument based on the modular approach. Criteria
developed by EBA/BCBS/IOSCO were seen as a natural and authoritative base for the criteria.
Respondents support a differentiation not including credit risk elements and applying to all
tranches of a deal, since differentiation is about the originating and structuring procedure. The
importance of avoiding a proliferation of criteria/definitions/regimes in EU legislation (CRR,
Solvency II, LCR) was highlighted as a key reason for introducing a unified instrument for the
definition of STS criteria. These views were equally held across all categories of respondents
(e.g. industry associations, market participants, supervisors as well as think tanks). Please see
Annex 7 for an extensive summary of responses to the public consultation.
33
In the comparison table below, each option is rated between "--" (very negative), ≈ (neutral) and
"++" (very positive) based on the analysis in the previous sections. The benefits are, however, very
difficult to quantify in monetary terms. The costs should be understood in a broad sense, not only as
compliance costs but also against all the other negative impacts on stakeholders and on the market
of alternative options. This is why we have assessed the options based on the respective costs and
benefits in relative terms.
In view of the above analysis and the opinion of stakeholders in the public consultation, option 3
(an EU legislative initiative to specify applicable STS criteria), is the preferred option.
Option Effectiveness Efficiency Impact on
Stakeholders
1.1 No action on
differentiation
(=) Differentiation
limited to existing EU
legislation.
(=) Market participants
remain deprived of a
recognisable STS
product, thus changing
little from the current
situation
(=)
1.2 Soft law by EU (-) Limited
coordination
potentially creating a
set of different
provisions and STS
standards across the
EU.
(=) Market participants
remain deprived of a
recognisable STS
product, thus changing
little from the current
situation
(+) Fast
implementation
procedure
(=) Small costs in
terms of administrative
burden for EU
authorities and market
participants, but
limited effectiveness
1.3 EU legislative
initiative to
specify STS
criteria
(++) Introduction of an
STS product that is
relevant and trusted for
all categories of
investors
(++) Creation of a
harmonised STS
definition applicable
across all EU
jurisdictions and
financial sectors
(++) Creation a more
transparent and
sustainable market for
securitised products
more than offsets
limited costs
(-) Longer EU
legislative procedure
and the need to revisit
various pieces of
legislation and
technical standards,
some only recently
adopted.
(-) Administrative
costs for market
participant in adapting
to the new legislation.
6.2) Section 2 - Scope of the STS definition
During the financial crisis different asset types within the global securitisation market performed
very differently. This raises a question about the scope of securitisations that should be eligible for
34
the STS category. This section considers three main policy options for the scope of STS
securitisation. The first option is to limit the scope of STS criteria to 'term' securitisations (asset
backed securities with maturities longer than one year) currently included in the LCR and Solvency
2 criteria. The second option would extend this also to ABCP securitisations. The third option
would allow term, ABCP and synthetic securitisations to be included in the scope.
6.2.1) Policy option 2.1: Cover only term securitisation
This option is the baseline and builds on the existing differentiation approaches developed by the
BCBS-IOSCO working group as well as in the Solvency II and LCR Delegated Acts. The scope of
STS securitisations would only be open to 'term' securitisation. Furthermore, to be considered as
STS, securitisations would require an effective transfer of ownership of the underlying assets from
the originator of such assets to a dedicated and legally separate Special Purpose Vehicle that issues
the securitisation. In other words, only "true sale" or "cash securitisations" will be eligible,
according to BCBS-IOSCO and EBA criteria, thus keeping synthetic securitisations out of the scope
of the criteria. This option would also be consistent with the ECB framework for refinancing
operations, where synthetics are not accepted as collateral by the central bank.
The non-inclusion of ABCP would be in line with the developments of the BCBS-IOSCO task force
as specific criteria are still under development. However, EBA has already prepared a set of specific
criteria which adjust the term criteria for specificities of short-term products11
.
Chart 14: overview of options
11
These are available at
https://www.eba.europa.eu/documents/10180/950548/EBA+report+on+qualifying+securitisation.pdf
35
(a) Effectiveness - ensuring differentiation of STS deals from more opaque and complex ones
The criteria set out in the Solvency II and LCR Delegated Acts exclude securitisations containing
structured products or derivatives not used for hedging purposes on the basis that this adds an
additional layer of complexity and risk (including counterparty credit risk). There is also a list of
eligible underlying assets, which covers: residential mortgages; loans to SMEs; auto-loans; leasing;
consumer finance and credit card receivables. This list includes only instruments which fulfil the
identification criteria. For instance, instruments without common types of underlying assets (such as
CDOs), or instruments involving important refinancing operations during the lifetime of the
transaction (such as CMBS) cannot qualify. In the latter case it means in practice that investors in
the securitisation instrument should be repaid before the underlying loans mature. This implies a
need to refinance the underlying assets and thus a significant degree of uncertainty. This feature was
the cause of significant losses during the crisis (CMBS generated losses 20 times higher than
RMBS – see chart below)
The decision to include or exclude certain asset classes in the LCR and Solvency II delegated acts
was based on EU/international standards and market practices (cf. PCS Label scope), which was
based in turn on a historical assessment of their credit performance. The credit performance of
CDOs (except Collateralised Loan Obligations, CLOs) and CMBS during the crisis was very poor
compared to consumer ABS and RMBS (see Chart 15 and discussion in the 'problem definition'
section). The BCBS-IOSCO working group and EBA advice continue to follow the same approach.
This would clearly be effective in achieving differentiation and in fighting stigma.
Chart 15: European securitisation losses 2000-2014, by market segment
Note: The chart shows total cumulative expected and realised losses on all Fitch rated European
securitisation deals between 2000 and 2014. Source: Fitch Ratings
36
(b) Efficiency and impact for stakeholders
This option would not impose additional administrative costs nor require substantial legislative
effort from EU authorities. For investors, the exclusion of securitisations that generally did not
perform well during the financial crisis can have a positive impact on the trust they have in STS
securitisations. Moreover, since these excluded asset types (CMBS, CDOs) have a relatively small
issuance in the EU (each represented 3% of 2014 EU issuance), it would not have a major impact on
the market.
6.2.2) Policy option 2.2: - cover term and ABCP securitisations
In addition to criteria for term securitisations, this option would also set out additional criteria for
identifying the simplest and safest types of short term securitisations, taking into account the
specificities of the ABCP securitisation technique.
ABCP is a type of bond that is typically issued by a conduit sponsored by a bank. The commercial
paper issued by the conduit is collateralised by the pool of assets. The maturity on ABCP is
typically short (30-90 days), and the liabilities are refinanced at regular intervals. ABCP can be
backed by a variety of collateral types but represents a sufficiently distinct structure from term
securitisations that it warrants separate consideration. ABCP is a key source of short-term financing
for a variety of underlying loan types (Chart 17). According to AFME, the European market for
ABCP conduits was just over EUR 80 billon as at the end of Q4 2014. ABCP conduits provide a
key alternative to bank funding for European SMEs.
Chart 16: European term securitisation issuance, by product type
Source: SIFMA – See glossary annex for acronyms explanation
37
Similar to term securitisations, the outstanding volume and issuance of ABCP have dropped
significantly post-crisis. According to BCBS-IOSCO,12
at the end of 2013, outstanding ABCP in the
US amounted to about a fifth of its 2007 peak. In Europe and Australia, the declines have been even
more significant, with the outstanding volumes about an eighth to a tenth of the 2007 peaks.
However, there has been some modest recovery in 2014 (Chart 18).
Chart 17: European ABCP asset
breakdown: Q4 2014
Chart 18: Historical quarterly European
ABCP issuance, 2005-2014.
Source: Moody's Source: AFME
(a) Effectiveness - ensuring differentiation of STS deals from more opaque and complex ones
ABCP constitute an important source of short-term financing for European companies, particularly
SMEs. The question is whether it is possible to distinguish between different types of ABCP
structures and identify ABCP which may be deemed eligible to qualify as simple, transparent and
standardised securitisations.
Complex and opaque ABCP structures such as arbitrage conduits and some SIV had a role in the
global financial crisis. These structures tended to invest in securitisations of risky assets, rather than
"real economy" assets, therefore representing complex re-securitisations. By contrast, simple ABCP
structures have "real economy" assets such as trade receivables from SME companies, which
performed well during the crisis. Thus, it appears possible to separate out those ABCP structures
that are more stable, transparent and beneficial for the economy. Recognising this, the EBA is
currently working on the identification of criteria able to achieve such a goal in order to isolate
simple, transparent and standardised ABCP structures. This indicates that, as for term
securitisations, there is scope to reduce stigma in the ABCP markets, through introducing STS
criteria developed to the specific characteristics of this market.
(b) Efficiency and impact for stakeholders
The cost of introducing dedicated criteria for ABCP is likely to be minimal. Inclusion of ABCP
criteria should support SME and broader corporate financing. Simple and transparent conduits have
12
http://www.bis.org/bcbs/publ/d304.pdf
38
become a valuable short-term financing option in various Member States. Introducing them in the
scope of STS would allow them to play a key role in alleviating the credit crunch currently suffered
by European SMEs.
Strengthening a complementary funding channel for SMEs additional to banks would help protect
vulnerable SMEs from experiencing problems relating to the banking sector in periods of financial
stress. This is particularly important if one recalls that SMEs are typically short of funding
alternatives to bank credit. From a financial stability perspective, a set of robust and detailed
identification criteria need to be developed with the objective of avoiding the resurgence of
arbitrage and leveraged structures such as SIVs.
6.2.3) Policy option 2.3: cover term, ABCP and synthetic securitisations
This option would widen the scope of STS securitisation and introduce differentiated criteria for
both ABCP and synthetic securitisations. At present, synthetic structures do not qualify for
preferential treatment under the LCR and Solvency II delegated acts. The policy and regulatory
work to date at EU (delegated acts/EBA advice) and global level (BCBS-IOSCO) also excludes
synthetics structures from the scope. This has also been the approach of private sector initiatives
such as the PCS label. However, as some synthetic structures may be used for supporting
infrastructure and SME financing, this option is worth exploring (see also Annex 5 for further
details on synthetics).
(a) Effectiveness - ensuring differentiation of STS deals from more opaque and complex ones
Synthetic structures mimic the transfer of ownership of the underlying assets/loans from the
originating banks to the securitisation vehicle with a derivative contract, such as a credit default
swap (CDS). This introduces an additional counterparty credit risk. The drafting of the CDS is
usually not standardised and defines what risks are transferred and under what conditions. This
introduces legal uncertainty and risks. Synthetic structures are therefore not simple or transparent.
Their inclusion in the STS framework could be seen as contradicting the basic principles of the
simple, transparent and standardised approach. This, together with the widely known role synthetic
securitisation had in exacerbating the crisis (synthetic CDOs were the most common structure used
to securitise subprime US mortgages in the run-up to the crisis), could undermine the credibility of
the differentiation exercise and its ability to reduce the stigma surrounding securitisation.
Available data also suggests that EU synthetic securitisation has been substantially more likely to
default than securitisation considered within the scope of STS. Synthetic CDOs have shown a
default rate 19 times higher than STS products in 2007-2013. Even high-quality synthetics such as
those issued by the EIF have generated 4 to 8 times higher losses than STS products.
For these reasons, international institutions (EBA, BCBS, IOSCO) have excluded synthetic
products from the scope of STS securitisation and did not carry out work to identify specific criteria
for synthetics. While in principle it may be possible to isolate a set of criteria that would allow a
distinction between structures used for arbitrage and those intended for proper risk mitigation13
, the
additional complexity of such products requires further work in setting up this criteria.
13
The deals with an arbitrage purpose are normally sold by investment banks to replicate exposures to certain assets
that they do not own and to give investors an indirect exposure to those assets. In deals with proper risk mitigation
39
Crucially, choosing this option would require the EU to move ahead of the global work and to
disregard the advice received by the EBA sub-group on securitisation. EBA stated that it has
reached the consensus to keep synthetic transactions out of the scope of the currently proposed STS
framework, as more time is needed to develop criteria isolating simple and transparent synthetics
from the rest. The subgroup acknowledged the relevance of this segment of the securitisation
market for banking in the EU and is willing to engage in further work and analysis, for the potential
development of an STS synthetic securitisation framework, after the technical advice on STS
‘traditional’ securitisation has been finalised and submitted. By contrast, international work on term
and ABCP securitisations is mostly concluded and consensual criteria have been identified.
Considering the complexity of the structures involved, the data available, the lack of work on
identifying criteria, and the high degree of consensus among supervisors and regulators, including
synthetics in the STS framework would not be an effective option for fighting stigma and achieving
differentiation in the securitisation markets.
(b) Efficiency and impact for stakeholders
On SMEs: originating banks often find that their SME customers do not want the bank to sell on
their loans, so a traditional cash securitisation is not possible. Enabling synthetic transactions could
in theory enable more investors to gain exposure to SMEs, which may in turn support SME
financing. However, such exposure can be achieved via ABCPs.
On investors: as discussed, including synthetic structures within the scope of STS securitisation
may send a mixed message, diluting the STS differentiation. In addition, synthetic structures do not
allow investors to take control of the underlying assets in enforcement scenarios and they allow the
risk of the underlying asset to be multiplied many times. This option may lead to less investor
clarity and protection, with negative effects for overcoming stigma.
On issuers: while synthetic structures tend to be cheaper to set up than "true sale" securitisations,
they provide only capital relief but no funding to the issuer. Therefore, only the revival of a "true
sale" securitisation market would provide issuers with a tool to achieve both capital relief and
funding.
6.2.4) Impact summary and conclusion
Option 2.1 would build on the international work already carried out and include in the scope of
STS securitisation only term products satisfying internationally-agreed criteria and with strong
credit performance during the crisis. This would clearly be effective in achieving differentiation and
fighting stigma. Nonetheless, two important sources of funding for EU companies and, in particular,
intentions the owners of the reference assets are instead typically the originator and the assets are normally those
originated as part of its ordinary business.
Stakeholders' view – Two thirds of respondents consider criteria for short term securitisations
should be developed. Most feel this criteria should differentiate between those structures devoted
to real economy financing (e.g. multi-seller ABCP conduits) and those used for arbitrage (e.g.
SIVs). Importantly, these views were expressed by the majority of investors (banks and non-
banks) in securitisation as well as issuers and supervisors.
The majority of respondents (74%) agreed that synthetics may be currently excluded by the STS
framework. The majority of respondents from industry associations (73%) and private
companies (68%) are also of this view. Other categories (regulators, legislators, NGOs, private
individuals) showed bigger majorities in favour of the exclusion. Annex 5 and 7 provide a
detailed breakdown of replies by category of respondents.
40
SMEs would remain out of the scope: ABCP and synthetic securitisations. Their importance
suggests attention should be paid to their possible inclusion.
There are marked differences between these two products on a number of aspects important for
their regulation. First, identifying simple, transparent and standardised ABCP conduits used to
finance "real economy" assets such as SME loans seems to be an achievable goal. Indeed, EBA's
work in this area is almost concluded; criteria for STS ABCP should be available before the
summer. On the contrary, as discussed above, identifying STS synthetics is a harder task and no
work on criteria has been done so far. Also, synthetics are intrinsically more complex products,
meaning that a very strong case must be made to include them in the STS framework if the power
of differentiation is to be preserved. Finally, available data shows EU synthetic products
underperformed traditional STS securitisation. For these reasons, option 2.2 is preferable to option
2.3.
In view of the above, option 2.3 (include term and ABCP securitisations) is the preferred
option. More evidence should be put forward before developing specific criteria for synthetic
securitisations. However, the Commission would welcome further work to promote STS synthetic
structures going forward.
Option Effectiveness Efficiency Impact on
Stakeholders
2.1 Same scope as
LCR and S2
(=) (=) (=)
2.2 2.1 + ABCP (+) Stigma in the
ABCP market reduced
by introducing STS
criteria developed to
reflect its specific
characteristics, as
provided by EBA
(+) Introducing ABCP
criteria may play an
important role in
alleviating the credit
crunch currently
suffered by European
SMEs at minimal
costs.
(=) Minimal costs of
introducing criteria for
ABCP.
(+) Simple and
transparent conduits
have become a
valuable SME
financing option in
various Member
States.
2.3 2.2 + synthetics (-) Reduced anti-
stigma effect with
inclusion of more
complex synthetic
products; may be seen
as contradicting the
basic principles of the
STS approach
(-) Lack of data and
international work on
criteria reinforcing the
problem
(-) Reduced
differentiation
achieved with the
introduction of
products more
complex in nature and
widely seen as central
in the global financial
crisis
(+) Enable more
investors to gain
exposure to SMEs
41
6.3) Section 3 - Ensuring compliance with STS criteria and consistency in
implementation
This chapter describes and assesses three policy options to ensure compliance and consistency in
the implementation of the criteria for STS instruments. Compliance will be crucial to the success of
this initiative, as differentiation will only work if investors trust these new instruments. Irrespective
of the decision taken on the options described in this chapter, five general principles must apply
and contribute to the proper implementation of STS securitisation.
a) Ensuring investors' due diligence (investors' responsibility). The compliance mechanism is
not intended to provide an opinion on the level of risk embedded in the securitisation. The scope of
the compliance assessment should be strictly limited to criteria establishing the 'foundation
approach', namely applying to the structure of the instrument. Investors should continue performing
careful due diligence of STS instruments before investing. The financial crisis has shown that
investor reliance on external credit ratings was excessive (cf. section 1.3.1). This trend led to a
general relaxation of due diligence efforts by investors, notably in wrongly AAA-rated tranches.
The main purpose of this initiative is to reassure investors, giving them the transparency needed to
assess STS products, without leading to any relaxation of their vigilance. This principle is essential
to avoid 'moral hazard' situations where investors would be incentivised to reduce their scrutiny in
assessing risks. The STS criteria are intended to make securitisation easier to analyse but not to be a
substitute for due diligence. Increasing transparency and simplicity of the securitisation products,
the STS initiative should allow investors, credit rating agencies and supervisors to assess with more
precision the risk involved in the assets contained in securitisations. It follows that mechanistic
reliance on credit rating to evaluate a deal's riskiness should be reduced.
Chart on the assessment's scope
b) Responsibility to comply is first on originators. Originators of STS instruments should be the
first responsible in ensuring that a product fulfils the criteria. They will have to attest that the
product is meeting all STS criteria. The onus would remain on originators as they are in possession
of the most complete information regarding the transactions and are the best placed to make the
determination on the characteristics of the instruments. In addition, if the originator is found liable
for misleading/false attestation, sanctions on originators would be much more effective than
sanctions on the ad hoc securitisation vehicle itself.
42
c) Sanctions should be in place for non-compliance. There is a need for appropriate sanctioning
measures for participants in the STS market to set the right incentives. For originators, the measures
would refer to normal supervisory sanctioning powers. Sanctions should be both proportionate and
dissuasive to prevent investors being misled and could range from pecuniary fines to a prohibition
against issuing new STS securitisation for a pre-determined period of time. There is also a need to
consider the implications on investors (e.g. what happens if a securitisation is re-qualified as non-
STS). Investors would no longer benefit from incentives attached to the 'STS category'. In this case,
a transitional period could be foreseen for investors to prevent fire sales and pro-cyclical effects
(avoiding 'cliff-edge' effects). Specific sanctions should also be applied to independent third parties
involved in the process.
d) Appropriate public oversight. In the course of their regular assessments of prudential
requirements (e.g. onsite/off-site examination of solvency requirements), supervisors will verify
that STS instruments fulfil the criteria. This monitoring is important to ensure the accuracy of
prudential ratios as 'STS' instruments may benefit from a differentiated prudential treatment.
Specific monitoring arrangements should also be defined for originators of STS instruments –
especially if they are not banking entities – and for potential third parties.
e) The EU STS market should not be fragmented. The vast majority of stakeholders (broadly
represented in all categories – see annex 7) emphasise the need to ensure a consistent
implementation of the STS criteria throughout the EU. To ensure investors' confidence and to avoid
divergences across financial sectors and Member States, the set of criteria should be defined as
clearly and objectively as possible. The credibility of this initiative should not be undermined by
leaving the possibility to originators of entering into regulatory arbitrage or 'forum shopping'
strategies. Thus an effective coordination mechanism involving the ESAs needs to ensure a clear
and consistent interpretation of the criteria and of the prudential consequences. A potential 'race to
the bottom' – as to attract new issuing structures in a given jurisdiction – would be detrimental to
the whole project. This would in turn reinforce the current stigma and contribute to the
fragmentation of the EU market. To ensure clarity and comparability for investors, transparency
requirements should be applied to all securitisations.
– 6.3.1) Option 3.1 - Establishing a compliance mechanism based on self-
attestation
Under this option, the responsibility for determining compliance with 'STS' criteria would lie with
originator firms, which would be legally liable for attesting that all criteria were met. They would
be required to disclose this attestation in the offer documents after an appropriate assessment of
each of the criteria. Ex-post oversight would be carried out as in normal supervisory activities, the
STS status of a securitisation (and its corresponding prudential treatment) would therefore still be
subject to supervisory checks. Having the final word on the prudential treatment applied to a
securitisation deal, the supervisor would also have the final word on the STS status of a deal.
43
Chart for option 3.1
(a) Effectiveness - ensuring differentiation of STS deals from more opaque and complex ones
The attestation would establish legal liabilities for originators, thus affecting positively investors'
views on STS securitisation. This approach would not eliminate investors' concerns about conflicts
of interest that may affect the objectivity of originators in making their attestation. Originators
would in fact have incentives to attest a deal is STS in order to reassure potential investors of its
quality and allow them to enjoy a less burdensome prudential treatment. Misleading self-attestation
is therefore the main risk of this approach. Nonetheless, false self-attestation would have serious
consequences if unveiled: the sanctions and reputational damage suffered by the originator who
attested a deal as STS while this has been rejected by the supervisor would provide a powerful
incentive to comply.
This approach would also introduce detailed due diligence requirements by the part of investors on
the underlying exposure packaged in the securitisation as well as on its structure. This would give a
strong incentive to investors to take full responsibility for their investment decisions and thoroughly
perform their due diligence, which is a key ingredient to a safe and sustainable market. Due
diligence failings, which led to a mechanistic reliance of investors on credit ratings were indeed a
key ingredient in the US subprime securitisation crash.
Supervisory checkes on STS deals would continue to be performed on a regular basis, thus
provisind the overarching guarantee to the correct functioning of the system. As already pointed
out, the final word on the STS status of a deal would be that of the supervisors.
This approach does not limit in any way the recourse to validation by third parties of a deal's STS
status. If the latter will provide value added to investors and originators, they will require it and a
market will arise. Giving third parties effective regulatory power (their decision would indeed
impact profoundly the prudential treatment of deals) would require third parties to be regulated. It
seems therefore more effective to regulate and supervise directly the securitisation deals than third
parties "labelling" the latter.
Since securitisation transactions will likely involve banks, insurance companies and asset managers
from different countries, in both the issuing and investing side of the deal, a number of supervisors
will have to collaborate in the supervision work on securitisations. In some cases it may be the
supervisor responsible for the issuer that may challenge an STS self-attestation. In other cases, it
may be the supervisor responsible for the investor in such deal. In any case, the first check will be
that of the investor, which will perform its due diligence on the STS criteria.
