What qualifies as a simple, transparent and
One component of the EU’s Capital Markets Union
project is to ensure that securitisations are carried out in a
transparent and risk-reflective manner, and that they are of
high quality. As with many other financial instruments, this
more cautious approach is a direct reaction to practices that
were brought to light by the financial crisis.
Two new regulations take effect in January 2019 that aim to
introduce a consolidated framework for securitisations in the
EU: the Securitisation Regulation and an accompanying framework
outlining the capital treatments of different types of
asset-backed deals (known as the Capital Requirements
Regulation or CRR). These have been in the pipeline since
"I am an optional ABS buyer,
not a forced one"
The Securitisation Regulation introduces rules for simple,
transparent and standardised (STS) securitisations which cover
all asset-backed transactions, without differentiating
according to the type of investor - as was the case under the
previous framework where investment firms and insurance
companies, for example, were subject to different rules.
All securitisations, including those that want to qualify as
STS will be subject to the same disclosure, risk retention and
due diligence requirements. STS transactions will also have
lower capital requirements than other types of asset-backed
deals, which is believed could have a positive effect on
issuances going forward.
What are the capital requirements for STS
The CRR incorporates recommendations set out in the Basel
III framework on securitisation and sets out that STS
transactions benefit from
lower capital requirements. There are two methods: internal
(based on an originator’s own risk ratings) and
standardised (approved at regulator level) to determine the
risk associated with the underlying assets used in the
How is STS determined?
Transactions have to meet multiple requirements to qualify
as STS: the label refers to how a transaction is structured so
will focus on elements like homogeneity of the underlying
assets, clear historical performance data for these assets or a
defined framework for rates, risks or conflict resolution.
"Getting an STS label is not just a box ticking exercise
which then allows investors to mechanistically invest in a
securitisation," said a London-based lawyer. "Everyone has to
do their due diligence properly."
It’s up to the originators, sponsors and
special purpose vehicles to notify regulators have to be
notified of the STS label. The European Supervisory Markets
Authority will also be informed.
Some types of securitisation will not meet STS criteria:
securitisations of non-performing loans (NPLs), managed
collateralised loan obligations or commercial mortgage-backed
securities are some examples. For NPLs, this is because of a
lack of transparency associated with the underlying loans.
Is it easy for a transaction to qualify for the STS
In theory it is. Some of the criteria used to determine
whether a transaction will be awarded the STS label are
likely to be used for securitisations outside of
that new framework as well: for instance, the need for a
true sale. A true sale happens when assets have been
effectively transferred from the seller
and are therefore protected from claims
made in the event of the
"The parties to a securitisation will generally
want to ensure that the deal is structured as a true sale
regardless of the STS label," said
Mayer Brown counsel Merryn Craske. "It’s very
likely that securitisations that many will consider
to be high quality will exist out of the STS sphere as
But even though the Securitisation Regulation
hasn’t yet been implemented, some criticism has
already targeted the STS framework for being everything but
simple. There are multiple criteria an asset-backed transaction
(ABS) needs to comply with to be classed as STS – this
is where problems could start.
"Getting an STS label is not
just a box ticking exercise which then allows investors
to mechanistically invest in a securitisation"
The European Banking Authority is
currently consulting on how to interpret the criteria until
The simplicity criterion alone has several tens of
requirements and may ultimately not even have the same
interpretation depending on the member states. When it comes to
the standardisation element, factors such as mitigation of
interest rates and currency risks, adequate references for
interest payments or the requirements for the transaction
documentation could turn out as equally complex.
"Is it worth building a new IT infrastructure to capture STS
deals or do we continue focusing on areas where there is actual
clarity?" said an in-house at an EU bank. "This is a legitimate
question: will investors be put off by the difficulty and could
STS become a niche product?"
This thought is echoed by a London-based compliance
participant. "If the regulator wants to work to make one asset
too complex, then I think that many in the market will focus on
other ones, there is enough liquidity elsewhere," they said. "I
am an optional ABS buyer, not a forced one."
Craske mentioned asset-backed
commercial paper (ABCP) programmes which she said
would be unlikely to qualify as STS
ABCP programme to qualify,
the entire programme, the sponsor and every single
transaction in the programme (except for temporary
non-compliance with certain criteria for a maximum of five
percent of the aggregate amount of the underlying
exposures) would have to meet
the STS requirements, which will be very
difficult if not impossible to achieve," she said.
Are there sanctions for using the STS label
The proposed Securitisation Regulation sets out penalties in
the event its requirements are breached. These could be as high
as €5 million ($5.9 million approximately) for individuals
or 10% of the total annual turnover for legal entities.
Criminal sanctions are possible too depending on how member
states apply the regulation.
"The penalties for getting it wrong could be quite severe
but the benefit of having these sanctions could be to
incentivise market participants to build transactions
properly," said the London lawyer.
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STS agreement good for