On September 30th 2015, the European Commission adopted its Securitisation initiative, consisting of a proposal for a Securitisation Regulation (the “Regulation”) and a proposal to amend the Capital Requirements Regulation (the “CRR”). The Council of the European Union amended the drafts of these texts the final form of which was approved on December 8th 2015.
The purpose of the proposed Regulation is to provide a single framework for all securitisation transactions, partially replacing current rules in sector-specific regulation, such as the Credit Rating Agency Regulation and the Alternative Investment Fund Managers Directive.
In addition, the proposed Regulation introduces “Simple, Transparent and Standardised” (“STS”) securitisations, which would be granted some relief from regulatory capital requirements under the CRR.
The proposed Regulation imposes due diligence rules on the “institutional investor”, a definition which includes a broad range of undertakings, such as UCITS management companies, alternative investment fund managers, insurance undertakings and credit institutions. These investors must verify certain information before acquiring a position in a securitisation.
The proposed Regulation also introduces a dual approach risk retention regime. The risk retention requirement is directly imposed on originators, sponsors or original lenders. Absent an agreement, the originator should retain risk (a material net economic interest of at least 5%). The institutional investor should check whether the originator, sponsor or lender has retained risk.
In addition, the proposed Regulation sets out transparency requirements. Originators, sponsors and special purpose entities of a securitisation must provide investors, at a minimum, with certain information, such as a transaction summary and details on the underlying exposures. One of these entities must be designated as responsible for supplying the necessary information to holders of securities and competent authorities.
As mentioned, the proposed Regulation introduces STS securitisations. Securitisations (as defined in the Regulation) are STS if they satisfy certain criteria relating to simplicity, standardisation and transparency. Originators, sponsors and special purpose entities must jointly notify ESMA of compliance with the STS requirements and ESMA publishes the notification on its website. Since STS securitisations are to be supervised by national competent authorities, Member States shall ensure that competent authorities have the necessary supervisory, investigatory and sanctioning powers. For the investors, one of the benefits of the STS status is that regulatory capital requirements for exposures to STS are reduced under the proposed amendments to the CRR.
With some exceptions, the proposed Regulation will apply to securitisations, the securities of which are issued on or after the date it enters into force.As the next step in the EU legislative process, the Commission’s proposals will now go to the European Parliament for its consideration. The three European institutions, the Commission, the Council and the Parliament, will then negotiate a common position, which is expected to take place in the second half of 2016.