44
With a vast number of supervisors involved, it is important to limit legal uncertainty, ensuring
consistency and speed of implementation of compliance decisions. With this aim, guidelines and
technical standards will accompany the legislative initiative. These should ensure consistent
interpretation and application of the STS criteria throughout the EU and its different financial
sectors. Furthermore, in case of disagreement between supervisors on a specific securitisation deal,
a mechanism of binding mediation by ESMA is envisaged.
(b) Efficiency and impact for stakeholders
This option would increase originators' liability in case of wrongdoing. Originators have indeed
shown in the responses to the public consultation (see "stakeholders' view" box on page 47) a strong
preference for a system where responsibilities for STS attestation are shared with other parties
(supervisors, independent third parties). In the absence of external checks on STS criteria, investors
would have more incentives to perform robust and detailed assessments before investing. This
option would limit moral hazard concerns as supervisors would only be involved ex post when
reviewing prudential requirements. In addition, third parties could anyhow be involved in the
compliance mechanism if the markets values such an involvement and is therefore willing to pay
for it. This option will therefore not limit in any way the development of third party validation
schemes. If these will provide value added to investors, these should require it and issuers should
adapt.
This approach would have limited financial implications for investors and public budgets, as
originators would have to support the self-attestation costs. In the absence of an ex-ante public
intervention, this approach would not eliminate regulatory risks for investors as self-attested STS
instruments could be re-qualified at a later stage. This option is seen as the most suitable by some
supervisory authorities and central banks as long as appropriate public oversight is maintained.
– 6.3.2) Option 3.2 - Option 3.1 with the involvement of third-parties
Similar to option 3.1, option 3.2 would rely on self-attestation by originators. It would however be
complemented by the mandatory involvement of a third party, for certification and/or for
management purposes. As investors may have concerns with the objectivity of the assessment
performed by originators, they might view self-attestation as not sufficient to rebuild trust and
overcome stigma. A control system relying on independent third parties could thus be established to
prevent the issuance of non-compliant STS instruments.
This option could build on EU procedures in place to establish labelling in other areas14
. 'Control
bodies' could be designated to perform specific checks to assess compliance with STS criteria.
These bodies would in turn respect requirements defining the nature, frequency and conditions of
their controls. Potential conflicts of interest would need to be identified and managed carefully from
the outset. Thus a specific oversight/licensing regime would have to be developed in order to
authorise and monitor these independent bodies.
14
For instance for organic products (i.e. Council Regulation n°834/2007)
45
Chart for option 3.2
(a) Effectiveness - ensuring differentiation of STS deals from more opaque and complex ones
Under option 3.2, the self-attestation would be complemented by an independent review of the STS
criteria. This approach would help address objectivity concerns related to originators' assessments.
An independent assessment of the securitisation would provide additional confidence to investors.
These independent entities would have to fulfil requirements and detailed procedures to assess the
STS instruments correctly. Appropriate safeguards would also be needed to prevent and address
potential conflicts of interests with originators especially if third parties were to rely on "issuer-
pays" models.
If properly informed and performed, third-party review would give additional assurance to investors
in STS products. This would obviously increase effectiveness of the option. Nonetheless, the third-
party review may induce lower scrutiny and due diligence by investors. This is precisely what
happened in the build-up phase of the US subprime bubble.
(b) Efficiency and impact for stakeholders
This option would rely on private sector entities to perform independent assessments of STS
securitisations. Several entities may enter into this market and competition could limit the costs for
issuers. Involving private entities would make the mechanism more flexible and scalable to market
activities. However, it would also imply additional costs.
The fees currently charged by "labelling" entities may offer a proxy for potential prices here (e.g.
initial fees to award a label are typically around EUR 12 000 plus annual maintenance fees of
around EUR 6 000). In addition, these entities would need to act under public oversight. Setting up
such an oversight process would also imply additional costs. If oversight were to be done at national
level, there would be costs for national supervisors, plus for ESAs for the necessary coordination. If
oversight were to be organised at EU level, it would be more efficient, but would still need adding
resources to the existing and constrained agencies.
46
Also, choosing third party validation as an option would not avoid the need for coordination among
supervisors. In fact, with or without mandatory third party validation, securitisation transactions
will likely involve banks, insurance companies and asset managers from different countries, in both
the issuing and investing side. As such, a number of supervisors will have to collaborate in the
supervision work on securitisations. The mechanism of binding mediation envisaged in the previous
option would be need under this option as well.
This approach would have similarities with other EU policy, in particular the procedures for EU
labelling. Public oversight of the independent entities could also build on the approach developed
for the registration and oversight of credit rating agencies. It is important to note that this approach
may present similar issues and risks causing 'overreliance' on third parties such as credit rating
agencies. Originators and investors are globally supportive of this option though, if they would
share part of the liabilities with third parties. However, as the latter would often have limited
activities and resource ("not for profit"), involving their liability may be an issue. In addition,
investors would never get full regulatory certainty as the final prudential determination would
remain in their hands.
– 6.3.3) Option 3.3 - Option 3.1 complemented by ex-ante supervisory checks
on each issuance
Similar to option 3.1, option 3.3 would rely on the self-attestation of originators, complemented by
ex-ante checks by supervisory authorities. This option would offer a higher degree of credibility due
to the specific status of supervisory authorities. Furthermore, prudential authorities benefit from a
wider overview of market practices and are less likely to be subjected to 'asymmetry of information'
issues. Moreover, with no "issuer-pays" model, no conflicts of interest should arise.
This approval mechanism would be developed for each securitisation instrument. This would ensure
that each individual instrument meets the STS criteria. Compared to the previous options it would,
however, imply higher compliance costs for issuers as they would have to request that all issuances
are checked. In this case, securities regulators would be better placed to perform this task.
Alternatively, an 'issuer-based approach' could be developed. This would mainly focus on processes
implemented by originators/sponsors to ensure compliance with the STS criteria. This would result
in a kind of license granted by authorities. The initial licensing/approval would be comprehensive
and detailed but it would reduce the compliance costs for large originators as they would not be
required to renew approval for every new transaction.
(a) Effectiveness - ensuring differentiation of STS deals from more opaque and complex ones
Instead of relying on independent third parties, supervisors would directly assess the compliance of
STS securitisation. This approach would be the most powerful to ensure investors' confidence and
overcome current stigma. This option would contribute to a sustainable development of the STS
market while preventing the emergence of new financial stability risks.
However, reliance on supervisors would reduce substantially investors' incentives to perform a
thorough due diligence. Also, this would reduce the responsibility of issuers, as supervisory
approval would be necessary. To counterbalance this, supervision would have to be very detailed
and vigilant for every deal issued in the EU. This would require substantial new resources and EU
coordination for supervisors relevant in the securitisation markets. While supervisory approval is
necessary for prospectuses, because they concern products sold to retail investors, securitisation
products would only be sold to institutional investors.
47
(b) Efficiency and impact for stakeholders
This option would be the most efficient in terms of ensuring the credibility of differentiation
between different types of securitisation. However, it would require considerably greater public
resources as supervisory authorities would have to establish new teams and develop new expertise
to carry out these new tasks. A supervisory approach relying on a large number of authorities would
generate risks of diverging interpretations and forum shopping in the absence of a strong
coordination mechanism.
Supervisory authorities gave limited support for this option as they may face additional liabilities
and are concerned with moral hazard issues. Investors and originators expressed appreciation for the
legal certainty associated with a supervisory review, but a majority of them expressed concern with
potential delay and a lack of timely reaction from public entities during the issuance process.
Chart for option 3.3
48
Stakeholders' view - Almost all respondents emphasise the importance of having appropriate
enforcement and compliance mechanisms in place to build a sustainable STS securitisation
market in Europe. Views are split on the best ways to ensure this objective.
Some respondents (most regulators and the supervisory community) argue that the onus of
ensuring compliance with the STS criteria should be mainly on originators and investors. They
argue that originators should self-attest that a given instrument meets the identification criteria.
They consider this approach as the best way to avoid excessive reliance on assessments delivered
by third parties, to reduce "moral hazard" risks and ensure proper due diligence by investors.
Indeed, the vast majority of respondents underline the importance that investors make their own
creditworthiness assessment and do not rely mechanistically on external credit ratings. Credit
ratings should be only one element amongst other to be considered in the overall assessment.
Other stakeholders (mostly market participants and industry associations) argue that recourse to
external parties is essential to overcome the current stigma attached to securitisations and to build
investors' confidence in STS instruments. Within this category, some suggest that public
authorities could be directly involved in providing this assessment, while a significant number of
respondents support the involvement of private bodies acting as "certifiers" or "control bodies".
A number of stakeholders across all categories emphasise the importance of consistent
interpretation of the STS criteria in all EU Member States, especially given the mobility of
securitisation structures and originators. The responsibility for determining whether a particular
instrument complies with STS criteria needs to be clearly assigned. The mechanism should
ensure consistency in its application. A consistent EU approach has to be implemented in order
to ensure a single market for STS. In order to achieve such objectives, several respondents
suggest that STS assessment/certification should involve a European authority (e.g. an ESA).
– 6.3.4) Impact summary and conclusion
The attestation by originators (option 3.1)would ensure that originators remain liable for issuing
instruments meeting STS criteria and should incentivise investors to perform appropriate due
diligence. Issuers should face appropriate sanctions if they make wrong declarations. This approach
would be combined with option 2 but on a non-mandatory basis. Originators would still have the
possibility to ask for a review by an independent third party if they consider that this would provide
added value.
In addition, to ensure a clear and consistent interpretation of the STS criteria and of the prudential
consequences attached to this category, an effective coordination mechanism between supervisory
authorities, involving binding mediation, is needed at EU level (ESMA, EIOPA and EBA). This
would help ensure a high degree of consistency and lead to a common EU approach in the
interpretation of STS standards.
49
Compliance mechanism
3.1 Establishing a
compliance
mechanism based on
self-attestation by
originators
(=) Stigma would be
slightly reduced and
trust based on
reputation of issuer
and potential
sanctions
(++) Reduced "moral
hazard" risks as
incentives for due
diligence remain high
(+) Limited costs for
public finance and
public authorities
resources.
(+) Better alignment
of incentives
beetween originators
and investors
(liability for
potential risks)
(-) Investors would
not benefit from
external support in
assessing STS
products.
3.2 Option 3.1 with the
involvement of
third-parties
(+) Stigma would be
reduced as
independent
assessment of STS
criteria will be
available
(--) Increased "moral
hazard" risks as
incentives to
investors' due
diligence are weaker
(+) Higher flexibility
and scalability of the
process
(-) Additional costs
for originators and
need to introduce
public oversight for
3rd parties
(+) Would provide
additional
confidence to
investors in
assessing STS
intsruments
(-) Even with 3rd
parties involved,
final prudential
decisions would
remain a
competence for
supervisors
3.3 Option 3.1
complemented by
ex-ante supervisory
checks on each
issuance
(++) Strong and
positive effects on
current stigma
(--) Increased "moral
hazard" risks as
incentives to
investors' due
diligence are weaker
(-) Implication on
public authorities
resources
(=) Greater legal
certainty for
investors-originators
but concerns on the
scalability and
timeliness of the
mechanism
(-) Potential
reputation risks for
public authorities
6.4) Section 4 - Banking and insurance prudential treatment
This section examines the effectiveness of the identified options in achieving the specific objective
of ‘differentiating STS products from more opaque and complex ones’ as well as the general and
the specific policy objectives.
50
The current framework for credit institutions investing in securitisations has been in force since
2007, implementing the ‘Basel II’ Accord. It has only been subject to small targeted changes in the
2013 Capital Requirements Regulation ("CRR"), which provides for specific credit risk capital
charges for exposures to these instruments.
Under the CRR, a "securitisation" is defined by reference to two key features: the stratification or
tranching of the credit risk associated with a pool of assets and the subordination between the
securitisation "tranches" such that the performance (and risk) of the tranched securitisation
exposures is dependent upon that of the underlying pool of asset and the relative position of the
tranche in the payment waterfall.
These two key characteristics are the main drivers for the dedicated capital treatment for
securitisation exposures. Other specific features that the current framework takes into account
include the so-called "model risk" which is more relevant for securitisations than for other types of
transactions because of the specific aspects of the securitisation structure (e.g. the correlations of
underlying exposures, bespoke cash-flow waterfalls, trigger mechanisms that can alter cash flows,
etc.).
The calculation of capital requirements is underpinned by the following key features of the
framework:
there are two overarching types of approaches: the standardised and the internal ratings based approach.
For their investments in securitisations, banks have to use the same type of approach that they are allowed
to use to calculate credit risk for direct investments in the relevant underlying securitised asset;
within each type of approach, there is in turn a so-called "hierarchy of approaches". This hierarchy requires
banks to always apply a "ratings based approach" where the securitisation tranches have been given an
external rating. The framework allocates capital requirements on the basis of the external rating given to
each tranche, which for the highest rated senior tranches must be no less than 0.56 Euro per 100 exposure
under the Internal Ratings Based Approach and 1.60 Euro under the standardised approach. For mezzanine
and junior tranches, risk weights increase as ratings lower, down to full deduction (100 Euro capital for 100
Euro of exposure); this is typically required for the "first loss piece" or most junior tranche.
for unrated securitisation tranches or positions (which is very often the case of the first loss piece in a rated
transaction), the investor bank must either deduct its investment from capital or, if certain conditions are
met, may be able to apply one of the alternative approaches to avoid deduction. For example, banks using
the internal ratings based approach may use the "supervisory formula", in which the input to the
calculation of capital requirements is determined by a formula provided for by the framework itself which
has regard to the capital that must be held in relation to the underlying assets before being securitised.
However, the conditions to allow the use of the supervisory formula are fairly stringent and require
previous permission of the bank's supervisor.
The current framework, hence, treats all securitisation transactions in the same manner, relying on
the tranche external rating (and regardless of the structural features of the transaction) as the key
factor to allocate regulatory capital requirements.
However, certain securitisation transactions characterised by complex structures, bad underwriting
practices, excessive leverage and maturity transformation performed significantly worse than the
models underlying the external rating calibrations had assumed at their inception. These
51
securitisation transactions suffered heavy and sudden downgrades during the 2007-08 financial
crisis which resulted in a rapid increase of capital requirements for banks that had invested in them.
Although STS securitisations performed strongly compared to those more complex transactions, the
market as a whole became tainted and stigmatised and issuance levels slowed down to a fraction of
the pre-crisis levels from which it has not recovered yet.
In December 2014, the BCBS adopted a revision of the securitisation framework with a view to
addressing some shortcomings of the Basel II standards15
. As part of that work, the Committee is
discussing the merits of a dedicated framework for STS products reflecting their lower complexity
and greater transparency. Quantitative work on a potential calibration for STS securitisations is
ongoing and the Committee might at best disclose available options for public consultation by the
third quarter of 2015. The calibration of STS securitisation is also being explored at EU level and
the EBA is expected to finalise their advice to the Commission in the coming weeks. The industry
has singled out regulatory capital treatment of securitisations as the most influential factor in the
efforts by public authorities to encourage a recovery of these markets.
For the purposes of this Impact Assessment, we have assumed the following two policy options
regarding the regulatory capital treatment for STS securitisations:
6.4.1) Option 4.1: - no change to the existing securitisation framework as set out in the CRR
Under this option, no changes would be made to the current securitisation framework in the CRR.
Accordingly, all securitisations (both STS and non-STS) would continue to be subject to the same
prudential treatment.
(a) Effectiveness - ensuring differentiation of STS deals from more opaque and complex ones
The disadvantage of maintaining the status quo would be that, as noted above, the current
securitisation framework has proved to be insufficiently risk sensitive to take into account properly
the risks that materialised during the crisis for non-STS securitisations. The absence of a framework
setting a clear distinction between STS and non-STS transactions would not help remove the stigma
currently attached to all securitisations.
(b) Efficiency and impact for stakeholders
This option would have the benefit of not imposing transitional costs or additional burden on
market players. Banks would avoid the costs of having to adapt to a new regulatory environment,
while supervisors would not have to adopt new supervisory approaches.
15
These evolutions address especially i) the mechanistic reliance on external ratings, ii) increase risk weights for highly-rated
securitisation exposures; iii) reduce risk weights for low-rated senior securitisation exposures; iv) reduce cliff effects; and v)
enhance the risk sensitivity of the framework. See http://www.bis.org/bcbs/publ/d303.htm
52
6.4.2) Option 4.2: - develop a preferential capital treatment for STS securitisations
The Commission would amend the existing requirements in the CRR differentiating between STS
and non-STS securitisations for regulatory capital purposes, with a risk-sensitive treatment for the
former (e.g. lower capital requirements) relative to the latter. The new prudential treatment would
be based on the advice to the Commission provided by EBA on July 6, 2015.
On the basis of both theoretical arguments and empirical evidence over the default and loss
performance of different securitisation instruments throughout the crisis period, the EBA advises
the Commission to re-calibrate the new Basel 2014 Securitisation Framework for STS securitisation
positions in the following way:
lower the risk-weight floor (i.e. the minimum capital requirement) for senior STS securitisation positions
from 15% (1.20 Euro per 100.00 Euro) value to 10% (0.80 Euro per 100.00 Euro)16
; and
reduce the capital requirements under all 3 approaches of the new Basel framework (IRBA-ERBA-SA)
reflecting the greater transparency and simpler structure of STS securitisations.
Focusing on the approaches based on external ratings, the table below compares the capital
requirements of the current CRR/Basel II with the capital requirements under the new Basel
framework and the EBA approach for STS securitisations. It is worth noting that the new Basel
framework (and accordingly, the EBA approach) gives priority (and provides incentives) to the use
of the IRBA approach whenever possible. However, IRBA capital requirements cannot be directly
compared with the current CRR/Basel 2 capital requirements since these mainly depend on external
ratings.
Table 1: Examples of capital requirements in Euro per 100.00 Euro of securitisation exposure
(senior position)
CRR/Basel II Basel new
(ERBA)
(all banks)
EBA approach
for SST (ERBA)
(all banks)
SA banks IRB banks
Rating Capital charge Capital charge Capital Charge Capital charge
AAA 1.60 0.56 1.20 0.80
A+ 4.00 0.80 3.20 2.00
BBB+ 8.00 2.80 6.00 4.40
BB+ 28.00 20.00 11.20 8.40
B+ 100.00 100.00 20.00 16.80
16
For non-senior tranches under the ERBA the floor would be lowered from 20% to 15%
53
Under all three approaches (IRBA-ERBA-SA) the lowest possible capital requirement (80 cents per
100 Euro of exposure) remains slightly above the current CRR levels under the IRB approach (56
cents per 100 Euro of exposure/tranche rated AAA and 64 cents per 100 Euro of exposure/tranche
rated AA). However, it should be noted that:
- this is in line with the capital requirements of 80 cents per 100 Euro of exposure for AAA rated
covered bonds under the CRR and would ensure a level playing field between comparable funding
instruments, as advocated by the majority of market participants as well as regulators;
- such increase would be largely compensated by the substantial reduction of capital charges for less
well-rated tranches. For instance, the ERBA capital requirement for BB+ rated tranches capital
requirements would be more than halved when compared with capital requirements under current
CRR/Basel II. This would also mitigate the risk of (pro-cyclical) cliff effects; and
- finally, in all cases where banks are allowed by their supervisor to use the IRBA, they would
benefit from generally lower requirements than under the ERBA, although the 0.80/100 Euro floor
would apply in any case. According to EBA calculations on a sample of securitisations issued in the
EU in the period 2000-2014, the use of the IRBA for STS would imply a reduction (on average) of
the magnitude of 83% when compared to the current CRR treatment (IRB approach).
The increase in capital charges for non-STS securitisations which results from the revised Basel
framework relative to the current CRR would enable the Commission to address the consensus
among supervisors about the insufficient conservativeness of the current framework for non-STS
securitisations. From the industry’s perspective, this increase would be largely compensated by the
decrease of capital charges for STS securitisations (which is the large majority of current and
prospective EU securitisations) and address concerns regarding the alleged excessive
conservativeness of the new Basel framework for these securitisations only.
Accordingly, adopting the approach proposed by the EBA would strike the right balance between
the need to protect financial stability and to encourage economic growth through a safer, more
transparent and sustainable securitisation market and therefore it is suggested as the way forward to
implement option 4.2.
(a) Effectiveness - ensuring differentiation of STS deals from more opaque and complex ones
A framework that provided for a clear distinction between STS and non-STS securitisations by
giving a preferential capital treatment to the former would have a number of positive effects,
namely:
the resulting securitisation framework would be more risk-sensitive and better balanced: preferential
capital requirements would be available for more transparent and simpler structures, which are less risky
and typically back the flow of long term finance to the real economy (as opposed to highly risk and
speculative investments);
capital requirements would incentivise banks to comply with differentiated STS criteria; such criteria would
promote better behaviour and market discipline at all stages of securitisation transactions (e.g. structuring,
execution...), thus reducing overall risk in the system and strengthening financial stability. Indeed, the STS
criteria are designed to encourage simple, transparent and comparable securitisation structures with a
sound and robust execution by all parties involved, features which the current framework fails to address;
54
investors would be encouraged to re-enter the securitisation market, as a differentiated framework would
send a clear signal that risks are now better calibrated and, therefore, the likelihood of a systemic crisis
reoccurring would have been reduced;
this option would reduce the negative effects of sovereign rate caps (see section 3.2.2 for a discussion of
the problem). This is because for STS products the capital charges would be lower for all ratings and
increasing more gradually as the rating declines. Therefore, an STS securitisation issued in a country where
a sovereign rating cap is having an impact at present would face a smaller capital charge than it does
currently.
(b) Efficiency and impact for stakeholders
A preferential regulatory capital treatment for STS securitisations would require a recalibration of
the current capital requirements, which the EBA is currently assessing with a view to putting
forward a proposal to the Commission in short order. The recalibration could be limited to the most
senior tranche of each STS-compliant transaction, that is, only such a tranche would be STS for
regulatory capital purposes. Alternatively, the recalibration could be carried out across the whole
waterfall structure, such that all tranches of an STS-compliant transaction would receive a
beneficial regulatory capital treatment compared to non-STS securitisations. The latter option would
be more likely to encourage the broadening of the investor base for STS securitisations, insofar as
banks would not be unduly penalised from a regulatory capital perspective for holding mezzanine
positions.
The obvious disadvantage of this option would be the transitional costs that would be avoided with
option 1.
Prudential treatment of insurers' investments into STS securitisation
In the context of the Solvency II standard formula, the following options regarding differentiated
capital requirements for insurers' STS versus non-STS securitisation positions can be considered:
option 4.3 (baseline): keep the Solvency II standard formula unchanged, which already provides for a
tailored treatment of insurers' investments in senior tranches of STS securitisation deals, but treats other
tranches just as any non-STS securitisation.
option 4.4 : refine the existing approach, without changing the scope of the differentiated approach (i.e.
improve the risk-sensitivity of the calibrations for senior tranches only).
option 4.5: (in addition to the actions in 4.4) extend the differentiated approach to insurers' investments in
non-senior tranches of STS securitisation deals (so that non-senior tranches of STS securitisation deals are
not treated like any tranche of non-STS securitisation).
55
6.4.3) Option 4.3 – baseline: no further action
The Solvency II delegated act17
already includes a definition of STS securitisation, which affects
the amount of capital that insurers must hold against the risk of fluctuation of prices of such
investments (spread risk). For the purpose of calculating capital requirements, the delegated act
divides insurers' investments into securitisation in two types: Type 1 securitisation positions, which
only include the most senior tranches of STS deals, and Type 2 securitisation positions, which cover
everything else, including non-senior tranches of STS deals and generate significantly more onerous
capital requirements (see chart below).
Chart 19: allocation of tranches between the existing Type 1 and Type 2 positions in Solvency II
(Type 2 is more onerous).
Senior
tranche
Mezzanine
tranche
Equity
Risk increases
for investors
Senior
tranche
Mezzanine
tranche
Equity
STC securitisation deal Non-STC securitisation deal
Type 2 positions
Type 1 position
(a) Effectiveness - ensuring differentiation of STS deals from more opaque and complex ones
Stakeholders (bank issuers, insurance companies as well as supervisors) have criticised the existing
division for not being risk sensitive enough, and preventing insurers from fully supporting the
growth of the STS securitisation market, given that insurers would rather be incentivised to invest in
top tranches.
Stakeholders have nevertheless welcomed the fact that capital requirements for Type 1 positions
were set no higher than those applicable to the typical underlying assets (unrated loans) on the basis
of a look-through reasoning. Indeed, senior tranches are mechanically less credit-risky than the
whole of the underlying pool of securitised assets if they were held directly. But stakeholders
complain that the delegated act does not entirely follow the logic of this look-through approach, as
certain loans held directly, such as residential mortgage loans, would still enjoy a less onerous
treatment than the senior tranche of an STS securitisation backed by the same loans.
17
Article 177 of Commission Delegated Regulation (EU) 2015/35
56
The limited differentiation present in the current approach (baseline) can therefore be improved in
two ways: either refine the treatment of Type 1 securitisation (namely by fixing the inconsistencies
in the look-through approach) without changing the dividing line between Type 1 and Type 2 or
amend the Solvency II delegated act more substantially by providing a differentiated treatment for
all tranches of STS securitisation.
6.4.4) Option 4.4 – modify treatment for senior tranches only
This policy option would improve the risk sensitivity of the existing calibration for Type 1
securitisation positions in 3 ways:
fixing the inconsistencies in the look-through approach between the capital requirements applicable to
senior STS tranches and the underlying assets;
introducing some risk-sensitivity regarding external ratings, as the current capital requirement is identical
for positions rated AA, A and BBB. This results from capping the calibration at the level of that applicable to
underlying assets (3%) which was decided at the time of adoption of the delegated act18
. Risk factors could
be interpolated between the existing figures for AAA and BBB rated securitisation positions as shown
below.
Credit quality step 0 1 2 3
Risk factor, per year of duration 2.1 % 3 %2.4 % 3 % 2.7 % 3 %
the increase of risk factors with duration could be mitigated compared to the current proportional
increase19
. The same "kinking" pattern as for the risk factors applicable to corporate bonds could be
translated in the risk factors for securitisation. However, this amendment may have a limited impact given
that securitisation instruments are seldom very long-dated.
(a) Effectiveness - ensuring differentiation of STS deals from more opaque and complex ones
This option is helpful in fostering differentiation and supporting the development of the market for
STS securitisation products, but only partially: insurers would be mostly incentivised to invest in
senior tranches, with non-senior tranches not enjoying as large an investor base. From the point of
view of a securitisation issuer, non-senior tranches would remain as hard to place as they are now
18
See the Solvency II impact assessment report, section 5.1, preferred policy option #4
http://ec.europa.eu/finance/insurance/docs/solvency/solvency2/delegated/141010-impact-assessment_en.pdf
19
The Solvency II capital charges for spread risk on bonds and loans are higher for instruments with longer maturities.
The charges do not increase linearly with maturity though; instead the additional charge per year of maturity reduces in
order to avoid excessive capital charges for longer maturities. The spread charge for securitisations, in contrast,
currently increases linearly with maturity.
57
(where the overwhelming majority of non-senior tranches are retained by the issuer). Since the
almost totality of the risk is borne by non-senior tranches, issuers would continue to be unable to
transfer risk to investors. Securitisation would therefore remain confined to a tool to raise funding
but not a risk-transfer tool. With cheaper sources of funding available (central bank repo operations,
covered bonds..), securitisation will continue to be a scarcely appealing technique for EU issuers.
(b) Efficiency and impact for stakeholders
As all the refinement to the calibration under this option can be done relatively quickly, the option
does not require a major administrative and legislative effort. Nevertheless, in terms of impact, the
benefits of this option (namely, fixing the look-though approach) would be limited and accrue
mostly to the market for residential mortgage backed securities. There is no impact on insurers in
terms of administrative burden or costs.
6.4.5) Option 4.5 – modify treatment for senior and non-senior tranches
This policy option addresses the criticism that treating non-senior tranches of STS securitisation
deals in the same was as any other non-STS securitisation is not appropriate. It is a more ambitious
option since it would require calibrating from market data a specific set of risk factors for such non-
senior STS tranches. The calibration would follow a look through approach based on the capital
charge for the underlying exposures increased by a non-neutrality factor to capture the model risk of
the securitisation. The capital charges of the underlying exposures would be based on the current
Solvency II delegated act and the non-neutrality factor would be aligned with the average factors
from the banking approach based on the EBA advice.
(a) Effectiveness - ensuring differentiation of STS deals from more opaque and complex ones
By creating a broad investor base for all tranches (not only senior), this option would address the
concern that if insurers only invest in senior STS tranches, this may not be enough to stimulate the
development of STS securitisation deals. The problems for non-senior tranches described above
would indeed be tackled.
Furthermore, since STS structures would present lower modelling risk and thus render all tranches
(senior and non-senior) less risky with respect to similar tranches in non-STS structures,
recalibrating all tranches capital charges would better reflect the risk profile of the securitisation
deal.
(b) Efficiency and impact for stakeholders
By allowing STS securitisation to perform both of its key roles (funding and risk transfer), this
option would allow the differentiation to have a tangible effect, fostering the emergence of an STS
market able to attract (and transfer risk to) non-bank investors as well, thus helping the EU
economy to have a more balanced (bank and non-bank) funding structure. A more balanced funding
structure would reduce risks to financial stability as the effects of a financial shock on the access to
credit of EU firms and households would be less immediate and strong.
58
The higher effectiveness of this option compared with the previous offsets the higher costs in terms
of time and effort required to design a specific calibration for non-senior tranches of STS products.
There is no impact on insurers in terms of administrative burden or costs.
6.4.6) Impact summary and conclusion
Taking into account the weaknesses of the current banking prudential framework to calibrate
properly the risk of non-STS securitisations and the potential advantages of developing a
preferential capital treatment for STS transactions, option 4.2 with a full recalibration of all
tranches, based on the EBA advice received by the Commission on 6 July 2015 should be followed.
Similar considerations are valid for the capital treatment of insurers' exposure to securitisation.
While the no action option (4.3) would entail some differentiation of STS products, this would be
far too limited to render STS products recognisable and economically viable to invest in. As things
stand, insurers would still be incentivised to invest in top tranches alone. This problem would
therefore not be eliminated by improving the capital treatment of senior tranches of STS deals alone
(option 4.4). Recognising that simplicity, transparency and standardisation are features of a deal and
not just a tranche, recalibrating capital charges for all tranches of an STS securitisation would be
more justifiable and, even more importantly, it would create a broad non-bank investor base for all
tranches and allow STS securitisation to perform both of its key roles (funding and risk transfer).
Stakeholders' view - With few exceptions, the overwhelming majority of respondents are in
favour of differentiating the prudential treatment of STS securitisations versus other
securitisations. Two views (more or less equally represented) were expressed as to how to
achieve such differentiation. A first group led by industry representatives opposes the
transposition of the new BCBS framework and is convinced that it would penalise
securitisation and unduly discriminate vis-a-vis other debt instruments (e.g. covered bonds). A
second group (mainly Public Authorities and investor associations) judges positively the use of
the new BCBS framework (modified with a more favourable treatment for STS securitisations)
as baseline for the review of CRR provisions to ensure, inter alia, global consistency. A
minority of respondents (mainly including issuers/originators and investors) think that CRR
provisions in most cases adequately address risks attached to securitisations and would like to
see no (or marginal) amendments implemented. In general stakeholders belonging to this
group support a correction of the “one-size-fits-all” approach to take into account the specific
features of STC securitisations;
There is also vast support for improving risk-sensitivity in the Solvency II formula from all
categories of respondents (investors, issuers and supervisors). It is widely felt that calibrations
are too onerous. A vast majority of respondents considers that calibrations applied to "Type 2
securitisation positions" are punitively high, because they are partly based on US subprime
data. It is argued that such calibrations shrink significantly the investor base for STC
securitisation. It is unanimously felt that STC qualification should apply at transaction level,
not at tranche level. However, there is a wide variety of (sometimes contradictory) suggestions
to achieve this. Views are split as to how granular calibrations should be (there are concerns
about complexity of the standard formula).
Most stakeholders consider that the introduction of a credible STS framework should in itself
help expand the institutional investor base for EU securitisation beyond insurance companies.
Please see Annex 7 for an extensive summary of responses to the public consultation.
59
This option is more effective than the previous one, as it would incentivise insurers to invest in all
tranches of STS products, depending on their risk appetite, with risk-sensitive calibrations for each
level of tranches.
Should the recalibration of prudential capital charges lead to overheating of the securitisation
market, macro prudential tools can be used to reduce issuance and cool down the market. For
example, loan-to-value limits could be tweaked for mortgage markets. These represent the vast
majority of issuance and outstanding amounts in securitisation markets. Slowing down their growth
would thus go a long way in reducing risks to financial stability arising from eventual overheating.
As noticed in the introduction, the initiative is likely to impact Member States in different degrees,
depending on the development and structure of their markets, as well as their macroeconomic
environment. For this reason, (if needed) macro prudential tools should be set on a national basis.
Option Effectiveness Efficiency Impact on
Stakeholders
4.1 No change to the
existing
securitisation
framework as set
out in the CRR
(--) the insufficiently
risk-sensitive
framework will not
differentiate STS from
non-STS products
(=) (=) no transitional
costs or additional
burden imposed on
market players
4.2 Develop a
preferential
capital treatment
for STS
securitisations
(++) preferential
capital requirements
for more transparent
and simpler structures
(+) costs of
recalibration and
transition
counterbalanced by
recognition of STS
risk-profile in
prudential treatment
(-) recalibration and
transitional costs for
supervisors, issuers
and investors
(+) foster the
reemergence of the
STS market
4.3 No further action
on Insurance
prudential
treatment
(=) (=) (=)
4.4 Modify treatment
for senior tranches
of STS products
(=) Unable to sell non-
senior tranches, issuers
continue to be unable
to transfer risk to
investors, STS
products remain hard
to invest in for
insurers
(=) Limited costs and
limited benefits,
accruing mostly to
RMBS market
(=) Insurers further
incentivised to invest
in senior tranches
only
60
4.5 Modify treatment
for all tranches of
STS products
(++) Creates a broad
non-bank investor
base for all tranches
allowing securitisation
to perform its funding
and risk transfer roles
(+) Higher
effectiveness offsets
higher costs to design a
specific calibration for
non-senior tranches of
STS products.
(+) Fosters the
emergence of an STS
market able to attract
non-bank investors as
well
6.5) Section 5 - Standardisation and harmonisation
This chapter describes and assesses three policy options aiming at fostering the standardisation of
processes and practises as well as tackling regulatory inconsistencies. The absence of
standardisation is frequently perceived as one of the main obstacles to the development of
securitisation markets within and across the EU. The vast majority of stakeholders of all categories
(see annex 7) express their support for addressing current inconsistencies in the regulatory
framework and for further standardisation of securitisation in the EU. This would increase legal
clarity and comparability across asset classes, it would ease investors' assessments and it would
facilitate and reduce issuance costs for originators. This standardisation may also help supervisory
authorities to monitor the risk profile of financial intermediaries and macro-prudential risks. Greater
standardisation of the instruments would also increase market liquidity and help the development of
secondary markets.
Description of policy options to foster standardisation and address inconsistencies
This section considers three main policy options to foster standardisation and address regulatory
inconsistencies. The first option is the baseline option, where the EU would not intervene and rely
solely on reforms adopted in the past years and on what market operators and Member States may
decide to implement. The second option would result in an EU legislative initiative setting up a
single consistent EU securitisation framework based on existing EU legislation defining
securitisation, transparency, disclosure, due diligence and risk retention rules. Building on this
horizontal legislation, the EU would encourage market participants to develop further
standardisation of securitisation documentation. The third option would go further than the second
option adopting – on top of the horizontal legal instrument - an EU securitisation framework
harmonising Member States' legal frameworks for securitisation vehicles (including modalities to
transfer assets to SPVs and the rights and obligations of note holders).
6.5.1) Option 5.1 – Baseline - No EU action
Under this option, the main focus would be on finalising the implementation of the agreed reforms
and addressing the remaining issues such as completing some of the missing pieces of the
securitisation framework. It would notably imply finalising the establishment of a centralised
website collecting and disseminating detailed information of all securitisation instruments as
61
required by the Credit Ratings Agencies Regulation (CRA3, article 8.b)20
. Having this infrastructure
being operational in a reasonable period of time is key to ensure transparency. This option could
also include the development of additional templates to collect data of specific securitisation market
segments which are not yet covered by the CRA3 Regulation.
Under this option, other limited initiatives would also be envisaged such as implementing risk
retention rules in areas where this requirement is not yet in place (for example for mutual funds,
under UCITS) and adjusting the modalities of implementation (cf. EBA recommendations of
December 2014).
(a) Effectiveness - Fostering standardisation and addressing inconsistencies.
This option would help in reducing some regulatory inconsistencies and fixing a limited set of
issues such as impediments to the development of a centralised website for securitisation
instruments. The main assumptions beyond this approach are that i) the effects of past reforms (e.g.
Solvency II, Liquidity Coverage Ratio delegated acts, CRA3) have still to materialise and that ii)
the market will organise itself in the medium to long term to promote standardisation. However,
since the agreed reforms tackle only some sector-specific standardisation issues, their effect in
reducing inconsistencies across financial sectors and foster standardisation will remain very limited.
Administrative burden associated with current inconsistencies and lack of standardisation would
continue represting a considerable hindrance to a sustainable revival of securitisation. Thus, this
option scores poorly in achieving the standardisation objective.
(b) Efficiency and impact for stakeholders
This approach would imply limited costs for public finance. No budget has indeed been foreseen for
the setting up of the centralised ESMA securitisation website, casting doubts of the feasibility of
such website. Coordination costs for the private sector are likely to be significant, whereas potential
long terms benefits would remain uncertain. In addition, the administrative burden will remain
important as most of the current inconsistencies will not be tackled (cf. current inconsistencies
regarding originators' disclosure and investors' due diligence requirements as highlighted by the
ESAs Joint-Committee report). The expected impacts on stakeholders will remain limited. Most
investors/originators as well as supervisory authorities are concerned with existing overlaps and
inconsistencies across financial services regulations and sometimes within the same sector (e.g. on
disclosure/due diligence requirements, as highlighted in the Joint-Committee report). These
elements and the lack of standardisation would not be addressed by potential market initiatives.
6.5.2) Option 5.2 – Establishing a single consistent EU securitisation framework and
encouraging market participants to develop further standardisation
Under this option, the objective would be to develop a uniform set of criteria and rules
underpinning the numerous pieces of EU legislation dealing today with securitisation. This
approach would not be limited to 'STS securitisation' but encompass all securitisation instruments.
It would notably introduce a list of common definitions (e.g. securitisation, special purpose entities,
20
As of today, there are important impediments to be fixed in order to have this website effective. Specific efforts
should notably be performed to make this website economically viable as there is currently no funding to allow this
website to be developed.
62
originator…) applying across EU financial sectors. This single legal instrument covering all
securitisation instruments, would also include common provisions governing transparency,
disclosure, due diligence and risk retention requirements. This horizontal text would build on
existing EU rules and address as much as possible current inconsistencies and gaps across financial
sectors. Under this approach, corresponding provisions in sector-specific texts would be repealed
and cross-references to the horizontal act introduced. If the decision to introduce in a general
manner STS securitisation in EU law were to be taken, this single text would also lay down all STS
criteria for the EU financial sector. This common set of consistent rules would clarify and simplify
the EU regulatory framework for originators, investors and supervisors. This would help market
participants to launch further standardisation initiatives. Building on the positive outcome of the
Private Placement initiative, the EU could encourage efforts in two specific areas:
i) The development of standardised securitisation documentation - The reporting
requirements introduced by several central banks in Europe have been a major achievement to
standardise loan-level information on securitisation instruments. This has already contributed to
providing investors with many more elements on underlying risks. However, this initiative
could be complemented by further standardisation efforts. For instance the lack of
harmonisation in definitions within and across Member States is an impediment to assessing and
comparing instruments. Promising initiatives have been launched in certain Member States such
as in the Netherland for the RMBS segment (e.g. the Dutch Securitisation Association
initiative).
The Dutch example - The private sector Dutch Securitisation Association (DSA) has
developed a standard template for Dutch securitisation transactions in order to reduce
complexity and improve transparency. The DSA was established in October 2012 with the
aim of promoting the interests of both issuers of and investors in Dutch securitisation
transactions. In response to the decline in market activity, the originators of Dutch RMBS
transactions jointly started an initiative in 2010 to improve transparency and reduce
complexity of Dutch securitisation transactions. This initiative has resulted in the introduction
of a standard for Dutch RMBS transactions, in respect of both investor reporting and
documentation. According to Dutch authorities, this standardisation and the existence of a
template are appreciated by the Dutch financial sector.
ii) The development of standardised contracts/framework - Some stakeholders also suggest
developing standardised contracts (e.g. "master agreements") to be used as a reference for
securitisation issuances. This could constitute the main corpus of securitisation documentation
and be complemented by ad hoc provisions which may not be applied in all transactions or in all
Member States. Entities would only need to refer to such agreements instead of reproducing the
full list of provisions. Any deviations should be made immediately visible and should be
explained. The existence of material deviations from the standardised documentation would be
an indication as to whether the instruments comply or not with the "simplicity, transparency and
standardised" features. This initiative would rely on the private sector to develop these market
standards. Similar initiatives as for Private Placement or for Derivatives (ISDA protocol) could
be used as examples.
(a) Effectiveness - Fostering standardisation and addressing inconsistencies
This option would ensure legal and regulatory clarity for originators and investors. This would
simplify the current piecemeal approach in EU regulations for originators and investors and tackle
potential ambiguities generated by the current juxtaposition of sometimes almost identical – but not
63
identical - sets of rules in sector-specific regulations (e.g. on risk retention, disclosure). This
approach would also help in addressing some unnecessarily diverging rules across financial sectors
(e.g. on due diligence requirements for investors). This would also reduce risk arbitrage
opportunities and simplify monitoring by supervisory authorities monitoring. In addition, this
option would offer opportunities to address existing inconsistencies or implementing problems of
adopted legislation such as for the transparency website. This would allow increasing the
effectiveness of already agreed reforms and interventions in the field such as the Solvency II,
Liquidity Coverage Ratio delegated acts and CRA3.
This approach would rely on market participants and trade association to foster greater
standardisation of securitisation. This bottom-up approach will ensure greater consistency and
accuracy in the harmonisation process. It would also reflect the best practices and limit the risks of
introducing provisions which may have unintended consequences on the market. This approach has
been successful in the Netherlands for the RMBS market. However, the likelihood of reaching an
agreement at the EU level would be more challenging as national specificities and constraints (e.g.
contract, property and insolvency law) would be much more important. However, difficulties may
also be important for some market segments, RMBS being quite standardised instruments.
(b) Efficiency and impact for stakeholders
This approach would have a limited impact on public finance. This option will reduce
administrative burden for market participants mainly originators and investors as they would obtain
greater clarity on the applicable rules. It would also reduce their regulatory/compliance risks and it
would become easier to standardise securitisation on the basis of the harmonised framework.
Stakeholders generally support the simplification of the current EU framework for securitisation as
a single legal instrument could further contribute to the development of a robust securitisation
market.
As regards the standardisation of securitisation documentation, this approach may take longer as it
implies market participants will need to get organised and to agree on a consensual set of rules.
Incentives to develop these frameworks may also be limited in the short term. It would imply
administrative and legal costs for the private sector and the collective gains may take time to
materialise ("free rider" behaviour). However, among stakeholders there is a consensus on the
merits of encouraging further standardisation in the documentation of securitisations without
imposing a "straitjacket" framework which may not be suitable for certain segments of the market.
6.5.3 Option 5.3 – Adopting a comprehensive EU securitisation framework
This option would build on option 2 and be complemented by the adoption of an EU legal
framework harmonising Member States' frameworks for securitisation. It would be a wide-
encompassing initiative including notably common rules for the setting-up of the special purpose
vehicle, the modalities to transfer assets to SPVs and the rights and obligations of note holders.
While some Member States have legal frameworks for securitisation (cf. box and annex 8),
important national markets rely on contractual arrangements (e.g. UK, NL). Introducing this
approach would result in the adoption of an EU legal framework which may supersede current
national arrangements or be optional (i.e. a 29th
regime).
For investors, such an EU securitisation structure could reduce unnecessary burden in the due
diligence process and save time spent in analysing country-specific securitisation practices. In turn,
a harmonised framework may increase their confidence to invest in securitised instruments. The
64
objective would be to establish a structure that helps issuers as well as boosts investor appetite in
EU securitised products.
National regimes in the EU: A questionnaire was addressed to all Member States in the
context of the Financial Services Committee in March 2015 (see annex 8 for detailed
responses). Out of the 15 respondents:
 Nine Member States (Austria, Bulgaria, Croatia, the Czech Republic, Finland, Germany,
the Netherlands and the United Kingdom) indicated that they do not have in place specific
legislative provisions for securitisation besides the measures transposing the relevant EU
legal acts. However, in some countries guidance, regulations and guidelines relevant to
securitisation have been issued by regulators as well as market sponsored bodies.
 Seven Member States (France, Greece, Italy, Latvia, Portugal, Romania and Spain) noted
that they have established a legal framework regarding securitisation of debts.
(a) Effectiveness - ensuring differentiation of STS deals from more opaque and complex ones
This option would score very highly in achieving standardisation of securitisation markets in the
EU. It may contribute to the greater harmonisation of securitisation practices, help create economies
of scale, and provide access to securitisation for smaller lenders in Member States where
securitisation markets are underdeveloped.
(b) Efficiency and impact for stakeholders
This approach would have structural effects on some Member States especially those that do not
rely on a legal framework for securitisation. Unintended consequences could be important for some
local markets which remain active in some segments. A number of stakeholders see the theoretical
merits of such an initiative. However, most stakeholders have doubts as to the possibility of
developing an EU harmonised legal framework to support the establishment of securitisation
vehicles, the transfer of assets or the subordination among noteholders in the short to medium term.
The vast majority of stakeholders – especially from the financial sector - highlighted that while
standardisation efforts would be beneficial in the long term, regulators should not jeopardise
short/medium term benefits by delaying the whole initiative.
Stakeholders' view - The importance of increased standardisation is underlined by the
majority of respondents, who are in favour of a principle based approach that is compatible
with the differing national securitisation regimes. Market participants from both the issuing
and investing side of the business as well as supervisors think this is a key area of intervention
in order to revive the securitisation market.
More than two thirds of respondents (broadly spread across all categories) think that a single
EU securitisation instrument would contribute to the development of the EU securitisation
market. On the other hand, 7 respondents are not in favour of developing a single instrument,
while a number of other respondents (4) have a nuanced position pointing out that cross-
sectoral consistency and a level playing field are more important than creating a single EU
securitisation instrument.
Those stakeholders that do not support the development of a single instrument mainly point
out that the requirements in different sectors are of a different nature (e.g. prudential
requirements, diversity assets, risk profile assets and their duration,); that a single instrument
would require harmonisation of property/contract law and would run into legal and taxation
issues, that the market already knows the existing Member State framework very well and
65
6.5.4) Impact summary and conclusion
Option 5.1 would leave the administrative burden associated with current inconsistencies and lack
of standardisation across financial sectors unchanged. Establishing a single and consistent EU
securitisation framework (option 5.2) would instead increase legal certainty for originators and
investors and reduce current regulatory inconsistencies. This would be achieved will limited impact
on public finances. Option 5.3 would potentially achieve higher standardisation than option 5.2, and
have similar effects on legal clarity and the reduction of inconsistencies. However, progress on key
files such as insolvency laws and taxation regimes is likely to be slow and would depend chiefly on
Member States actions, with uncertainty on the scope, depth and timing of the initiative. Such
uncertainty is indeed shared by most stakeholders (public and private) that responded to the
consultation.
Establishing a clear and consistent EU legal framework for securitisation (option 5.2) would ensure
greater clarity for investors and originators. Having this horizontal EU instrument in place would
aid market participants in launching initiatives to further standardise securitisation frameworks
especially for harmonising securitisation documentation. This approach is seen as more flexible and
practicable than the third option, as the final outcome is not depending on standardisation in other
complex areas such as insolvency law and taxation regimes.
66
Option Effectiveness Efficiency Impact on
Stakeholders
5.1 No further
action at EU
level
(=) Limited effects in
reducing
inconsistencies accross
financial sectors
(=) No impact on
standardisation in
ST/MT
(=) No additional costs
on public finances
(=) Limited impacts on
stakeholders.
Administrative burden
associated with current
inconsistencies and
lack of standardisation
would remain
5.2 Establishing a
single and
consistent EU
securitisation
framework and
encouraging
market
participants to
develop further
standardisation
(++) Would increase
legal clarity for
originators and
investors and reduce
current regulatory
inconsistencies
(+) Foster
standardisation by
relying on market
participants' initiatives
(=) Limited impact on
public finances
(+) Standardisation
would take longer as
market participants are
left to organise
themselves
(++) Positive impacts
on investors and
originators with
reduced administrative
burden and greater
flexibility to steer the
standardisation
process.
5.3 Adopting a
comprehensive
EU
securitisation
framework
(++) Same effect as
option 2 on legal
clarity and reduction of
inconsistencies.
(++) Would introduce
a high degree of
standardisation of the
28 securitisation
frameworks
throughout the EU
(=) Limited impact on
public finances
(-) Uncertainty of the
standardisation aspects
as progress depends on
other files (e.g.
insolvency law,
taxation regimes)
(=)Lenghty discussions
would generate
regulatory uncertainty
(-) Potential negative
impacts on Member
States with well-
functionning
securitisation markets
(+) Positive impact on
Member States with no
national framework for
securitisation
67
7) THE RETAINED POLICY OPTIONS AND INSTRUMENT
7.1. The retained policy options
Based on the analysis above, the first objective (to differentiate simple, transparent and standardised
securitisation products from more opaque and complex ones) is best fulfilled by a combination of
options 1.3, 2.2, 3.2, 4.2 and 4.5. These are therefore the retained options. These options together
should introduce an immediately recognisable STS product in EU securitisation markets. Backed by
an efficient compliance mechanism, STS products will be trusted by investors and can thus provide
the legal basis for an amended capital treatment. This will indeed reflect more closely the risk
profile of STS products, thereby allowing investors and issuers to reap the benefits of simple,
transparent and standardised structures.
The most effective and efficient policy option to achieve the second objective (to foster the spread
of standardisation of processes and practises in securitisation markets, tackle regulatory
inconsistencies) is option 5.2, which is therefore retained. Establishing a single and consistent EU
securitisation framework and encouraging market participants to develop further standardisation
will increase legal clarity for originators and investors and reduce current regulatory
inconsistencies. This will in turn positively impact investors' and originators' administrative burden.
7.2. The choice of the instrument
The proposed legislative measures aim in particular at creating a sustainable market for Simple,
Transparent and Standardised (STS) securitisation products. To this end the legislative measure will
stipulate the criteria to be met by securitisation products in order to be considered STS, create a
specific prudential treatment for these products and harmonise existing provisions in EU law on
securitisation related to risk retention, disclosure and due diligence.
STS securitisation products will have to meet a number of criteria that should be uniform across the
EU. Comparable criteria with a more limited scope are currently in place in two delegated
regulations adopted by the Commission (the LCR and Solvency II delegated acts). The prudential
treatment of securitisation instruments is laid down in the Capital Requirements Regulation (CRR)
and the SII Delegated Act. Finally, the substantial rules on disclosure, risk retention and due
diligence are laid down in a number of different EU regulations (CRR, Solvency II Delegated Act,
the CRA delegated Regulation and the AIFM delegated Regulation).
Article 114(1) TFEU provides the legal basis for a Regulation creating uniform provisions aimed at
the functioning of the internal market. STS securitisation products, their prudential treatment and
the harmonisation of the existing provisions in EU law on securitisation related to risk retention,
disclosure and due diligence will underpin the correct and safe functioning of the internal market. A
directive would not lead to the same results, as implementation of a Directive might lead to
divergent measures being adopted at national level, which are likely to lead to distortion of
competition and regulatory arbitrage. Moreover, the EU provisions already in place in this area have
been adopted in the form of Regulations.
The creation of this legal framework will require the adoption of a number of legal acts. First, a
securitisation Regulation that will create uniform definitions across financial sectors and
harmonised rules on risk retention, due diligence and disclosure. The same regulation will stipulate
68
the criteria for STS securitisation for all financial sectors. This regulation should also repeal
provisions in sectoral legislation that will become superfluous due to the introduction of the
securitisation regulation. Secondly, legal acts for a more risk-sensitive prudential treatment of
securitisation for banks and insurers will have to be adopted. For banks the current prudential
framework is laid down in CRR and for insurers in the Solvency II delegated act. For the banking
treatment a proposal for amending CRR should be adopted, while for insurers the Solvency II
delegated act will be amended to revise the prudential treatment once the new securitisation
regulation enters into force.
7.3. The impact on SMEs
The policy options chosen should have several positive effects on SME financing (see Annex 6 for
a detailed analysis). First of all, the inclusion of ABCP in the STS framework, with consequential
improvement in their capital treatment, will foster the growth of this important source of short-term
SME financing.
Secondly, the initiative should provide banks with a tool for transferring risk off their balance
sheets. This in turn means that banks should free more capital that can then be used to grant new
credit. While in recent years banks have tended to use their resources to buy government bonds and
other debt rather than providing new credit to firms and households, this is more likely to happen
now in an environment of minimal (if not negative) interest rates paid by government bonds and
similar assets. As a consequence, freed capital should be increasingly used by banks to provide new
credit to households and firms, most of which are SMEs in the EU.
Finally, by introducing a single and consistent EU securitisation framework and encouraging
market participants to develop further standardisation, the initiative should reduce operational costs
for securitisations. Since these costs are higher than average for the securitisation of SME loans, the
fall should have an especially beneficial effect on the cost of credit to SMEs. Several respondents to
the Commission's public consultation on securitisation have highlighted the importance of
documentation and product standardisation to render SME securitisation more economically viable
(see Annex 6).
7.4. Social impact
To the extent that the proposed policies will create a new channel of financing for the EU economy,
one that is less dependent on banking sector conditions, they will reduce the effect of financial
crises on credit provision and thus on growth and employment. The social costs of such crises will
be reduced. Furthermore, by fostering the spread of securitisation structures whose risks can be
analysed, understood and priced, the policy options will foster a securitisation market conductive to
better funding of the economy in a context of financial stability.
7.5. Environmental impact
Nothing would suggest that the proposed policy will have any direct or indirect impacts on
environmental issues.
7.6. Impact on third countries
As described in section 1.4, the work on securitisation has an important international angle.
International standards to identify simple, transparent and standardised securitisations are being
developed by a Task Force led by the Basel Committee on Banking Supervision (BCBS) and the
International Organisation of Securities Commissions (IOSCO) and are close to finalisation. The
69
criteria to be adopted in the EU should be based on this international standard, but will be more
operational.
As described in section 3.1.1 there is a strong consensus among European and international
supervisors, regulators, central banks and market participants that the post-crisis reputation of
securitised products issued in Europe was severely tarnished by practices and events taking place in
the US: US securitisation products performed far worse than EU products.
At this point of time it is not clear whether other jurisdictions will implement STS standards in their
legal frameworks. The US, as the largest securitisation market in the world, requires special
attention, because EU investors invest in these US products and are thus interested in their
prudential treatment.
The STS criteria will be based upon international standards developed by BCBS-IOSCO and would
in principle allow issuers of securitisation products from third countries to comply with the criteria
and thus be qualified as STS securitisation. The attestation by originators that the products comply
with the STS criteria will be complemented by a certification by independent third-parties. Those
third parties should be supervised by a public authority from the EU. Where third countries
implement the criteria in their legal framework, equivalence could be considered for their rules and
the certification of STS products.
The preferential prudential treatment offered to EU bank and insurers investing in STS
securitisation should also be open for non-EU products, which would ensure that no barriers are
created for third countries products. As regards the risk retention, due diligence and disclosure rules
these would be based on existing EU law provisions.
The new STS framework may moreover provide third country investors with an interesting category
of investments in which to invest, while for third country regulators it might be an interesting
avenue to further develop their own legal frameworks.
70
8) MONITORING AND EVALUATION
Ex-post evaluation of all new legislative measures is a priority for the Commission. Evaluations are
planned about 4 years after the implementation deadline of each measure. The forthcoming
Regulation will also be subject to a complete evaluation in order to assess, among other things, how
effective and efficient it has been in terms of achieving the objectives presented in this report and to
decide whether new measures or amendments are needed.
In terms of indicators and sources of information that could be used during the evaluation, data on
the price and characteristics of securitisation deals prevailing in the market will be obtainable from
the European DataWarehouse, which already covers the vast majority of the market and whose
quality is checked preiodically by the ECB. Private financial data providers such as Bloomberg or
Reuters may also be useful.
The most important indicator for the achievement of the first objective (Differentiate simple,
transparent and standardised securitisation products from more opaque and complex ones) will be
the difference in the price of STS versus non-STS products. If the objective is achieved, this
difference should increase from today, with STS products being more highly valued and thus more
highly paid than non-STS ones by investors. Of course, this could and should trigger an increase in
the supply of STS products, reason for which the achievement of this objective will also be
measured with the growth in issuance of STS products versus non-STS ones.
The second objective (Foster the spread of standardisation of processes and practises in
securitisation markets, tackle regulatory inconsistencies) will instead be measured against three
criteria: 1) STS products' price and issuance growth (since a decline in operational costs should
translate in higher issuance and/or higher prices for STS products), 2) The degree of standardisation
of marketing and reporting material and finally 3) feedback from market practitioners on
operational costs' evolution (hard data on this may not be publicly available).
71
ANNEX 1 – Glossary
ABCP: Asset backed commercial paper. It is a form of commercial paper (short-term credit to
companies) that is collateralized by other financial assets.
ABS: Asset backed security. A financial security backed by a loan, lease or receivables against
assets other than real estate and mortgage-backed securities.
AFME: Association for financial markets in Europe
AIFMD: Alternative Investment Fund Managers Directive
BCBS: Basel committee for banking supervision
BOE: Bank of England
CDO: Collateralised debt obligation. A structured financial product that pools together cash flow-
generating assets– such as mortgages, bonds and loans – that are debt obligations themselves.
CDS: Credit default swap
CLO: Collateralised loan obligation. A security backed by a pool of debt, usually corporate loans.
CMBS: Commercial mortgage backed security. A type of mortgage-backed security that is secured
by the loan on a commercial property.
CRA: Credit rating agency
CRA3: Credit rating agency directive 3
CRR: Capital requirements regulation and directive
EBA: European banking authority
ECB: European central bank
EIF: European investment fund
ERBA: External rating based approach of the Basel framework for bank prudential capital regime
adopted in December 2014
GDP: Gross domestic product
IG: Investment grade. A rating that indicates that a bond has a relatively low risk of default. 'AAA'
and 'AA' (high credit quality) and 'A' and 'BBB' (medium credit quality) are considered investment
grade.
IMF: International monetary fund
IOSCO: International Organization of Securities Commissions
IRB: Internal rating based approach of the previous Basel framework for bank prudential capital
regime
IRBA: Internal rating based approach of the Basel framework for bank prudential capital regime
adopted in December 2014
LCR: Liquidity coverage ratio
72
MBS: Mortgage backed security. A type of asset-backed security that is secured by a mortgage or
collection of mortgages
PCS: Prime collateral security
RMBS: Residential mortgage backed security
SA: Standard approach of both the pre- and post-2014 Basel frameworks for bank prudential capital
SC: Structured credit
SF: Structured finance
SME: Small and medium enterprise
SPV: Special purpose vehicle. A "bankruptcy-remote entity", usually a subsidiary company, with
an asset/liability structure and legal status that makes its obligations secure even if the parent
company goes bankrupt.
STS: Simple, transparent and standardised
TSI: True sale international
UCITS: Undertakings for the collective investment in transferable securities
WBS: Whole business securitisation. A specific type of synthetic securitisation.
73
ANNEX 2 – Stylised facts on securitisation markets
Chart 1: US securitisation issuance Chart 2: European securitisation issuancea
Source: SIFMA Source: SIFMA, Comission Services
Chart 3: US securitisation outstanding Chart 4: European securitisation outstanding
Source: SIFMA Source: SIFMA
Source: Fitch Ratings Source: Fitch Ratings
a
includes retained issuance
Chart 5: Cumulative losses for 2000-2014 securitisation
issuances, by region and product typeb
Chart 6: Cumulative losses for EMEA2000-2014
securitisation issuances, by vintageb
b
Fitch rated deals only; EMEA = Europe, Middle East, Africa; APAC = Asia and Pacific. ABS = Asset Backed securities; CMBS = Commercial
Mortgage Backed Securities; RMBS = Residential Mortgage Backed Securities; SC = Structured Credit.
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
USD billion
Agency MBS Non-Agency MBS ABS
0
2,000
4,000
6,000
8,000
10,000
12,000
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
USD billion
Agency MBS Non-Agency MBS ABS
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
0
5
10
15
20
25
30
ABS
CMBS
RMBS
SC
ABS
CMBS
RMBS
SC
ABS
CMBS
RMBS
SC
US EMEA APAC Total
EUR billion
% losses
Loss
realised (%)
Loss
expected (%)
Original balance (EUR bn)
0
100
200
300
400
500
600
0.0
0.5
1.0
1.5
2.0
2.5
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
EUR billion
% losses
Loss
realised (%)
Loss
expected (%)
Original balance (EUR bn)
0
500
1,000
1,500
2,000
2,500
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
EUR billion
RMBS CDO CMBS Mixed
SME ABS WBS
0
100
200
300
400
500
600
700
800
900
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
EUR billion
WBS SME RMBS CDO ABS CMBS
74
ANNEX 3 – BCBS-IOSCO survey on "Impediments to sustainable
securitisation markets"21
21
Survey conducted in summer 2014. More details can be found in the original document: http://www.bis.org/bcbs/publ/d304.pdf
75
ANNEX 4 – STS criteria in the LCR and Solvency II delegated acts
The criteria to identify highly transparent, simple and standardised securitisation instruments set out
in the Solvency II and Liquidity Coverage Ratio delegated acts are based on recommendations from
the European Insurance and Occupational Pensions Authority (EIOPA) and a detailed analysis of
the liquidity of different instruments from the European Banking Authority (EBA).22
These criteria do not include any risk retention requirements (i.e. requirements that the originator,
sponsor or original lender should retain a material net economic interest in the transaction). This is
because risk retention requirements are already implemented in EU law and apply across the board,
to all types of securitisation instruments (whether high-quality or not) held by insurance
undertakings23
and credit institutions24
.
As set out in paragraph 1 below, most criteria are common to the Solvency II and LCR delegated
acts. However, as the purpose is different in each act – the Solvency II standard formula concerns
capital requirements, while the LCR delegated act prescribes rules for the assets held by banks in
their liquidity buffer – some criteria are specific to the LCR delegated act, to ensure that high-
quality securitisation instruments are also highly liquid.
1. Requirements common to the Solvency II and LCR delegated acts
1.1. Maximum seniority
The tranche must be the most senior in the securitisation transaction, and it must remain so at all
times, even after events that may impact the relative seniority of tranches, such as the delivery of an
enforcement or acceleration notice. This criterion ensures that the credit quality of the tranche is
indeed enhanced as compared to the credit quality of the entire pool of underlying exposures.
Maximum seniority is among the more relevant features justifying a prudential treatment that is
aligned to the underlying exposures.
1.2. Homogeneous eligible underlying exposures
Homogeneity in the type of underlying exposures increases soundness, simplicity and transparency
(in particular, loan-level reporting is easier to produce and interpret). All underlying exposures must
belong to only one of the following types:
Residential loans: securitisation positions may be backed by loans secured by a first-ranking
mortgage and/or by fully-guaranteed residential loans as referred to in Article 129(1)(e) of the
Capital Requirements Regulation. In both cases, the pool of loans must feature on average a loan-
to-value ratio lower than or equal to 80%. In the case of mortgage loans only, it is possible to
derogate from this loan-to-value requirement, provided that instead, the national law of the Member
State where the loans are originated provides for a maximum loan-to-income ratio not higher than
22
This analysis examined the liquidity of some asset backed securities against a number of metrics. However, this work was not
sufficient for EBA to recommend the inclusion of ABS (apart from RMBS) as HQLA for the purposes of LCR.
23
By virtue of Article 135(2) of Directive 2009/138/EC (Solvency II).
24
By virtue of Article 405 of Regulation (EU) No 575/2013 (CRR).
76
45%, and each loan in the pool complies with this limit. The relevant national law must be
communicated to the Commission, and EBA and/or EIOPA.
Loans, leases and credit facilities to undertakings, in particular SMEs: securitisation positions may
be backed by commercial loans, leases and credit facilities to undertakings to finance capital
expenditures or business operations other than the acquisition or development of commercial real
estate, provided that at least 80% of the borrowers in the pool in terms of amount are small and
medium-sized enterprises at the time of issuance of the securitisation.
Auto loans or leases: securitisation positions may be backed by a loans or leases for the financing of
a broad range of vehicles. Such loans or leases may include ancillary insurance and service products
or additional vehicle parts, and in the case of leases, the residual value of leased vehicles25
. All
loans and leases in the pool shall be secured with a first-ranking charge or security over the vehicle
or an appropriate guarantee in favour of the securitisation special purpose vehicle.
Consumer loans and credit card receivables: securitisation positions may be backed by loans and
credit facilities to individuals for personal, family or household consumption purposes. As a
consequence of this closed list of eligible underlying exposures, commercial mortgage backed
securities (CMBS) and collateralised debt obligations (CDOs)26
are excluded. This is justified given
their poorer performance, as shown in EIOPA's advice and other studies of CMBS.27
No re-securitisations, no synthetic securitisations: re-securitisations are explicitly excluded, as they
are typically complex and less transparent structures, where the cascading of investor losses is very
difficult to understand due to re-tranching.
The same goes for synthetic securitisations, where the underlying exposures are not transferred to
the special purpose vehicle. Instead, the transfer of risk is achieved by the use of credit derivatives
or guarantees, while the exposures being securitised remain with the originator. The transfer of the
assets to be securitised ensures that securitisation investors have recourse to those assets should the
Securitisation Special Purpose Entity (SSPE) not fulfil its payment obligations. Such recourse
cannot be granted in synthetic transactions, due to the fact that only the credit risk associated with
the underlying assets, rather than the ownership of such assets, is transferred to the SSPE. Such a
structure also adds counterparty risk on derivatives or guarantees, and hampers investors' rights to
the proceeds of the underlying exposures. In addition, most synthetic structures add to the
complexity of the securitisation in terms of risk modelling.
1.3. Restricted use of derivatives and transferable financial instruments
Derivatives can only be used for hedging currency and interest rate risk. This also excludes the
synthetic securitisations described in the above paragraph. The pool of underlying exposures must
not include transferable financial instruments (this effectively means CDOs are excluded), except
25
Auto loans or lease securitisations including residual values must however comply with paragraph 0 below, which prevents the repayment of the
securitisation depending predominantly on the sale of the vehicles.
26
CDOs are also excluded by virtue of the criteria in point 0 because their underlying exposures usually include transferable debt instruments, such
as non-investment grade bonds.
27
See page 121 of EIOPA's technical report (2013).
77
financial instruments issued by the securitisation special purpose entity itself, in order to
accommodate master trust structures.
1.4. 'True sale' and absence of severe 'claw back' provisions
The transfer of the underlying exposures to the securitisation special purpose vehicle must be
sufficiently certain from a legal point of view:
 the transfer must be enforceable against any third party and the underlying exposures be
beyond the reach of the seller (originator, sponsor or original lender) and its creditors,
including in the event of the seller's insolvency ('true sale' requirement);
 the transfer of the underlying exposures to the SSPE may not be subject to any severe
clawback provisions in the jurisdiction where the seller is incorporated because such
provisions induce legal insecurity on investors' rights.
1.5. Continuity provisions for the replacement of servicers, derivative counterparties and
liquidity providers
The underlying exposures must have their administration governed by a servicing agreement which
includes servicing continuity provisions to ensure, at a minimum, that a default or insolvency of the
servicer does not result in a termination of servicing. Where applicable, the documentation
governing the securitisation must also include continuity provisions to ensure, at a minimum, the
replacement of derivative counterparties and liquidity providers upon their default or insolvency.
The aim of these two criteria is to mitigate credit risk with different counterparties involved in the
securitisation transaction, whose default or insolvency could jeopardise the smooth running of the
transaction.
1.6. Absence of credit-impaired obligors
At the time of issuance of the securitisation or when incorporated in the pool of underlying
exposures at any time after issuance, the underlying exposures must not include exposures to credit-
impaired obligors (or where applicable, credit-impaired guarantors). The definition of credit-
impaired obligors or guarantors is both backward-looking (e.g. the obligor has declared bankruptcy,
or has recently agreed with his creditors to a debt dismissal or reschedule, or is on an official
registry of persons with adverse credit history) and forward-looking (e.g. the obligor has a credit
assessment by an external credit assessment institution or has a credit score indicating a significant
risk that contractually agreed payments will not be made compared to the average obligor for this
type of loans in the relevant jurisdiction). This criterion effectively excludes 'sub-prime' loans from
the high-quality securitisation category.
1.7. Absence of loans in default
At the time of issuance of the securitisation or when incorporated in the pool of underlying
exposures at any time after issuance, the underlying exposures must not include exposures in
default, as defined in the banking prudential rules in Article 175 of Regulation (EU) No 575/2013.
This criterion ensures that the securitisation does not contain loans or leases already in default when
the securitisation transaction begins or when new exposures are transferred to the SSPE.
1.8. Reliance on the future sale of assets securing the exposures
78
The repayment of the securitisation position must not be structured to depend predominantly on the
sale of assets securing the underlying exposures; however, this shall not prevent such exposures
from being subsequently rolled over or refinanced.
The point of this criterion is to exclude transactions where the ability of the SSPE to repay the
securitisation notes is subject to an unacceptable level risk of risk, due to overreliance on the
proceeds of the sale of assets securing the underlying exposures such as used cars when an auto
lease securitisation transaction matures. While recognising that auto lease securitisations including
residual values may be eligible as high quality (see paragraph 0), the repayment of those
securitisations should not rely predominantly on the future realisation of those residual values.
1.9. Pass-through requirement for non-revolving structures
Cash proceeds from the underlying exposures should flow in a simple and transparent way to
investors. Structures where a significant amount of cash is retained within the SSPE (for example,
securitisations with bullet payments) would not comply with this pass-through profile and,
therefore, are excluded.
1.10. Early amortisation provisions for revolving structures
Where the securitisation has been set up with a revolving period, the transaction documentation
provides for appropriate early amortisation events, which shall include at a minimum all of the
following:
 a deterioration in the credit quality of the underlying exposures;
 a failure to generate sufficient new underlying exposures of at least similar credit quality;
 the occurrence of an insolvency-related event with regard to the originator or the servicer.
High-quality securitisations should ensure that, in the presence of a revolving period mechanism,
investors are sufficiently protected from the risk that principal amounts may not be fully repaid.
Sufficient protection should be ensured by the inclusion of provisions which trigger amortisation of
all payments at the occurrence of adverse events such as those mentioned in the criterion.
1.11. At least one payment at the time of issuance
At the time of issuance of the securitisation, the borrowers (or, where applicable, the guarantors)
must have made at least one payment. This is intended to exclude securitisation backed by newly-
originated loans. However, this requirement would not be proportionate in practice for the
securitisation of credit card receivables. Hence there is a derogation for this type of securitisation.
1.12. Absence of self-certified loans
In the case of securitisations backed by residential loans, the pool of loans must not include any
loan that was marketed and underwritten on the premise that the loan applicant or, where applicable
intermediaries, were made aware that the information provided might not be verified by the lender.
This requirement is essential to exclude loans where the applicant and, where applicable,
intermediaries, might be incentivised to misrepresent essential information, e.g. to overstate their
income. This criterion also helps exclude 'sub-prime' lending.
1.13. Assessment of retail borrowers' creditworthiness
79
In the case of securitisations where the underlying exposures are residential loans, auto loans or
leases, consumer loans or credit facilities, the creditworthiness of the borrowers must be assessed
thoroughly, in accordance with the Mortgage Credit Directive (Directive 2014/17/EU) or the
Consumer Credit Directive (Directive 2008/48/EC) or equivalent rules in third countries, where
applicable. This requirement effectively excludes flawed securitisation business models, relying on
unsound underwriting practices.
1.14. Transparency and disclosure of loan-level data
Where either the originator or sponsor of a securitisation is established in the Union, they must
comply with transparency requirements set out in the Capital Requirement Regulation.
Furthermore, in accordance with Article 8b of Regulation (EU) No 1060/2009, the European
Securities and Markets Authority (ESMA) will in 2017 set up a website centralising the publication
of information regarding structured finance instruments, i.e. securitisations. Through this website,
the issuer, originator or sponsor of the securitisation will be able to publish information on the
credit quality and performance of the underlying assets of the structured finance instrument, the
structure of the securitisation transaction, the cash flows and any collateral supporting a
securitisation exposure as well as any information that is necessary for investors to conduct
comprehensive and well-informed stress tests on the cash flows and collateral values supporting the
underlying exposures.
Where neither the issuer, nor the originator, nor the sponsor of a securitisation is established in the
Union, comprehensive loan-level data in compliance with standards generally accepted by market
participants must be made available to existing and potential investors and regulators at issuance
and on a regular basis.
1.15. Listing requirement
Both the Solvency II and LCR delegated acts require that high-quality securitisation positions
should be listed on a regulated market/recognised exchange, or admitted to trading on another
organised venue, with a robust market infrastructure. The drafting of this criterion could not be
strictly aligned in the two acts because of legal constraints stemming from differences in the
corresponding 'level 1' legislation28
. In addition, under the LCR delegated act, securitisation
positions may be deemed highly liquid if they are tradable on generally accepted repurchase
markets. This was not included in the Solvency II delegated act as repurchase transactions to
generate liquidity are not typical for insurers.
1.16. Credit quality
Both the Solvency II and LCR delegated acts require that high-quality securitisation positions
receive a minimum external credit assessment, on issuance and at any time thereafter. The
minimum external credit assessment is one of the elements for high-quality securitisation positions
and does not constitute sole and mechanistic reliance, in accordance with the principles of the
Financial Stability Board for reducing reliance on CRA ratings29
.
28
On the one hand, the Solvency II Directive uses the concept of a "regulated market" as defined in Article 13(22). On the other hand, the Capital
Requirements Regulation uses the concept of a "recognised exchange" as defined in Article 4(1)(72). While the latter is also based on the concept of
a "regulated market", the CRR definition also includes clearing mechanism requirements.
29
Available at: http://www.financialstabilityboard.org/publications/r_101027.pdf
80
In Solvency II, the position should be investment grade, i.e. be assigned to credit quality step 3 at
least. In order to ensure that the securitisation position is highly liquid, the LCR delegated act
requires that it is assigned to credit quality step 1. The mappings of external credit assessments onto
the respective scales of credit quality steps applicable in banking and insurance legislation is
prepared by the Joint Committee of the European Supervisory Authorities.
2. Requirements specific to the LCR delegated act
The LCR delegated act includes all the requirements for high quality securitisations set out in the
Solvency II Delegated Act but adds some additional requirements specifically for liquidity
purposes. It would not be justified to assume that all high quality credit securitisations would be
sufficiently liquid in a market stress scenario.
2.1. Minimum issue size
The larger the issue size, the deeper the secondary market. Therefore, the LCR delegated act
provides for a minimum issue of EUR 100 million.
2.2. Maximum weighted average time to maturity
Securitisations with a short-weighted average life and high prepayments have proven to enjoy good
liquidity during periods of stress, as they convert into cash in a short time span (this is the case of
auto loan ABSs, for example). Accordingly, the LCR delegated act will only recognise positions in
securitisations where weighted average time to maturity is less than 5 years, assuming call or certain
prepayment options are exercised.
81
ANNEX 5 - Synthetic securitisation
This annex is aimed at explaining the basics of synthetic securitisation, its benefits and risks.
 What is a securitisation process?
In its most basic form, securitisation involves two steps. Firstly a company (the "originator") with
loans or other income-producing assets—identifies assets it wants to remove from its balance sheet
and pools them into what is called the reference portfolio. It then sells this asset pool a special
purpose vehicle (SPV), specifically set-up to purchase the assets and realize their off-balance-sheet
treatment for legal and accounting purposes. Secondly, the issuer finances the acquisition of the
pooled assets by issuing tradable, interest-bearing securities that are sold to capital market investors.
The investors receive cash flows generated by the reference portfolio.
Source: IMF 200830
 What is a synthetic securitisation?
In synthetic structures there is no transfer of ownership of the underlying assets/loans from the
originating banks to the securitisation vehicle. Instead, a derivative contract, such as a credit
default swap (CDS), is used to gain credit risk exposure to a specified pool or portfolio of
underlying assets.
Synthetic structures provide the issuer with capital relief (i.e. lower capital charges), as the
credit risk of the assets underlying the securitisation (e.g. bank loans to SMEs) is transferred to a
third party with the CDS contract. Synthetic structures do not provide funding however, as the
assets (in the previous example, SME loans) remain on the issuer's balance sheet, they are not sold.
That is a main difference with "true sale" securitisation, which provides both credit risk transfer and
funding for the issuer.
30
http://www.imf.org/external/pubs/ft/fandd/2008/09/pdf/basics.pdf
82
 What are the potential risks of synthetic securitisation?
A synthetic structure introduces more complexity and uncertainty in the transactions. This type of
structure creates an additional counterparty credit risk, on top of a "true sale" securitisation, that
must be managed. The nature of this additional counterparty risk is dependent on the way it is
structured (e.g. risks attached to the entities providing protection via the CDS, nature of the
collateral).
Source: True Sale International 31
A key additional risk lies in the legal drafting of the derivative used to mimic the asset transfer from
the originator to the issuer of the securitisation. Such drafting is usually not standardised and
defines what risks are transferred and under what conditions. This introduces legal uncertainty and
risks that must be taken into consideration. By contrast, a "true sale" securitisation has a clear
and standardised form of risk transfer, as the asset underlying the securitisation are effectively sold
to the issuer of such securitisation.
Synthetic structures were abused in order to reduce prudential capital requirements, rather than
used in order to obtain genuine transfer of risk. In the run-up to the 2007-2008 financial crisis, there
was an emergence of "arbitrage structures" that generated important losses for investors. The US
Financial Crisis Inquiry Report concluded that "the synthetic CDOs proliferated, in part because it
was much quicker and easier for managers to assemble a synthetic portfolio out of pay-as-you-go
credit default swaps than to assembly a regular cash CDO out of mortgage backed securities (…)
and they tended to offer the potential for higher returns on the equity tranches." When the bubble
burst, hundreds of billions of dollars in losses in mortgages and mortgage-related securities shook
markets as well as financial institutions. The synthetic structuring, through derivatives, magnified
these losses. There are famous examples such as the deal arranged by Goldman Sachs called
ABACUS 2007-AC1. The German bank IKB lost almost all of its $150 million investment in this
instrument.
In Europe too, synthetic structures generated losses that are a multiple of those generated by
simple and transparent structures. Based on historical data, the probability of a synthetic CDOs
31
http://www.true-sale-international.de/en/abs-im-ueberblick/wasistabs/
83
defaulting is 19 times higher than that of simple structures such as RMBS and credit cards ABS
(see table below, from AFME).
Table A.1 – losses generated by EU term securitisations 2007 to 2013
Source: AFME
Simpler synthetic structures such as those issued by the EIF generated losses of 0.8% on average.
This level is identical to that of average EU structured credit products (see Figure 6 in the main
text). While these losses were considerably smaller than those of their US counterparts, structured
credit and EIF synthetics have nonetheless underperformed traditional securitisations
considerably. Traditional EU securitisations such as RMBS and ABS generated losses of 0.0% and
0.1% respectively. The available data does not support the introduction of synthetics in the STS
scope.
 What is the current state of play in the policy discussions?
The financial sector globally agrees that more work is needed in order to develop STS criteria for
synthetic securitisation. They acknowledge the political sensitivity of this segment due to the
financial crisis and the higher complexity of such products, both requiring caution. For instance the
main private body developing a label for high quality securitisations - Prime Collateralised
Securities (PCS) - has excluded synthetic securitisations from their list of eligible securitisation
instruments. They are likely to develop criteria but only in the medium-term.
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Synthetics are neither eligible for ECB/BoE refinancing operations. It follows that central banks
do not accept synthetics are safe collateral against which to lend funds to banks. Also, the ECB
excludes synthetics from the list of assets purchasable under its ABS Purchase Programme.
No work on identifying criteria for simple and transparent synthetics has been carried out by
international organisations. Neither the BCBS-IOSCO nor the EBA did include synthetics in the
scope of simple, transparent and standardised securitisation. They do not plan to develop criteria to
identify simple for synthetics in the near future.
Two MS with sizeable securitisation markets are reluctant to progress quickly. A few other MS are
more open to integrate synthetics but only at a later stage, recognising that further work is needed if
there is to be properly defined additional specific criteria for synthetics.
An overwhelming majority of respondents to the Commission's public consultation on
securitisation agreed with the exclusion of synthetic products from the STS scope. Notably, the
majority of industry associations and private companies also agreed. A detailed breakdown of
responses by category is presented in the table below. Under the column "YES" is presented the
percentage of respondents who agreed on the criteria excluding synthetics while under "NO" is the
percentage that argued against the exclusion.
Table A.2 – Percentage of respondents agreeing with STS criteria excluding synthetic
securitisations
Category YES NO
Private individual 75% 25%
Company, SME, micro-enterprise, sole trader 68% 32%
Consultancy, law firm 100% 0%
Legislators, Regulator and Supervisor 85% 15%
Industry association 73% 27%
Non-governmental organisation 100% 0%
Other 40% 60%
TOT 74% 26%
Source: European Commission
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ANNEX 6 - Financing SMEs with the securitisation tool
State of play
Recent changes in the regulation for securitisation include preferential rules for SME securitisation.
First, the (LCR) Delegated Act allows SMEs securitised products to be included in the liquid asset
pool for the LCR. This should support financing of SMEs. However, only senior tranches are
eligible, which implies that the amount of SME ABS to be included in the LCR pool will be small.
Secondly, the Delegated Regulation for Solvency II includes a definition of high-quality
securitisation (simple, sound, transparent, comparable) with a more favourable capital treatment
including loans to SMEs as admissible underlying asset (Article 177(2)(h)(iii) of the Delegated
Regulation). Whether or not that's enough to significantly change the extent of investment in SMEs
by insurers will also depend on relative yields to other products.
Promotional banks have supported the development in SME ABS in their countries and more
generally in Europe through special programs. KFW, for example, was very successful with the
PROMISE infrastructure for SME securitisation (72 transactions with a volume of € 126bn from
2000 to 2012). However, the majority of transactions under this scheme are currently short term
ABS (ABCPs) rather than SME ABS.
While beneficial, the LCR and Solvency II rules are unlikely to fight stigma and revive the market
for securitisations alone (see section 6.1.1). The same stands true for SME securitised products.
Regarding promotion banks' schemes, while these have met some success, they have not been able
to counteract the decline seen in SME securitisation issuance since the crisis. It appears that the
problems that have affected securitisation markets in general, analysed in the previous chapter, have
prevented such schemes to reach their full potential.
Introducing STS and a risk-sensitive prudential framework
Differentiating between STS products and the rest, and applying such differentiation in the capital
treatment applied to securitisations, the Commission's initiative would allow the securitisation
technique to perform both its funding and risk transfer functions. This would help banks to free up
capital currently needed to fund existing credit exposures. In this way, banks would be able to
extend new credit.
In a context of improving macro conditions and extremely low interest rates paid by other assets
(e.g. government bonds), banks are incentivised to give new credit to firms, which are mostly
SMEs. Reviving the securitisation market should then help easing credit conditions for SMEs and
improving their access to credit.
It is not easy to provide a reliable estimate on the additional provision of loans a revival of the
securitisation market could provide. This depends indeed on a multitude of factors: a) monetary
policy, b) demand for credit, c) developments in alternative funding channels (covered bonds,
unsecured credit to name a few). All of these are likely to change through time, affecting the final
outcome. With these caveats in mind, one can say however that, all things equal, if the securitisation
market would go back to pre-crisis issuance levels, banks would be able to provide an additional
€157bn of credit to the private sector. This would represent a 1.6% increase in credit to EU firms
and households (this is still 4.7% below its peak).
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Such an increase in loans provision would be likely distributed among all types of loans, including
loans to SMEs. This is an important point because it makes clear that by freeing up capital,
securitisation revival would indirectly help SME credit access. Assuming stable shares of SME
loans to total loans (18.5% in OECD jurisdiction, with wide variations, e.g.: 49% in Greece), this
would imply a 1.6% increase in SME loans.
On top of the indirect effect described, the direct effect of the Commission initiative on SME
lending should be sizeable as the more risk sensitive capital treatment would reduce capital charges
to STS SME securitisation, increasing the returns of such products compared to the returns
generated by keeping the SME loans on the bank's balance sheet. This problem has been
highlighted by the IMF as a key obstacle to SME securitisation (see page 21 for more details).
Furthermore, the inclusion of ABCP conduits satisfying criteria of simplicity, transparency and
standardisation in the STS perimeter will foster the growth of this key source of financing for
SMEs. It is worth recalling that an average €240bn of ABCP have been issued in the last five years
and that 63% of these instruments fund trade receivables, floorplan loans and equipment leases,
which are primarily granted to SMEs.
Finally, promoting securitisation market as a whole will develop investor and issuer expertise and
build an effective infrastructure around assessing, pricing and trading securitisations. This in turn
should reduce due diligence and credit analysis costs, helping SME loans to become a more viable
asset as investors seek higher yields and issuers seek diversification of their funding structure and
balance sheet management.
Public guarantee schemes
SME securitisation could also be supported through public schemes such as those ran by EIF or
various Member States in the past. Guarantees normally are time-limited and targeted on specific
asset segments (e.g. SME ABS).
Such schemes could help implementing the STS securitisation agenda aimed at helping SME access
to credit without prejudice to a legislative programme at a later stage. They would also increase
incentives for products standardisation (e.g. example of the US mortgages agencies) and would
promote liquidity.
The costs involved in such schemes are however high. For the guarantee scheme to have a
meaningful effect at an EU level, substantial fiscal costs would have to be borne by Member States,
in a context where budget reduction is a binding constraint across many EU jurisdictions.
Additional risks on taxpayers as well as moral hazard issues would also have to be considered.
Such schemes would also overlap with the various guarantee schemes existing in EU jurisdictions
as well as carried out by the EIB/EIF group such as the SME initiative (SMEI). This is an EU-wide
joint financial instrument of the EIB Group, the European Commission and the Member States,
approved by the European Council in 2013 and aiming at supporting SMEs through risk-sharing
financial instruments. In practice it relies either on guarantee facilities and securitisation tools. In
2015 an €800mn scheme was launched in Spain under the umbrella of SMEI. This is expected to set
the base for future financial instruments to support SMEs.
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ANNEX 7 – Summary of responses to the Commission's public
consultation on securitisation
The Commission held a public consultation between 18 February and 13 May 2015 to explore the
challenges and opportunities related to an EU framework for simple, transparent and standardised
securitisation (STS securitisation).
This consultation was part of the Commission’s Green Paper on the Capital Market Union
(CMU) and aimed at collecting views on 18 specific questions, grouped in 10 sections:
Identification criteria for qualifying securitisation instruments
Identification criteria for short term instruments
Risk retention requirements for qualifying securitisation
Compliance with criteria for qualifying securitisation
Elements for a harmonised EU securitisation structure
Standardisation, transparency and information disclosure
Secondary markets, infrastructures and ancillary services
Prudential treatment for banks and investment firms
Prudential treatment of non-bank investors
Role of securitisation for SMEs
120 responses to the public consultation were received from:
Member States government and financial authorities;
Issuers and originators of securitisation;
Investors in securitisation;
Financial institutions and their associated bodies;
Service providers to securitisation;
Non-financial institutions; and,
Individual citizens, academics and associations.
The list of public contributors to the consultation is annexed to this document. Please note that 10
respondents asked for their contributions to be kept confidential.
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2. STATISTICS ON RESPONDENTS
 Categories of respondents
Replies %
Organisations or companies 93 77%
Public authorities or international organisations 22 18%
Private individuals 5 4%
 Confidentiality request
Replies %
Yes, I agree to my response being published 110 91.6%
No, I do not want my response to be published 10 8.3%
 Type of organisations:
Replies %
Industry association 52 43%
Company, SME, micro-enterprise, sole trader 22 18%
Other 8 6%
Consultancy, law firm 6 5%
Non-governmental organisation 5 4%
 Type of public authorities
Replies %
Government or Ministry 11 9.17%
Regulatory authority, Supervisory authority or Central bank 7 5.83%
Other public authority 2 1.67%
International or European organisation 2 1.67%
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 Geographical origin of respondents
Replies %
United Kingdom 28 23.3%
France 16 13.3%
Belgium 16 13.3%
Germany 11 9.1%
Other country 7 5.8%
Spain 5 4.1%
Austria 5 4.1%
Ireland 5 4.1%
Italy 5 4.1%
The Netherlands 4 3.3%
Luxembourg 3 2.5%
Finland 3 2.5%
Denmark 2 1.6%
Norway 1 0.8%
Portugal 1 0.8%
Slovakia 1 0.8%
Malta 1 0.8%
Sweden 1 0.8%
Switzerland 1 0.8%
Croatia 1 0.8%
Czech Republic 1 0.8%
Greece 1 0.8%
Hungary 1 0.8%
 Role in securitisation markets
Replies %
Issuers / originators 26 21.6%
Investors / potential investors 19 15.8%
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Services providers (infrastructures, ancillary services providers.) 9 7.5%
Other (public authorities, non-financial entities, individuals…) 66 55%
 Field of activity or sector (multiple replies were possible):
Replies %
Banking 40 33.3%
Investment management (e.g. hedge funds, private equity funds,
venture capital funds, money market funds, securities)
34 28.3%
Other 30 25%
Not applicable 15 12.5%
Market infrastructure operation (e.g. CCPs, CSDs, Stock
exchanges)
12 10%
Insurance 11 9.1%
Credit rating 8 6.6%
Pension provision 7 5.8%
Auditing 5 4.1%
Academia / research 4 3.3%
Accounting 3 2.5%
Social entrepreneurship 2 1.6%
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3. SUMMARY OF THE RESPONSES
1. Identification criteria for qualifying securitisation instruments
Question 1:
A. Do the identification criteria need further refinements to reflect developments taking place at
EU and international levels? If so, what adjustments need to be made?
B. What criteria should apply for all qualifying securitisations ('foundation criteria')?
Main messages:
There is a strong support for differentiation based on modular approach. EBA/BCBS/IOSCO
seen as natural and authoritative base for criteria. Slight preference for BCBS-IOSCO
principle-based approach, while EBA approach is seen as a bit too prescriptive by various
stakeholders (mostly industry). Support for STS differentiation not including credit risk
elements and applying to all tranches (cf. "it's about the originating and structuring procedure
so applies to all tranches of the deal").Strong emphasis on the importance to have consistency
of legislation at EU level and the need to avoid proliferation of criteria/definitions/regimes
(CRR, S2, LCR..)
The vast majority of respondents (74%) agreed that synthetics may be currently excluded by
the STS framework. The majority of respondents from industry associations (73%) and private
companies (68%) are also of this view. Other categories (regulators, legislators, NGOs, private
individuals) showed bigger majorities in favour of the exclusion. A detailed breakdown of
responses by category is presented in the table below. Under the column "YES" is presented
the percentage of respondents who agreed on the criteria excluding synthetics, while under
"NO" is the percentage that argued against the exclusion.
Category YES NO
Private individual 75% 25%
Company, SME, micro-enterprise, sole trader 68% 32%
Consultancy, law firm 100% 0%
Legislators, Regulator and Supervisor 85% 15%
Industry association 73% 27%
Non-governmental organisation 100% 0%
Other 40% 60%
TOT 74% 26%
Finally, some stakeholders are requesting more detailed on some criteria notably on those
related to comparability, homogeneity, definition of impaired credit and borrower, definition
of significant risk too vague and inconsistent.
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2. Identification criteria for short term instruments
Question 2:
A. To what extent should criteria identifying simple, transparent, and standardised short-term
securitisation instruments be developed? What criteria would be relevant?
B. Are there any additional considerations that should be taken into account for short-term
securitisations? "
Number of contributions on this specific question: 78
Of which:
Originators/issuers:18
Investors: 11
Public authorities: 15
Service providers: 5
Others: 30
Main messages:
Majority view: Almost two thirds respondents consider criteria for short term securitisations
should be developed. Most feel this criteria should differentiate between those structures
devoted to real economy financing (e.g. multi-seller ABCP conduits) and those used for
arbitrage (e.g. SIVs).
Many respondents suggest the criteria should take into account the type of underlying assets
and the level of overcollateralisation. There were also proposals for the criteria to limit
maturity mismatches and require frequent reporting of underlying risks and structures and the
nature of the liquidity support provided by the financial institution, amongst others.
Minority views: One tenth of respondents feel that the focus should first be on term
securitisation and that short term securitisation criteria should not be rushed ahead to avoid
repeating previous mistakes. One of these suggested that if such a criteria was developed it
should then only apply to the securitisation of trade receivables.
3. Risk retention requirements for qualifying securitisation
Question 3:
A. Are there elements of the current rules on risk retention that should be adjusted for qualifying
instruments?
The overwhelming majority of respondents (almost 70%) are in favour of maintaining the
level and forms of risk retention as they are or tightening them. Of these, some suggest that
the level of risk retention should be increased (to 15-20%).
All the regulatory community, central banks and finance ministries argued that the risk
retention requirements are a crucial tool to align interests of the various actors in the
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securitisation chain and that their level and form are currently working fine, so that they see
no reason for changing them. This view was shared also by the majority of industry
organisations and private companies, with a vast majority (almost 60%) of private sector
respondents arguing for keeping the rules as they are. Three more technical issues were raised
by several respondents and require attention: the definition of "originator" in CRR, the
exclusion of managed CLO and purchased receivables.
B. For qualifying securitisation instruments, should responsibility for verifying risk retention
requirements remain with investors (i.e. taking an "indirect approach")? Should the onus only
be on originators? If so, how can it be ensured that investors continue to exercise proper due
diligence?
Respondents have somewhat diverging views on how this shift should happen concretely.
About 60% of respondents (mostly industry stakeholders) argued for shifting the
responsibility to originators/issuers/sponsors (i.e. substituting the current indirect with the
direct approach). About a third of the respondents (mostly public authorities but not
exclusively) supported instead the EBA proposal of accompanying the indirect approach with
the direct approach thereby rendering both investors and issuers responsible. The second
group justified maintaining investors' responsibility in two ways: i) this would continue
ensuring EU investors invest only in securitisation backed by solid risk retention regimes and
ii) this would maintain the incentives for investors' due diligence in risk retention aspects
4. Compliance with criteria for qualifying securitisation
Question 4.A and 4.B
How can proper implementation and enforcement of EU criteria for qualifying instruments be
ensured? How could the procedures be defined in terms of scope and process?
Number of contributions on this specific question: 79
Of which:
Originators/issuers: 17
Investors: 14
Public authorities: 18
Service providers: 4
Others: 26
General process:
Almost all respondents emphasise the importance of having appropriate enforcement and
compliance mechanisms in place to build a sustainable STS securitisation market in Europe.
Views are split on the best ways to ensure this objective.
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Some respondents argue that the onus of ensuring compliance with the STS criteria should be
mainly on originators and investors. Originators may for instance be required to self-attest that
a given instrument meets the identification criteria. They consider this approach as the best
way to avoid excessive reliance on assessments delivered by third parties. This approach is
seen as the most efficient way to reduce "moral hazard" risks and ensure proper due diligence
by investors.
Other stakeholders believe that the recourse to external parties is essential to overcome the
current stigma attached to securitisations and to build investors' confidence in STS
instruments. In practice, some stakeholders suggest that public authorities could be directly
involved in providing this assessment, while a significant number of respondents are
supporting the establishment of private bodies acting as "certifiers" or "control bodies". These
entities – under the supervision of public authorities - would be requested to assess the
compliance of STS.
Due diligence / moral hazard: Originators and investors should remain responsible for
fulfilling their obligations, even though this could be facilitated to a certain extent through
elements provided by external parties. Investors should not reduce their own risk assessment
and interpret STS criteria as credit quality indicators. To this aim, sufficient information
should be accessible to them. This should include notably loan level and performance data and
publication by originators of comprehensive information with regard to aspects of the STS
criteria that cannot be verified directly by investors (e.g. underwriting standards). An
independent attestation/certification process should not lead to overreliance on STS
qualification.
Clarity: EU legislation on STS criteria should be precise enough to give a clear guidance to
originators and investors. The EU criteria should provide a minimum certainty to investors
even if STS qualification could be challenged or denied by competent supervisors (e.g. in the
context of an onsite examination). Legal certainty is an important means of building trust and
restarting the securitisation markets.
Timeliness/costs of the process: To make high-quality securitisation attractive for investors
and originators, the cost of implementing and enforcing the criteria would have to remain
within reasonable limits. Excessive delays in providing this compliance
assessment/certification would impede originators activities and be detrimental to the
development of an STS market. Some stakeholders suggest that not every securitisation
instrument or structure should be checked again for compliance with the criteria. In some
cases, it should be possible for a securitisation structure that has already been certified once to
be copied without the need for a full renewed check.
Avoiding fragmented approaches / ensuring EU Consistency: A number of stakeholders
emphasise the importance of a consistent interpretation of STS criteria in all EU Member
States, especially given the mobility of securitisation structures and originators. The
responsibility for determining whether a particular instrument complies with STS criteria
needs to be clearly assigned. The mechanism should ensure consistency in its application. A
consistent EU approach has to be implemented in order to ensure a single market for STS
instruments and to avoid "forum-shopping" risks. In order to achieve such objectives, some
respondents suggest that STS assessment/certification could be done directly by a European
authority (e.g. ESA).
Sanction regimes: The monitoring mechanism should foresee clear processes in case of a
breach in compliance either due to a wrong appreciation at the origination or due to a change
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in the securitisations’ structure during its life. These processes should notably address
originators and third parties in charge of assessing STS criteria. Where an investor benefits
from a preferential regulatory treatment with regard to a particular STS securitisation position
and does not meet these verification requirements by negligence or omission, the regulation
could include appropriate measures for sanctioning such negligence or omission.
Question 4.C
To what extent should risk features be part of this compliance monitoring?
Number of contributions on this specific question: 63 responses
Of which:
Originators/issuers: 12
Investors: 9
Public authorities: 13
Service providers: 3
Others: 23
A vast majority of respondents consider that the compliance monitoring should cover the
securitisation structure and the relevant STS criteria. However, it should not cover the credit
risk posed by the underlying assets. While credit risk features are an essential part, they should
be addressed within the due diligence process. Including risk features in the compliance scope
would raise several issues. It may in particular introduce a confusing message to investors.
These criteria are not aimed to provide an opinion on credit risks but to make investors’
assessments of risks more straightforward. The STS approach should help investor to properly
analyse the credit risk of the underlying assets in their due diligence process.
Investors should be fully responsible for their due diligence as they would for any other type
of financial instrument. The approach should avoid replicating the errors of the subprime crisis
and the overreliance on external entities (e.g. credit rating agencies). It is therefore difficult to
see how assessments or monitoring of these credit risks (for instance by an independent third
party) would help to achieve the STS objective. Compliance with STS criteria should only
ensure that due diligence process is less time-consuming due to strict requirements limiting
the complexity of securitisations and enhancing transparency and standardisation. Several
respondents underlined however that information on risk developments during the life cycle of
the transaction is of utmost importance. Thus originators should provide timely elements to
investors which should keep on requesting risk information in regular reports.
However, some stakeholders consider that it could be logical to include some credit risks
criteria in the compliance monitoring while addressing potential risks related to moral hazard.
Some underline that risk features are already part of the supervision of national competent
authorities over credit institutions. Therefore if an issuer-based approach would be taken,
these risk features would be monitored.
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5. Elements for a harmonised EU securitisation structure
Question 5:
A. What impact would further standardisation in the structuring process have on the
development of EU securitisation markets?
Number of contributions on this specific question: 72 responses
Of which:
Originators/issuers: 17
Investors: 16
Public authorities: 11
Others: 28
The majority of the respondents argue that a standardisation in the structuring process will
have a positive impact in the development of the securitisation market. It is claimed that such
standardisation i) will incentivise liquidity of the secondary market for securitized products,
ii) will ease investing in structured finance, iii) enhance investor confidence and promote the
further development of such markets. Moreover standardisation will enhance comparability
for investors by creating a level playing field with similar credit products such as covered
bonds and thus make securitisations more attractive. It will also help build the new market of
standard simple product for less sophisticated investors. Some argue that a more benign
capital treatment for the qualifying instruments will allow consideration of a wider range of
products with marginal additional resources. Finally a standardisation of the structures may
help enhancing secondary markets.
However, most stakeholders have doubts on the possibility for the Commission to develop –
in short/ medium terms - a harmonised legal framework to frame the establishment of
securitisation vehicles, the transfer of assets or the subordination among noteholders.
Discussions on taxation regimes, insolvency laws, and securities laws would be required as
pre-requisite. There is also support of encouraging further standardisation in the
documentation of securitisations by market participants themselves. The example of the
Dutch Securitisation Association is perceived as a promising initiative which could be
expanded to other asset classes and Member States.
A minority of respondents claim that it would be very difficult and undesirable to come up
with one European securitization structure. The advantages of securitisation, as a flexible tool
to design investment products best fitted to specific situations may disappear. It is suggested
that the European Commission should not risk of hampering the redevelopment of the
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European securitization market, by setting up a pan European securitisation structure, which
may require considerable time to be implemented due to two fundamental structural
differences between countries i.e. property ownership and insolvency laws. These Structures
have been developed over many years to accommodate particular national contract, property
and insolvency laws of the Member States. It is also proposed that imposing standardisation
would give a special advantage to those players who can benefit from standardization, namely
large institutions with “middle of the road” objectives.
B. Would a harmonised and/or optional EU-wide initiative provide more legal clarity and
comparability for investors? What would be the benefits of such an initiative for originators?
Number of contributions on this specific question: 67 responses
Of which:
Originators/issuers: 13
Investors: 14
Public authorities: 12
Others: 28
The majority of respondents underlined that a harmonised regime would make analysing a
transaction easier for investors and provide more legal certainty by easing the burden and cost
of having to comply with differing requirements or choose which label/s to conform to. It
would also facilitate cross-border investments within the EU, allowing access to a much wider
market by allowing for greater comparability of transactions and creating a level playing field
for investors. Moreover, some respondents stress that more harmonised legal environment and
disclosure frameworks would reduce potential barriers to the availability of transaction
counterparties. It would subsequently increase investor confidence and generate a
development of an EU wide securitisation market. For originators the main benefit would be
in reducing complexity within the structuring process, as well as within the recurring
transaction processes, through more consistent and simple documentation.
As regards the benefits of harmonisation a minority of respondents argue that the
securitisation process is already regulated in an adequate manner and further harmonisation
could lead to overregulation without providing an additional value. Standardisation in the
structuring process is difficult to achieve in the EU due to the differing national regulations on
securitisation. Other measures - stopping short of a new EU structure established by legal
instrument – may well yield quicker benefits; it would thus be preferred to develop industry
standards and best practices concerning the origination documentation and structure of SPVs.
Some of the matters (such as the nature and extent of subordination) should be left to markets
to define, rather than being set out in legislation. Harmonisation may be beneficial, but the
lack of a harmonised framework is not seen as a principal impediment to securitisation
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investment and/or issuance.
C. If pursued, what aspects should be covered by this initiative (e.g. the legal form of
securitisation vehicles; the modalities to transfer assets; the rights and subordination rules for
noteholders)? (60 replies)
The majority of the respondents consider that the initiative should cover the legal form of the
securitisation vehicle the form of assignment and notification requirements the rights and
entitlements of the noteholders as well as disclosure and documentation requirements.
Relating to the aspects covered by the initiative it is argued by some respondents that
harmonisation of securitisation requires harmonisation in various areas of law including:
general civil law issues; limited recourse and non-petition clauses; the law governing standard
terms and conditions; the law governing securities and debentures/debt securities, provisions
governing set-off; Insolvency law; general tax law issues and cross-border taxation and data
protection.
It is also proposed that a flexible approach with minimum fixed eligibility criteria should be
sufficient. Some suggest that the creation of a supra-national structure that would promote
cross-border investment without impacting the current national securitisations regimes has
also been proposed as has the definition of quality assets and underlying assets and eligibility
criteria.
D. If created, should this structure act as a necessary condition within the eligibility criteria for
qualifying securitisations?
Number of contributions on this specific question: 56
Of which:
Originators/issuers: 12
Investors: 9
Public authorities: 7
Others: 28
The majority of respondents consider that a standardised structure should not be considered a
necessary condition within the eligibility criteria for qualifying securitisations. The majority
supports a principles based harmonisation as opposed to a one size fits all approach.
Moreover, legal harmonisation may take a while to be completed and making a standard
structure a necessary prerequisite will hinder the Commission’s goal to quickly restart the
securitisation market.
The minority view is that a structure must act as a necessary condition within the eligibility
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criteria for qualifying securitisations.
6. Standardisation, transparency and information disclosure
Number of contributions on this specific question: 93
Of which:
Originators/issuers: 22
Investors: 16
Public authorities: 15
Service providers: 5
Others (please specify if there is a specific category reacting on this question): 35
Question 6:
A. For qualifying securitisations, what is the right balance between investors receiving the
optimal amount and quality of information (in terms of comparability, reliability, and timeliness),
and streamlining disclosure obligations for issuers/originators?
Main messages
There is a large support for transparency on SFI. Market participants shall have access to at
least the same amount of information as credit rating agencies (CRAs). The importance of
increased standardisation is underlined by the majority of the respondents, provided there is a
reasonable degree of flexibility to take into account the characteristics of different asset
classes and provided that the amount of information is balanced to the needs of investors
(some mentioned PRIPs as an example of balanced approach).
Some suggest considering possible exemptions from standard templates for transactions that
cannot be adequately covered. Some also insist on the need of consistency of enforcement
across Member States). Strong emphasis on the quality of information provided (not only
quantity). Large support also for the standardised templates provided by the CRA RTS on
structured finance instruments (2015) which are considered very useful. There is also a very
strong support for the set-up of a centralised transparency website for securitisation, so that
information could be submitted only once, in one place and in a single format. Many
contributors mention the European DataWarehouse (EDW) as a very positive experience,
very useful for investors.
Granular pools
Many contributors consider that the disclosure of loan to loan data for transactions backed by
very granular pools of assets: i) creates unnecessary burden for issuers; ii) is not useful for
investors and suggest limiting disclosure to aggregated data which in their opinion would be
more relevant/easier to assess by investors.
Some respondents considered that the approach taken in ESMA’s RTS is excessive as it may
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give investors enough information to figure out pricing/business strategies of their
competitors; this in turn may reduce incentives to use such instruments. However, according
to detailed elements provided by a public authority, these concerns would not be justified for
the following reasons:
- issuers already have this data, in an easy to disclose form; so the argument of additional
burden for issuers would not be justified;
- educated investors would strongly benefit from receiving loan level information which will
enable them to aggregate data according to their own criteria, and avoid them to depend on
the aggregation method used by issuers; in addition, in the absence of disclosure of loan to
loan data, it is impossible to check the quality of the underlying data.
Private transactions
Many contributors on the industry side are concerned about the application of art. 8b of the
CRA III Regulation (publication on the SFI website of loan to level data) also to private
transactions. They argue that in private transactions, investors are free to determine
contractually the level of transparency they consider necessary and in many instances that
level would be higher than in public transactions. Some of these contributors are also
concerned by the need to protect commercial secrets. In their view, in such cases, extending
public disclosure on private transactions may act as a disincentive for such transactions. On
the other side, many of the above mentioned contributors on the industry side would
appreciate that private transactions be eligible for STC (with the understanding however, that
private transactions seeking eligibility would need to comply with loan level disclosure
requirements, provided this information is disclosed only to relevant parties and the
supervisors).
Minority views:
- Some stakeholders mention that transparency is not sufficient to ensure that all investors
have the capacity to assess the information; promoting simple structures is equally important
in their view;
- Standardisation would be difficult to achieve, given the great variety of transactions. Some
indicate that adjustments are more needed for CMBS and RMBS, while would be less
meaningful for revolving transactions
- Standardisation would be useful, but should ensure sufficient flexibility in order not to
prevent the development of innovative.
B. What areas would benefit from further standardisation and transparency, and how can the
existing disclosure obligations be improved?
There is a strong support in favour of standardisation of investors’ reports. Also, many
respondents highlighted that standardisation of definitions/key transaction terms (including of
important ratios) used would be helpful. Some stakeholders were also in favour of further
standardisation of performance metrics and of qualitative characteristics of securitisation (e.g.
servicing characteristics).
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C. To what extent should disclosure requirements be adjusted – especially for loan-level data – to
reflect differences and specificities across asset classes, while still preserving adequate
transparency for investors to be able to make their own credit assessments?
Many respondents suggest adjusting disclosure requirements to the characteristics of each
asset class.
Question 7:
Number of contributions on this specific question: 66
Of which:
Originators/issuers: 18
Investors: 12
Public authorities: 17
Service providers: 5
Others (please specify if there is a specific category reacting on this question): 14
A. What alternatives to credit ratings could be used, in order to mitigate the impact of the country
ceilings employed in rating methodologies and to allow investors to make their own assessments
of creditworthiness?
The vast majority of respondents underline the importance that investors make their own
creditworthiness assessment and do not rely mechanistically on external credit ratings. Credit
ratings should be only one element amongst other to be considered in the overall assessment.
Respondents suggest several type of alternatives (see below), but many of them are realistic
about the difficulty to completely eliminate reliance on ratings. Most frequently suggested
alternatives are:
- disclosure is viewed as the most important tool for reducing reliance on ratings, as it enables
investors to make their own risk assessment;
- use an internal risk/ratings based approach (e.g. in terms of expected loss);
- promote simple structures.
Some minority contributors suggest additional alternatives such as:
- use of monoline insurers or over-collateralisation to limit the impact of country ceilings;
- creation of one or several non for profit, supra national, capital market or multilateral funded
rating agency (to be funded by investors)
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B. Would the publication by credit rating agencies of uncapped ratings (for securitisation
instruments subject to sovereign ceilings) improve clarity for investors?
The majority of respondents consider that the publication also of uncapped ratings (without
the country ceiling) would offer additional clarity for investors and enable them to make their
own analysis of the sovereign risk.
There is however a significant proportion of respondents that highlight that the publication of
uncapped ratings, although interesting for information purposes, would have however limited
value for investors as long, as prudential legislation would continue to take into account the
“capped ratings” (with the country ceiling).
Some stakeholders highlight the need not to underestimate the country risk and the need for
investors to perform some kind of country risk assessment. Some stakeholders also raise
awareness about the need to avoid interfering with CRAs methodologies.
7. Secondary markets, infrastructures and ancillary services
Question 8.A: For qualifying securitisation, is there a need to further develop market
infrastructure?
Number of contributions on this specific question: 63
Of which:
Originators/issuers:18
Investors: 7
Public authorities: 11
Service providers: 4
Others: 23
In favour of developing further market infrastructure: 46 responses (of which 20 were
focusing only on information)
Not in favour of developing further market infrastructure: 16 responses
No reply: 57
Most of respondents focus on infrastructures aiming at collecting and disseminating
information on securitisation markets in the EU. The development of central repository would
be necessary for market participants and investors in particular. Existing infrastructures such
as the European Data warehouse (EDW) are perceived as positive initiatives which should be
further developed. A number of respondents underlined the necessity to develop synergies and
avoid diverging reporting requirements in this area (e.g. for central banks, supervisors and
rating agencies). It was also suggested that additional elements could be collected such as
information on trading activity and deal prices. It may encourage new investors to participate
in the market. There was no strong call for the establishment of other type of infrastructures in
the short/medium term.
Some respondents underlined that the ability to trade securitisation instruments – notably
qualifying instruments - on an exchange would open it up to a broader base of potential
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investors and increase liquidity on secondary markets (e.g. money market funds as tradability
is a mandatory prerequisite for investing). To promote these secondary markets, respondents
also highlighted the need to be careful on potential interactions with the current discussion on
the review of the trading book requirements by the Basel Committee.
A number of stakeholders mention the importance of addressing specific issues related to
ancillary services (bank account and swap providers) with a view to enhance the SPV’s
economic and legal position in an insolvency situation. Some suggest that consideration could
be given to the extent to which, for qualifying securitisations, public entities (EIB,
promotional banks) could be more involved in the provisions of ancillary services.
Question 8.B
What should be done to support ancillary services? Should the swaps collateralisation
requirements be adjusted for securitisation vehicles issuing qualifying securitisation
instruments?
Number of contributions on this specific question: 53
Of which:
Originators/issuers:17
Investors: 5
Public authorities: 10
Service providers: 3
Others: 18
In favour of doing something to support ancillary services: 39 responses
Not in favour of doing something to support ancillary services: 14 responses
No reply: 67
Most of respondents highlight the key role of ancillary services in the securitisation chain.
Two specific areas are identified by stakeholders: the provision of swaps services (interest
rates or FX swaps) and of bank accounts to securitisation structures. The majority of
respondents indicate that the number of "eligible" counterparties is limited as the list of
entities benefitting from sufficiently high quality ratings has been reduced over the last years.
In practice stakeholders would like to decrease the existing overreliance on credit ratings
and/or to explore alternative options. Several entities suggest that public entities such as
central banks, supranational institutions or promotional banks could provide part of these
ancillary services to securitisation vehicles.
Several respondents suggest reducing the risks associated with the bankruptcy of
counterparties. For instance some underlined that carving out swaps or bank account
arrangements in a case where a financial institution (counterparty to the securitisation
structure) goes into resolution would give more confidence to investors and agencies. The
examples of Italian and French laws making the securitisation vehicles bank accounts
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independent from the depository bank insolvency estate are seen as interesting options to
assess.
Many originators and trade associations support the Bank of England and European Central
Bank position that derivative collateralisation requirements for securitisation special purpose
entities should apply in the same way as for derivatives executed by covered bond issuing
entities. It means mainly that securitisation vehicles could be exempted from the legislative
requirements to provide collateral under EMIR regulation. This proposal is – however – not
shared by all respondents especially by some public authorities.
Question 8.C
What else could be done to support the functioning of the secondary market?
Number of contributions on this specific question: 53 responses
Of which:
Originators/issuers: 15
Investors: 10
Public authorities: 11
Service providers:4
Others: 13
No reply: 67
Most of the respondents are in favour of initiatives supporting the well-functioning of
secondary markets for securitisation.
A number of stakeholders emphasize that the introduction of criteria to identify simple,
transparent and standardised securitisation (and a more risk sensitive prudential treatment)
will help in promoting demand on secondary markets. Increased transparency - through the
establishment of centralised database collecting and disseminating information on underlying
assets and documentation of the different transactions - will also contribute to increase
liquidity on these markets.
Several members point out the importance of having an appropriate calibration of the capital
requirements on trading book positions in the banking regulation. These provisions –
currently under review by the Basel Committee – play an important role in the emergence of
market makers. Equally important for the private sector representatives are the pre and post-
trade transparency requirements in the MIFIR-MIFID context.
Some stakeholders also highlight the potential benefits of adjusting the "indirect approach"
to risk retention requirement to ensure greater legal clarity for potential investors. Adjustments
to sector-specific regulations are also mentioned as possible options such as allowing UCITS
funds and MMF to invest more in STS securitisation.
Improving market making could also be achieved through the development of specific
liquidity solutions and the establishment of “last recourse buyer”. Some stakeholders are of
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the views that recognized public or supranational guarantors could add to the market liquidity.
8. Prudential treatment for banks and investment firms
Number of contributions on this specific question: 63
Of which:
Originators/issuers: 18
Investors: 5
Public authorities: 15
Others : 23
Services providers: 2
Question 9: "With regard to the capital requirements for banks and investment firms, do you
think that the existing provisions in the Capital Requirements Regulation adequately reflect the
risks attached to securitised instruments."
The majority of respondents consider the current regulatory treatment for various reasons not
suited to properly reflect the risks inherent in securitisation products and are in favour of
revising it. This group of respondents can be divided in two sub-groups:
A first sub-group mainly composed of Industry representatives in the area of
issuers/originators consider the current treatment already punitive and not reflecting historical
performance of EU securitisation markets and would favour a downward re-calibration:
 to implement a capital neutrality principle, particularly for senior tranches and/or STC
securitisations;
 to align treatment (also in the area of liquidity rules) with that of comparable investment
(particularly recurrent the reference to the unjustified incentives to the benefit of covered
bonds);
 to address the distortions (i.e. overstatement of risks) in the case of rating based approaches
after the tightening of criteria by CRAs and in relation to sovereign rating caps
A second sub-group including mainly Public Authorities (Supervisors, Ministries, Regulators)
consider it necessary to address a series of shortcomings of the existing EU framework
(mechanistic reliance on external ratings, inappropriately distributed capital charges across
tranches, cliff-effects), on the basis of the recent BCBS proposals (possibly with some
adjustments/ fine-tuning, e.g. reversing the hierarchy with regard to ERBA and SA
approaches)
A minority of respondents (mainly including issuers/originators and investors) think that CRR
provisions in most cases adequately address risks attached to securitisations and would like to
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see no (or marginal) amendments implemented. In general stakeholders belonging to this
group support a correction of the “one-size-fits-all” approach to take into account the specific
features of STC securitisations;
Some respondents consider it necessary to enhance the harmonization of rules about the
conditions to recognise the Significant Risk Transfer.
Question 10: If changes to EU bank capital requirements were made, do you think that the recent
BCBS recommendations on the review of the securitisation framework constitute a good
baseline? What would be the potential impacts on EU securitisation markets?
Number of contributions on this specific question: 60
Of which:
Originators/issuers: 19
Investors: 7
Public authorities: 11
Others : 22
Services providers: 1
The respondents can be divided in 2 groups more or less equally represented.
A first group led by private sector representatives opposes the transposition of the new BCBS
framework and is convinced that it would penalise securitisation and unduly discriminate vis-
a-vis other debt instruments (e.g. covered bonds). In particular the following issues are of
concern for these respondents:
Substantial departure from the capital neutrality principle;
Disregard for the (good) performance of European ABS during the crisis;
Difficulties for non-originating banks to use the IRB and the consequent expected prevalence in the
EU of the (more penalising) ERBA over the other 2 approaches;
The treatment of exposures to ABCP (including liquidity assistance) which could penalise term
securitisations;
Excessive penalisation of senior tranches;
Lack of calibration per asset class;
The definition of tranche maturity and the level of RW floor.
A second group (mainly Public Authorities and investor institutions) judges positively the use
of the BCBS revised framework as baseline for the review of CRR provisions to ensure, inter
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alia, global consistency. However the majority of the respondents included in this group
consider it necessary to implement some adjustments with in primis a more favourable
treatment for STS securitisations.
Question 11: How should rules on capital requirements for securitisation exposures differentiate
between qualifying securitisations and other securitisation instruments?
Number of contributions on this specific question: 72
Of which:
Originators/issuers: 17
Investors: 11
Public authorities: 13
Others : 27
Services providers: 4
With a few exceptions, the large majority of respondents are in favour of differentiating the
prudential treatment of STS securitisations versus other securitisations. As regards the
methodological approach main suggestions are:
Keeping for STS the current CRR treatment;
Implementing for STS a (near to) neutrality principles;
Aligning or approximating the treatment of STS to that of Covered Bonds;
Calibration for STS should focus on reducing the RW floor (some suggest a 10% or keeping the current
7% under IRB or even cancelling it) and on re-scaling RW in all 3 approaches through a scaling factor
or, alternatively, adjusting the “p” factor (SEC-IRBA and SEC-SA);
Calibration for non-STS should not be reviewed upward;
Using BCBS treatment as the backstop treatment for non-STS securitisations.
Many respondents included in this group (and generally falling in the category of
issuers/originators) draw the attention of the Commission to the need of avoiding cliff effects
between STS and non-STS and to pay attention to the impact of those STS criteria that are
dynamic (e.g. retention requirement). Ensuring a consistent treatment across different
legislations (capital, liquidity and collateral regulations) and not discriminate negatively
against ABCP are also among the main concerns of this group of respondents.
A small number of respondent are against any differentiation since this would create an
unjustified barrier for non-STS securitisations and would contribute to “unwarranted RWA
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variability”
Question 12: "Given the particular circumstances of the EU markets, could there be merit in
advancing work at the EU level alongside international work?"
Number of contributions on this specific question: 65
Of which:
Originators/issuers: 18 (including associations representing bank originators)
Investors: 10
Public authorities: 12
Others: 25
Although not spelt out as such in the question, most respondents have understood it as a
binary decision between either front-running international standards with a dedicated EU
framework for STS securitisation or holding European developments until there is an
international agreement.
Against that background, a slim majority of respondents would be in favour of front-running
international standards. However, it should be noted that many of the respondents in this camp
have expressed strong caveats. In general, those respondents would prefer to have consistency
between European and international standards for STS securitisations in as much as possible.
Accordingly, they suggest the Commission should try to secure international agreement first
and only front-run global standards in the event that agreement at that level cannot be reached
reasonably soon.
There were several respondents that opposed front-running international developments to
various degrees, although caveated responses were less common in this case. That is,
respondents in this camp tended to take a straightforward position in favour of consistency
between EU and international standards on STS securitisation. The remaining respondents did
not take a clear line either way.
Among the constituent groups identified above, a clear majority of public authorities and
originators/issuers favoured front-running international standards, either decidedly or with
caveats. In the other camp, it is worth highlighting that a majority of investors were very
clearly against front-running international standards, while only a few were in favour but with
reservations in some cases.
9. Prudential treatment of non-bank investors
Question 13: Are there wider structural barriers preventing long-term institutional investors from
participating in this market? If so, how should these be tackled?
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Number of contributions on this specific question: 71
Of which:
Originators/issuers: 14
Investors: 12
Public authorities: 13
Service providers: 4
Others: 28.
Many respondents felt that the introduction of STS criteria, if implemented in a credible and
effective manner, would help reduce investor stigma and make securitisation more attractive
to investors. There were a number of comments about the regulatory and non-regulatory
restrictions on pension and insurers that stop them from investing in securitisations. For
pension funds those mentioned were often market led (e.g. in investor mandates) or
restrictions in national frameworks. For insurers, Solvency II capital charges were frequently
raised as an impediment. It was widely felt that pension funds and insurers were natural
potential investors in securitisations, but that market conditions would need to adapt for this to
be realised. Many respondents felt that Solvency II capital charges, in particular for mezzanine
tranches, should be recalibrated.
Some commented that uncertainty was holding back investors in a number of jurisdictions. A
supervisor felt that greater standardisation of structures could draw in a greater institutional
investor base by reducing the required cost of analysis. A few other replies suggested that the
investor base could be expanded by improving credit assessment capabilities.
Question 14.A: For insurers investing in qualifying securitised products, how could the
regulatory treatment of securitisation be refined to improve risk sensitivity? For example, should
capital requirements increase less sharply with duration?
Number of contributions on this specific question: 57
Of which:
Originators/issuers: 8
Investors: 11
Public authorities: 15
Others: 23
There is vast support for improving risk-sensitivity in the Solvency II standard formula and
avoiding alleged cliff-edge effects in calibrations. But there is a wide variety of (sometimes
contradictory) suggestions to achieve this. For example, a few respondents suggest increasing
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certain calibrations on other assets classes rather than cutting existing calibrations for senior
STC securitisation (which are at or below the level of direct unrated loans, by virtue of the
look-through approach).
While supporting the current look-through approach, a quarter of a respondents complained
that it is not properly implemented on two types of underlying assets:
residential mortgage loans, which attract a significantly lower charge under the counterparty risk
module.
secured unrated loans, which can attract charges lower than 3% per year of duration even in the
framework of the spread risk module.
Many respondents also found that the existing calibration for STC securitisation lacks risk-
sensitivity because it was artificially flattened at 3% for several rating classes.
Beside the possible tweaks mentioned above, it is widely felt that calibrations are too onerous,
but few practical solutions for recalibration are proposed. Around 15% of respondents
consider that calibrations on STC securitisations should be reduced in line with corporate
bonds, or even covered bonds, of the same credit quality. Although many respondents from
the industry mention the very good track record of STC securitisation in terms of default rates,
only three respondents actually suggest that securitisation positions should be exempted from
spread risk and instead, be subject to counterparty default risk, automatically or depending on
insurers' intention to hold those positions to maturity or not.
On the contrary, another 15% of respondents caution against lowering the existing calibration
for STC securitisation, arguing that this would lack empirical grounds and that the Solvency II
regime has not yet been tested. Authorities in a MS find the current calibration on senior
tranches unjustifiably low.
As for the dependence on duration, there is significant support to mitigate its effects, but
dependence on duration is rather seen as of secondary importance compared to the initial level
the calibration. EIOPA points to the lack of relevant data necessary to kink spread risk factors
along duration.
Question 14.B: Should there be specific treatment for investments in non-senior tranches of
qualifying securitisation transactions versus non-qualifying transactions?
A vast majority of respondents consider that calibrations applied to "Type 2 securitisation
positions" (including non-senior tranches of STC securitisation) are punitively high, because
they are partly based on US subprime data. They argue that such calibrations shrink
significantly the investor base for non-senior tranches of STC securitisation.
It is unanimously felt that STC qualification should apply at transaction level, not at tranche
level. However, consequences for calibrations are less clear-cut. Views are split as to how
granular calibrations should be (there are concerns about complexity of the standard formula).
Two central banks suggest that there should be four sets of calibrations, to accommodate STC
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vs. non-STC products, and senior vs. non-senior tranches of those products. There are
diverging opinions as to the relative levels of those calibrations: should capital requirements
on non-senior STC tranches be more or less onerous than on senior non-STC tranches? In two
rating agencies' opinion, experience suggests that both are possible, depending on the specifics
of each transaction.
Almost 20% of respondents argue in favour of 'capital neutrality' at the level of a whole
securitisation structure (instead of capital neutrality on senior tranches only). In their view, the
total capital requirement applicable to all tranches of a given STS securitisation should not be
higher than those applicable to the whole underlying portfolio.
More specifically, an additional 15% of respondents argue that the same set of existing
calibrations (Type 1) could be used for senior and non-senior tranches of STC securitisation.
Anyway, seniority gives rises to differences in ratings anyway, so that spread risk factors
would capture this difference, without the need to derive a new calibration on scarce data
(EIOPA's concern).
Only two supervisors and a central bank are explicitly opposed to any specific calibration for
non-senior STC tranches.
Question 15:
A. How could the institutional investor base for EU securitisation be expanded?
B. To support qualifying securitisations, are adjustments needed to other EU regulatory
frameworks (e.g. UCITS, AIFMD)? If yes, please specify.
Number of contributions on this specific question: 70
Of which:
Originators/issuers: 15
Investors: 11
Public authorities: 11
Service providers: 3
Others: 30.
Most stakeholders consider that the introduction of a credible STS framework should in itself
help expand the institutional investor base for EU securitisation. The harmonising of concepts,
definitions, due-diligence and reporting requirements were also viewed as important factors
that would bring the costs for prospective investors. Greater consistency of rules between
banks and insurers was also highlighted as being important. Many stakeholders feel that banks
will have to continue to play a big role in the investor base, at least until a much larger non-
bank investor community in securitisation can be sustained.
The majority of respondents do not consider amendments to the AIFMD or UCITS rules are
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needed to enable the investors caught by these rules to invest in securitisation, although some
call for an adjustment to the risk retention requirements so the onus for monitoring is on
originators, not investors. Many also stated that investor due-diligence requirements should be
significantly streamlined and relaxed.
Some public authorities stated that it was important that the STC criteria maintains high
standards and excludes the more complex securitisations. A consumer association states that
the investor base should not be expanded at all, while some private stakeholders advised that
the criteria should be widened to include a wider range of asset classes, such as CMBS, to
broaden the investor base. A supervisory authority said that it would be important not to
stigmatise non-qualifying securitisations. It was noted that the listing of securitisations could
make them eligible to UCITS and thus more attractive to investors. In some countries, such as
Croatia, no securitisation framework exists, so developing one would be a first step to
expanding the investor base. Some stakeholder called for a re-evaluation of risk retention
requirements and no increase in bank capital charges.
10. Role of securitisation for SMEs
Question 16:
Number of contributions on this specific question: 76
Of which:
Originators/issuers: 19
Investors/potential investors: 11
Public authorities: 14
Others (NGOs): 4
Others (Industry associations): 18
Others (Services providers): 7
Others (Consultancy, law firm): 3
A. What additional steps could be taken to specifically develop SME securitisation?
The importance of increased standardisation is underlined by the majority of respondents. A
distinction is being made between more standardisation at the level of documentation and
more product standardisation. Standardised information should be collected on a centralised
basis and access should be free for all market participants. There is support for allowing some
forms of synthetic securitisation to qualify as simple transparent and standardised.
Current capital weightings prescribed by Solvency II are considered to have a
disproportionate effect and should be lowered. Allowing the application of the SME scaling
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factor to securitisation positions would provide more incentives for regulated firms to actively
engage in securitisation. It should be ensured that SME securitisation falls within the
regulatory definition of STS instruments.
The role of Asset-Backed Commercial Paper (ABCP) in financing SME loans is seen as very
important. The development of a scoring system for SME companies in Europe is also
perceived as invaluable.
B. Have there been unaddressed market failures surrounding SME securitisation, and how best
could these be tackled?
The SME securitisation market is blamed to be only national and having information
asymmetry between the issuers and investors. Also the respondents noted market failures
stemming from the compulsory reference to external credit ratings, the severe changes in
rating methodologies, the favourable treatment of on-balance sheet SME loans by MS and the
ABS risk weightings.
The respondents make reference to several unaddressed market failures, including: the
inability for funds to originate loans and other types of debt in some markets, the exclusion of
non-deposit taking entities to provide direct SME credit, the lack of transparency and
standardisation of SME loans, as well as the current risk weightings for CLOs and the "one
size fits all" approach to risk retention. To correct the internal market failures, the respondents
suggested actions such as increasing transparency, standardisation, introducing quality
standards and enabling synthetic securitisation as an alternative method.
A couple of stakeholders stress that 'tranching' was argued to be one of the key factors to
provide investor protection in the SME securitisation markets and thus this procedure should
not be penalised. This is because the bankruptcies of SMEs are common, due diligence for
each issuing businesses is expensive and there is a lack of reliable risk assessment models or
measures of SME creditworthiness.
C. How can further standardisation of underlying assets/loans and securitisation structures be
achieved, in order to reduce the costs of issuance and investment?
The majority of respondents consider that due to the large variety of SMEs in terms of
company size and business models, it is important that originators have comprehensive
flexibility with regard to structuring their SME loans and tailoring these loans to the needs of
individual SMEs. Any further standardisation for STS securitisations should be based on
general principles which lead to certification/labelling. Further standardisation should be
achieved by exploring already existing private sector initiatives such as the Prime
Collateralised Securities Initiative (PCI), the True Sale International (TSI) or the Short term
commercial paper program (STEP label).
Minority views underline that further standardisation of underlying assets and securitisation
structures should be determined by the market and not by legislative intervention.
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D. Would more standardisation of loan level information, collection and dissemination of
comparable credit information on SMEs promote further investment in these instruments?"
The majority responded that a certain degree of standardisation at loan level information,
collection and dissemination of comparable credit information on SMEs is considered to be
essential for promoting investment in SME securitisation
Minority views pointed out that there is already sufficient standardisation of loan level
information (via Prospectus Directive, Capital Requirements Regulation, Article 8b of the
Credit Rating Agencies Regulation and its associated regulatory technical standards, as well as
initiatives such as the Bank of England and ECB ABS reporting standards). Any additional
transparency requirements that go beyond those already in place would be counterproductive.
The same applies for any additional collection and publication of data and information.
11. Miscellaneous
Question 17:
To what extent would a single EU securitisation instrument applicable to all financial sectors
(insurance, asset management, banks) contribute to the development of the EU's securitisation
markets? Which issues should be covered in such an instrument?
Number of contributions on this specific question: 64
Of which:
Originators/issuers:16
Investors:13
Public authorities: 13
Service providers: 4
Others: 18
No reply: 56
7 respondents replied that a single EU securitisation instrument would to a great extent
contribute to the development of the EU's securitisation market, while 20 agreed that a single
instrument would contribute to the development of the market. 16 respondents did not directly
reply to the question, but pleaded in favour of more regulatory consistency and a level playing
field. 11 respondents thought that the creation of a single instrument is not appropriate and/or
not a priority.
Those stakeholders that did not think the development of a single instrument is appropriate
mainly pointed out that the requirements in different sectors are of a different nature (e.g.
prudential requirements, diversity, risk profile and duration of assets); that a single instrument
would require harmonisation of property/contract law and would run into legal and taxation
issues; that the market already knows the existing Member State framework very well and/or
that it would be very challenging to (further) harmonise.
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Respondents also mentioned that the harmonised approach to STS securitisation could be a
first step towards a single EU securitisation instrument. Overall, in their replies respondents
did not focus too much on the legal instrument that would have to be used, but more on the
effects of the legal instrument which should ensure more cross-sectoral consistency, more
clarity of the existing rules in place and the potential time needed to put in place the new legal
framework.
On the issues to be covered in such an instrument:
 Many stakeholders mentioned the STS criteria;
 Quite a number of respondents mentioned:
 Capital charges for banks and/insurers;
 Definitions (e.g. of default, performance metrics, boundaries between securitisation and
investment;
 Disclosure rules;
 Risk retention;
 Harmonisation and/or simplification of the existing rules.
 A limited number of respondents mentioned the due diligence rules
Question 18A:
For qualifying securitisation, what else could be done to encourage the further development of
sustainable EU securitisation markets?
Number of contributions on this specific question: 43
Of which:
Originators/issuers: 8
Investors: 4
Public authorities: 11
Service providers: 6
Others: 13
No reply: 77
Many of the things that according to respondents could be done to encourage the further
development of sustainable EU securitisation markets were already mentioned in relation to
other questions.
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The most important elements mentioned were:
Harmonise and make more consistent the legal framework, standardisation;
The creation of a level playing field across instruments for prudential treatment;
Give an appropriate capital treatment to STS that is better than for non-STS;
Provide a more precise definition of what constitutes a significant risk transfer, also in context
leverage ratio;
The costs securitisation vehicles incur when entering into derivatives and third party service
agreements should not be increased unnecessarily;
Investigate whether off balance sheet treatment-tests are always applied consistently by auditors and
whether processes can be improved;
Active participation and promotion of STS by local state and regulator, financial and publicity support
of new intermediation models by public institutions;
Promotion of STS securitisation;
Due consideration should be given to the trading side under the MIFID rules so that there are no
counterincentives to trade these instruments;
There may be a need to create a process for licencing the operators, product information, etc. based
on the models of AIFMD or UCITS;
Consideration therefore needs to be given to the cost that regulatory changes have added to a
securitisation issue;
SWAP counterparty availability and GIC accounts are a problem, which could be removed when a
central bank would provide these services;
Ancillary facilities ranking senior or pari passu to rated positions have historically been unrated. At
the moment a rating can be inferred from a rated position, only where this rated position is
subordinated in all aspects to the unrated facility. This results in a higher cost of capital for providing
these facilities. Being able to infer a rating from a rated position which ranks pari passu to the
ancillary service would go some way to ensuring a more appropriate capital treatment for these
unrated positions;
Makes an assessment whether non-bank investors are able to adequately assess the credit risks
transferred and have the capacity to absorb or control these quantities of credit risk. These products
shall not to be directly marketed to retail investors (Clarify certain conditions relating to the use of
unfunded credit protection under Regulation 575/2013 (CRR), in particular Article 213(1)(c)(i) of CRR;
Credit quality should be irrelevant to the qualifying securitisation criteria;
Regulators and other participants must encourage investors to analyse securitisations with rigor and
117
objectivity;
All qualifying transactions and securities should be registered with a not-for-profit, jointly owned,
limited purpose data repository (a “Utility”) to enable real-time monitoring of both the transaction’s
actual vs. projected performance as well as the Market’s systemic dimensions (i.e. size, volume,
participants and inter-linkages).
Look at costs for SME loans securitization.
Question 18B: In relation to the table in Annex 2 are there any other changes to securitisation
requirements across the various aspects of EU legislation that would increase effectiveness or
consistency?
Number of contributions on this specific question: 25
Of which:
Originators/issuers: 8
Investors: 1
Public authorities: 8
Service providers: 2
Others: 6
No reply: 95
The 25 respondents that replied to this question mentioned a large number of different issues.
In many cases the issues also relate to other questions in the consultation.
The topic that was most raised was cross-sectoral consistency of the (interpretation/application
of the) EU securitisation rules, including the STS terminology.
Other issues mentioned were:
Clarify the application of AIFM Directive on securitisation vehicles.
Ensure a non-discriminatory regulatory treatment of securitisation compared to similar asset classes.
Exclude securitisation vehicles from collateralisation requirements under EMIR for securitisation;
Concerns about minimal rating requirements for swap providers that are necessary for a
securitisation to obtain a given rating;
Regulatory and prudential provisions should be adapted/clarified. For instance, leverage ratio rules
allow for too much scope of interpretation/should allow deduction of any securitisation tranches sold
to third party investors from the total balance-sheet size used for the computation of the leverage
ratio and NSFR creates a too harsh treatment of securitisation;
118
The creation of a uniform European standard (for tax, civil and insolvency law issues), at least for the
securitisation of bank loans, would be desirable.
Do public business promotion and economic development programs on a national and EU level,
linking securitisation and public economic promotion
Give due consideration on the trading side under the MIFID rules so that there are no
counterincentives to trade these instruments (EBF, Luxembourg Bankers' Association)
May need to create a process for licencing the operators and product information based on the
models of AIFMD or UCITS;
Essential that the Money Market Funds Regulation preserve the ability of money market funds to
invest in qualifying securitisations in both the long term ABS and the short term markets ABCP
market;
Concerns that the revised securitisation framework results in excessive risk weights for both senior
and junior CMBS bonds, as compared to other financial instruments;
Originators should ensure that their offering documentation includes specific relevant information
disclosures to make it easier for investors to satisfy specific contractual, fiduciary or statutory
compliance requirements for certain investments;
Either increasing the ‘illiquid’ bucket in UCITS from 10% or specifically determining qualifying
securitisations to be ‘liquid’ for purposes of UCITS;
Legal ring-fencing of trust accounts related to co-mingling and/or set-off amounts would ideally be
achieved to reduce cash reserve requirements which increase the costs of issuing securitisations due
to lack of legal clarity/risk;
When developing the STS criteria the national legislations concerning inter alia insolvency and
company law should not be overlooked;
Harmonised application of accounting standards;
Consideration may also be given to Delegated Regulation (EU) 1187/2014 as regards RTS for
determining the overall exposure to a client or a group of connected clients in respect of transactions
with underlying assets;
Systematic support of Member States for the securitisation issued in their countries is not needed,
nor any other type of guarantee provided by State agencies. Public support should be limited to an
efficient legal framework.
4. LIST OF RESPONDENTS
Advisory Committee of the CNMV (Spanish National Securities Market Commission)
AMAFI
119
AMUNDI
APG Asset Management N.V.
Asset Management and Investors Council (AMIC) at the International Capital Market Association
(ICMA)
Association for Financial Markets in Europe
Association Française de la Gestion financière (AFG)
Association française des Sociétés Financières
Associazione Bancaria Italiana
Assogestioni
Austrian Federal Economic Chamber, Division Bank and Insurance
Austrian Federal Ministry of Finance, Austrian Financial Market Authority
Autorité des Marchés Financiers
AXA INVESTMENT MANAGERS
Banking & Payments Federation Ireland (BPFI)
Banque de France/Autorité de Contrôle Prudentiel
Barclays Bank
BBVA
Better Finance
BlackRock
BNY Mellon
British Bankers Association
Building Societies Association
Bundesarbeitskammer Osterreich
Bundesverband der Deutschen Industrie, Deutscher Industrie- und Handelskammertag, Deutsches
Aktieninstitut
Casey Campbell
CNCIF
Commercial Real Estate Finance Council (CREFC) Europe
Confederation of Finnish Industries EK ry
Czech Ministry of Finance
Danish Bankers Association
Deutsche Bank
Deutsche Bundesbank
Dr Orkun Akseli
Dutch Securitisation Association
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EACB - European Association of Co-operative Banks
EIOPA
EMPLOYERS OF CONSTRUCTION OF ARAGON CONFEDERATION
EURONEXT
European Association of Public Banks
European Banking Federation
European Central Bank
European Fund and Asset management Association (EFAMA)
European Mortgage Federation
European Savings and Retail Banking Group (ESBG)
European Securities and Markets Authority (ESMA)
Fédération Française des Sociétés d'Assurances (FFSA)
Federation of Finnish Financial Services
Finance & Leasing Association
Finance Norway
Finance Watch
Financial Law Committee of the City of London Law Society
French banking Federation
German Banking Industry Committee
German Federal Ministry of Finance
Gouvernement Français
Groupe GTI
HM Treasury
ICI Global
Insurance Europe
INTERMONEY TITULIZACION, SGFT,S.A.
International Capital Market Association
Irish Debt Securities Association
Irish Department of Finance (Ministry)
Irish Securitisation Industry Working Group
Irish Stock Exchange
K&L Gates LLP
Leaseurope and Eurofinas (joint response)
Loan Market Association
121
Luxembourg Investment Fund Association (ALFI)
M&G Investment Management Ltd.
Magyar Nemzeti Bank (Central Bank of Hungary)
Managed Funds Association
MEDEF
Ministry of Finance
Ministry of finance of the Slovak republic
Moody's Investors Service
Nomura International plc
ORRICK, HERRINGTON & SUTICLIFFE
Osterreichischer Sparkassenverband
PensionsEurope
Philippe CREPPY
Prime Collateralised Securities (PCS)
Realkreditraadet (Association of Danish Mortgage Banks)
REGULATION PARTNERS
Risk Control Limited
RJM Consulting
Schroders
Scope Ratings AG
Société française des Analystes Financiers
Spanish National Securities Market Commission (Comision Nacional del Mercado de Valores -
CNMV)
Standard & Poors Rating Services
State Street Corporation
States of Guernsey
Structured Finance Industry Group
Swiss Finance Council
The Alternative Investment Management Association (AIMA)
The Association of Corporate Treasurers
The Investment Association
The Luxembourg Bankers Association - The ABBL
The Netherlands Ministry of Finance, also on behalf of the Netherlands Authority for the Financial
Markets (AFM) and the Dutch Central Bank (DNB)
The Swedish Government and the Swedish authorities (Finansinspektionen and Riksbanken)
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Thomas Zmugg
True Sale International GmbH, Frankfurt am Main, Germany
UBS AG
UEPC
UniCredit
Union Asset Management Holding AG
Verband der Automobilindustrie e.V. (VDA)
William J. Harrington, Experts Board - Key Expert on Structured Finance Topics, Wikirating
ANNEX 8 – Findings from the COM Questionnaire to FSC Members
on securitisation
The European Commission has received 17 replies on the FSC questionnaire on simple transparent
and standardised securitisation (Austria, Bulgaria, Croatia, the Czech Republic, Estonia, Finland,
France, Germany, Greece, Italy, Latvia, Lithuania, the Netherlands, Portugal, Romania, Spain and
the United Kingdom).
A. General
The EU framework for EU securitisation is composed of a large number of EU legal acts. These
include the Capital Requirements Regulation for Banks, the Solvency II Directive for insurers
and the UCITS and AIFMD Directives for asset managers. Legal provisions, notably on
information disclosure and transparency, are also laid down in the Regulation on Credit Rating
Agencies and the Prospectus Directive.
Question 1
a) Are there in addition to the transposition measures of the EU legal acts mentioned above
specific legislative and regulatory provisions in your country that create a legal framework
for securitisation? Is there any specific soft-law or guidance that covers this issue?
Ten respondents (Austria, Bulgaria, Croatia, the Czech Republic, Estonia, Finland, Germany,
Lithuania, the Netherlands and the United Kingdom) indicated that they do not have in place
specific legislative and regulatory provisions for securitisation, besides the measures transposing the
relevant EU legal acts. Some of these respondents pointed out that despite the inexistence of a
specific legal framework, guidance, regulations and guidelines relevant to securitisation have been
issued by regulators as well as market sponsored bodies.
Seven respondents (France, Greece, Italy, Latvia, Portugal, Romania and Spain) noted that they
have established a legal framework regarding securitisation.
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b) If there are such specific provisions, soft-law or guidance, what has been the impact of
these on the market? Please include, where possible, references to data or studies that
underpin your analysis.
With regard to the impact of the securitisation legal framework on the market two respondents
(Latvia, Romania) pointed out that such impact cannot be estimated due to the lack of securitisation
activity in the country, while Greece replied that such data are not available. Spain indicated that
even though the existence of a solid regulatory framework has shielded the market from episodes of
financial instability, securitisation activity has been subdued for the past 7 years. Finally, France
noted that the solid legal framework helps securitisation structures remain simple.
c) Do you believe that any evolutions in these rules, soft-law or guidance are needed to re-boot
securitisation markets taking notably into account developments at international and EU
levels?
There is no consensus on the need for evolution of the established national legal framework to re-
boot the securitisation market. Three respondents (France, Greece and Portugal) noted that the
framework currently in force is reliable and resilient, pointing out other obstacles (such as the rating
caps imposed by the rating agencies and the increased capital charges for investments in
securitisation), which inhibit the development of securitisation. Romania and Latvia indicated that
a review of the national securitisation framework, in light of the developments at the EU and
international level, is necessary and fitting. Italy explained that the Italian securitisation framework
will be revised to reflect the developments agreed at international and European level especially as
to the initiatives for developing a simple and transparent securitisation market. Spain indicated that
they have already adopted a new legal framework, which updates the regime on securitisation.
B. Harmonisation of securitisation structures
Question 2:
a) Are there any specific legislative and regulatory provisions in your country that create a
specific legal framework for the structure of securitisation transactions? Please describe the
main characteristics of this framework.
Six respondents (France, Greece, Italy, Portugal, Romania and Spain) provided details of the
specific legislative provisions which create a framework for securitisation and regulate issues such
as: the establishment of a special purpose vehicle, the transfer of receivables, the taxation of the
transfers and the SPVs, the insolvency of the originator and data protection. Three respondents
(Germany, the Netherlands and the United Kingdom) explained that there is no specific framework
for securitisation and transactions are carried out under general law provisions.
b) What best practices from your market could in your view be useful at EU level in order to
help issuers as well as boost investor appetite in EU securitised products?
France stated that establishing a vehicle that is supported by a strong legal framework, is subject to
strong regulatory requirements and is monitored by a responsible actor with legal personality acting
in the best interest of investors, is a good practice that could be useful at EU level. Germany
indicated as a best practice from its market, the True Sale International GmbH (TSI), which was
founded on the initiative of 13 German banks. The TSI has established standards for transparency,
investor information, lending and loan processing and also provides certification services for a
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corresponding and widely accepted German securitisation standard.32
In addition to that, a wholly
owned subsidiary of the TSI provides special purpose vehicles (SPVs) under German law that have
been used since 2005 in almost 100 securitisations transactions. Portugal highlighted the fact that
under its law the same STC (credit Securitisation Company) may be used by different originators to
issue an unlimited number of separate transactions is often seen as an efficient solution for
originators. Spain mentioned as good practices the favouring of true sale operations (compared to
synthetic operations), that only credit claims can transferred to the SPV (other types of movable and
immovable property are not allowed) and the especially demanding transparency requirements. The
United Kingdom indicated that the flexibility of its regime which has enabled innovation in
securitisation and the securitisation of a wide range of asset classes is well regarded by market
operators.
c) Are there in you jurisdiction any obstacles for the transfer of pools of assets to SPVs
established outside your jurisdiction?
Ten respondents (Austria, Czech Republic, Germany, Greece, Italy, Latvia, Lithuania33
, the
Netherlands, Spain and the United Kingdom34
) reported no specific obstacles that would prevent the
transfer of pools of assets to SPVs established outside the country’s jurisdiction. Romania indicated
that such transfers are only permissible to SPVs authorised by the national financial supervision
authority. France stated that the origination or purchase of non-matured receivables as regular
business practice is regarded under French law as a credit activity and thus requires licensing as a
credit institution in France (or the use of a European passport). SPVs subject to French law are
allowed to acquire these non-mature receivables to conduct business without having to apply for a
licence.
d) In terms of harmonisation, are there are any other initiatives in your country that would
deserve a specific attention?
Germany referred to the TSI initiative discussed in its reply under question 3b. Romania noted that
amendments aimed at strengthening the regulation of prudential supervision of the quality of debts
portfolio used to back-up the issued financial instruments and the issuance activity, are currently in
progress. The United Kingdom indicated that while there are no initiatives, there is a degree of
harmonisation of the business models and securitisation programmes of the major securitisation
issuers brought about by market pressure and market discipline. In addition to that, common
standards have been introduced at the underlying assets level. Finally, the introduction of
transparency criteria by the Bank of England and the ECB, has led to greater standardisation
between issuers.
e) Regarding infrastructures (for example trading/issuing venues) related to securitisation,
are there any initiatives in your country that would deserve specific attention? If specific
infrastructures have been developed, please describe them and specify their importance (for
example share of total transactions being traded/issued on each venue).
32
Originate to distribute securitisations are explicitly excluded from the potential scope of application of these standards
33
The transfer would have to comply with the requirements set forth by general laws.
34
However the transfer of certain types of receivable may give rise to additional requirements, for example a transferee of consumer
receivables requires a license from the UK consumer credit regulator, whereas a buyer of residential mortgage loans may require
authorisation from the FCA.
125
Ten respondents (Austria, Croatia, Germany, Greece, Latvia, Lithuania, the Netherlands, Romania,
Spain and the United Kingdom) indicated that there are no initiatives related to securitisation
infrastructure that deserve specific attention. France stated that a scheme has been developed for
securitising loans to SMEs but no other specific infrastructure has been developed; Spain noted that
securitisations can be traded both in regulated markets and multilateral trading facilities (Mercado
Alternativo de Renta Fija).
C. SME securitisations
Question 3:
What is the current situation as regards SME securitisation in your country?
Ten respondents (Austria, Bulgaria, Croatia, Czech Republic, Estonia, Finland, Greece, Latvia,
Lithuania, and Romania) indicated that there is no SME securitisation activity within their
jurisdiction at the moment. Four respondents (France, the Netherlands, Portugal and the United
Kingdom) noted that while there is some activity, SME securitisation never developed widely
within their territory, with volumes being subdued. Spain stated that there is an operation in place
that involves the securitisation of SMEs trade receivables. This operation takes place in the Spanish
multilateral trading facility for fixed income.
Please describe your national schemes (if any) and/private sector initiatives for SME securitisation.
Four respondents (France, Germany, Italy and the United Kingdom) indicated that there have been
initiatives for SME securitisation.
In France the main French banks, with the support of the Banque de France, have created the Euro
Secured Notes Issuer (ESNI). This vehicle issues secured notes backed by bank loans to SMEs
meeting the eligibility criteria for Eurosystem refinancing operations, measured by the Banque de
France rating (FIBEN). Private loans transferred as part of a collateral arrangement in favor of
ESNI shall nonetheless remain managed by the banking groups that granted them (each credit
institution participating in ESNI has its own independent compartment) and the securities are not
issued in tranches. These issues will provide a liquidity value to financing granted to SMEs and
mid-tier companies and allow capital market participants to benefit from high quality collateral. The
financial instruments issued may be used as collateral between capital market participants and as a
new investment asset class for investors.
Another initiative is currently being developed by the Banque Publique d’Investissement (BPI
France). In this structure, banks could sell a portion of their SME loans to a SPV (in order to allows
for a correct alignment of interests, banks must keep between 60 and 80% of each loan), and
BPI France would then guarantee the portion of the loans in the SPV. This would allow banks to
deconsolidate their loans, while maintaining a commercial relationship with their clients. For
BPI France, the structure ensures that its interventions focusing on addressing identified market
failure in SMEs access to credit can be implemented without imposing constraints on the funding
model of the banks.
In Germany the KfW PROMISE platform for synthetic securitisations of SME loans is structured
as follows: a bank transfers the credit risk of a reference portfolio of SME loans to KfW via a credit
default swap. The credit risk of the reference portfolio is then being tranched and KfW receives
credit protection for the super senior tranche by a credit default swap with an investment bank
acting as protection provider. The remaining risk of the reference portfolio is then first transferred
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to a German SPV via a certificate of indebtedness or a credit default swap which is then finally
transferring the credit risk to securitisation investors by issuing various credit linked notes. The
proceeds from issuing the credit linked notes are then used to collateralise KfW’s claims towards
the issuing SPV resulting from the credit default swap. Main benefits of the PROMISE programme
are its standardised structure and documentation and the reduction in capital requirements achieved
by the originator due to KfW’s favourable risk weight.
In Italy, there is the Confidi initiative (Confidi is an Italian non-bank financial intermediary
providing SMEs with credit guarantees) and the tranched cover system where credit protection is
directly bought from investors, in the form of a financial guarantee backed by cash collateral or
personal notes or tranching the underlying portfolio using the Supervisory Formula Approach
(SFA). This structure can also cover the risk of a new origination portfolio, thus facilitating new
securitisations, which in turn would provide substantial new lending to the real economy
In the United Kingdom the British Business Bank has undertaken two initiatives under the Enable
programme: Enable Funding and Enable Guarantees.
Enable funding. Under this scheme, the BBB will "warehouse" newly-originated asset finance
receivables from different originators, who are generally not large enough to issue securitisations on
their own. Once a stock has been built up, the BBB will seek to refinance by issuing a
securitisation. This initiative is aimed at improving the provision of asset and lease finance to
smaller UK businesses, and enabling smaller asset finance providers to access capital markets.
Enable guarantees. Under this scheme, the BBB can provide a guarantee to cover a portion of a
designated portfolio’s net credit losses in excess of an agreed threshold. The first transaction of the
enable guarantee programme was completed with Clydesdale and Yorkshire Banks in March 2015.
While this scheme does not involve a public securitisation, securitisation technology is used in
tranching the risk of the asset portfolio, and in assessing the credit risk of the portfolio.
D. Miscellaneous
Question 4: Are there any specific issues related to your national experience on securitisation
you would like to highlight?
Lithuania noted its support for a harmonised framework for securitisation in the EU; Portugal
highlighted the negative impact the post-crisis regulatory changes and the behaviour of credit rating
agencies has had on the issuance and sale of ABS. The Netherlands pointed out the regulatory
uncertainty and the high prospective capital charges as the main reasons behind the lack of activity
in the RMBS market. France also highlighted the high cost of securitisation as opposed to other
funding options and the need for standardisation and innovation. Italy noted that certain synthetic
securitisation transactions aimed at SMEs can be as clear and transparent as traditional
securitisation and offer significant added value in the bank management of risk and capital.
Therefore, they should not be excluded from the framework of STS securitisation. The United
Kingdom finally indicated that the small number of large banking institutions, which have similar
business models leads to economies of scale which benefit not only banks but also investors. In
addition to that, the government’s initiatives have enabled smaller banks to access the securitisation
markets.
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Replies to the FSC questionnaire
Existence of
specific
legislative and
regulatory
provisions?
Impact of the
existing legal
framework on
the market?
Would evolution of
the existing
national legal
framework be
needed to re-boot
the market?
Austria No N/A N/A
Bulgaria No N/A N/A
Croatia No N/A N/A
Czech Republic No N/A N/A
Estonia No N/A N/A
France Yes Positive No
Finland No N/A N/A
Germany No Positive No
Greece Yes N/A
Italy Yes N/A Yes
Latvia Yes N/A Yes
Lithuania No N/A Yes
Netherlands No N/A N/A
Portugal Yes N/A No
Romania Yes
No impact on the
market
Yes
Spain Yes Positive Yes
United Kingdom No Positive
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Harmonisation of securitisation structures
Existence of a
specific legal
framework for
the structure of
securitisation
transactions
Obstacles for the
transfer of pool of
assets to SPVs
outside the
country's
jurisdiction?
Initiatives in
term of
harmonisation?
Infrastructures
related to
securitisation?
Austria No No No No
Bulgaria No N/A No No
Croatia No N/A N/A N/A
Czech
Republic
No No N/A N/A
Estonia No N/A N/A N/A
France Yes No Yes
Finland No N/A N/A N/A
Germany No No Yes No
Greece Yes No No No
Italy Yes No No No
Latvia No No N/A N/A
Lithuania No No No No
Netherlands No No Yes No
Portugal Yes N/A No
Romania Yes Yes No
Spain Yes No Yes
United
Kingdom
No No No
129
SME securitisation
National schemes/private
initiatives for SME
securitisation
Austria No SME securitisation activity No
Bulgaria No SME securitisation activity N/A
Croatia No SME securitisation activity N/A
Czech Republic No SME securitisation activity N/A
Estonia No SME securitisation activity N/A
France
Subdued volumes of SME
securitisation activity
Euro Secured Notes Issuer
(ESNI)/ Initiative of the
Banque Publique de
Investissement
Finland No SME securitisation activity N/A
Germany
Subdued volumes of SME
securitisation activity
KFW promise platform
Greece
No SME securitisation
activity
Italy
No SME securitisation
activity
Confidi
Latvia No SME securitisation activity N/A
Lithuania No SME securitisation activity N/A
Netherlands
Subdued volumes of SME
securitisation activity
N/A
Portugal
Subdued volumes of SME
securitisation activity
Romania No SME securitisation activity N/A
Spain Yes N/A
United
Kingdom
Subdued volumes of SME
securitisation activity
British Business Bank
Initiatives (Enable
funding/ guarantees)
130
ANNEX 9 – Bibliographical references
Abiad, A., Dell'Ariccia, G., & Li, B. (2014). "What have we learned about creditless recoveries?"
In: Claessens, S., Kose, M. M. A., Kose, M. A., Laeven, M. L., & Valencia, F. (2014). Financial
Crises: Causes, Consequences, and Policy Responses. International Monetary Fund.
AFME (2014). "Securitisation Data Report Q4:2014", December 2014.
BCBS-IOSCO Joint Forum (2011). "Report on asset securitisation incentives" July 2011.
BoE-ECB (2014). "The case for a better functioning securitisation market in the European Union".
Joint BoE-ECB paper, May 2014.
Coval, J., Jurek, J., & Stafford, E. (2009). "The economics of structured finance". The Journal of
Economic Perspectives, 3-26.
EBA (2014). "EBA discussion paper on simple, standard and transparent securitisations".
EBA (2015) "Prudential treatment of securitisations" Staff working document, 18 March 2015.
ECB (2011). "Determinants of credit-less recoveries", ECB WP n. 1358 by Bijsterbosch, M., &
Dahlhaus, T.
Fitch (2014). "Global structured finance losses: 2000-2014 issuance"
Giovannini, A., Mayer, C., Micossi, S. (2015): "Restarting European long-term investment
finance", CEPR Press
Gorton, G. B. (2008). "The panic of 2007". National Bureau of Economic Research WP 14358
IMF (2014) "SME securitisation in the Euro Area: a policy proposal"
IMF (2014b) "Euro Area policies, 2014 Article IV consultations, selected issues" in IMF Country
Report No. 14/199
IOSCO (2012) "Global developments in securitisation regulation", November 2012.
JC (2015) "Draft final report on securitisation prepeared by the Joint Committee Task Force on
Securitisation" 23 March 2015
Laas, D. and Siegle, C. (2014) "Basel Accords versus Solvency II: Regulatory Adequacy and
Consistency under the Postcrisis Capital Standards", mimeo, University of St. Gallen.
Shin, H.S., (2009), "Securitisation and financial stability", The Economic Journal vol. 119, pp. 309-
332