The New Securitisation Framework: what has really changed

Jurisdiction

These do not specify scope but are read to apply to entities established in the EU.

These do not specify scope but are read to apply to entities established in the UK.

Apply only to entities established in the UK which means “an entity which is constituted under UK law with a head office, or, if it has a registered office, that office is in the UK”. AIFMs which are not authorised in the UK will no longer be considered institutional investors post-implementation. The PRA Rules do not apply to non-UK firms with branches in the UK.

Jurisdiction - STS

The originator, sponsor and SSPE involved in a securitisation considered STS shall be established in the EU.

The originator and sponsor involved in a securitisation which is not an ABCP programme or an ABCP transaction and is considered STS must be established in the UK.

The sponsor involved in an ABCP programme considered STS must be established in the UK.

The originator and sponsor involved in a securitisation which is not an ABCP programme or an ABCP transaction and is considered STS must be established in the UK.

The sponsor involved in an ABCP programme considered STS must be established in the UK.

Resecuritisation

The EU Securitisation Regulation includes a ban on resecuritisation (i.e. where the underlying exposures used in a securitisation include securitisation positions) save for grandfathered securitisations and securitisations to be used for the following legitimate purposes: (i) the facilitation of the winding-up of a credit institution, an investment firm or a financial institution; (ii) ensuring the viability as a going concern of such entity in order to avoid its winding-up; or (iii) where the underlying exposures are non-performing, the preservation of the interests of investors.

The UK Securitisation Regulation onshored the then current EU Securitisation Regulation.

The Securitisation Regulations Framework does not include ‘legitimate purposes’ as an exception on the ban on resecuritisation. Instead, manufacturers can apply to the PRA (or, as applicable, the FCA) for a waiver of the ban, and institutional investors can apply to the relevant regulator for a waiver in order to invest in a resecuritisation.

Synthetic STS securitisations

On-balance sheet synthetic securitisations may achieve STS status.

On-balance sheet synthetic securitisations may not achieve STS status.

On-balance sheet synthetic securitisations may not achieve STS status.

Risk Retention

“Sole Purpose” test

Under the EU Securitisation Regulation, when identifying which entity may be the risk retainer for the purposes of Article 6 of the EU Securitisation Regulation, an entity shall not be considered to be an originator where the entity has been established or operates for the sole purpose of securitising exposures.

The EU RR RTS further provides that an entity shall not be considered to have been established or to operate for the sole purpose of securitising exposures if all of the following criteria are met: (i) the entity has a business strategy and payment capacity consistent with a broader business enterprise, (ii) the exposures to be securitised and any corresponding income is not its sole or predominant source of income and (iii) the management body has the necessary experience and the entity has adequate corporate governance arrangements.

An entity established or operating for the 'sole purpose' of securitising exposures was not permitted to be an originator for the purposes of risk retention. In practice, market participants used the EU regulatory technical standards binding in the EU in relation to risk retention[4] (the “EU RR RTS”) as non-binding guidance on how to interpret this test in the absence of a UK standard, as the EU RR RTS was not in force at the relevant time and so was not onshored.

Unlike the EU Rules, under the Securitisation Regulations Framework, the definition of ‘sole purpose’ now specifies factors that should be taken into account (namely: whether the entity has a business strategy and payment capacity consistent with a broader business enterprise and whether the management body has the necessary experience and the entity has adequate corporate governance arrangements) rather than factors that must apply, and the “sole or predominant source of income” limb has been removed, making this test looser under the Securitisation Regulations Framework than the EU Rules.

Cash collateralisation for synthetic/ contingent retention

Synthetic or contingent forms of risk retention must be fully collateralised, where an entity other than a CRR or Solvency II firm is acting as the risk retainer.

Synthetic or contingent forms of risk retention must be fully collateralised where an entity other than a credit institution is acting as the risk retainer.

The Securitisation Regulations Framework widens the scope of the exception in the UK Securitisation Regulation to the rule that synthetic or contingent forms of risk retention must be fully collateralised where a CRR firm or a UK Solvency II firm is acting as the risk retainer to encompass investment and insurance firms, which brings the new rules in line with the scope of the exception in the EU Rules.

Non-Performing Exposures (NPEs)

Where a securitisation of NPEs includes a non-refundable purchase price discount, the risk retention requirement will be calculated by reference to the market value of such NPE rather than its nominal value.

The value of NPEs held by the risk retainer was based on the nominal value of the exposures under the UK Securitisation Regulation.

The Securitisation Regulations Framework allows the use of a non-refundable purchase price discount rather than nominal value of the exposures to be used in determining the economic interest held by the risk retainer in NPE securitisations. This reflects the EU Rules.

Transfer of risk retention holding

Permits the risk retainer to transfer its retention holding, (i) in the event of insolvency of the retainer, (ii) where retention is on a consolidated basis and (iii) for legal reasons beyond the retainer’s control and beyond the control of its shareholders, where it is unable to continue acting as a retainer.

Did not permit the risk retainer to transfer its retention holding. In practice, market participants used the EU RR RTS as non-binding guidance on how to interpret this test in the absence of a UK standard, as the EU RR RTS was not in force at the relevant time and so was not onshored.

The Securitisation Regulations Framework permits the transfer of a retention holding: (i) on the insolvency of the retainer; and (ii) where retention is on a consolidated basis, however it does not include the ability for the risk retention holder to transfer its retention holding “for legal reasons beyond the retainer’s control and beyond the control of its shareholders, where it is unable to continue acting as a retainer” and so is more restrictive than the EU Rules.

Hedging of risk retention holding

Recital 7 of the EU RR RTS provided that hedging should be allowed where it is undertaken prior to the securitisation as a legitimate and prudent element of credit granting or risk management and does not create a differentiation for the retainer’s benefit between the credit risk of the retained securitisation positions or exposures and the securitisation positions or exposures transferred to investors.

Hedging retained risk was not permitted, subject to limited exceptions.

The Securitisation Regulations Framework contains a further exception to the rule that the retained risk may not be subject to any credit risk mitigation or hedging, by permitting the hedging of risk retention holdings where such hedging is undertaken prior to the securitisation as a prudent element of credit granting or risk management and it does not create a differentiation for the retainer’s benefit between the credit risk of the retained securitisation positions and the positions transferred to investors. This brings the UK Rules in line with the EU Rules.

Institutional investor Due Diligence

Institutional investor due diligence

Institutional investors must verify that the originator, sponsor or SSPE has made available the information required by Article 7 of the EU Securitisation Regulation in accordance with the frequency and modalities provided for in that Article, including ESMA template reporting. An EU investor cannot rely on UK templates and must receive ESMA reporting templates in order to comply with Article 5 of the EU Securitisation Regulation.

Institutional investors needed to verify that the originator, sponsor or SSPE has made available the information required by Article 7 of the UK Securitisation Regulation in accordance with the frequency and modalities provided for in that Article, including FCA template reporting.

In respect of securitisations where the originator, sponsor or SSPE were not established in the UK, UK institutional investors were required to verify that the originator, sponsor or SSPE had made available information that is “substantially the same” as if such originator, sponsor or SSPE were established in the UK, and as if the UK Securitisation Regulation applies to such entity.

This means that UK institutional investors could have accepted ESMA template reporting if it were “substantially the same” as the equivalent disclosure under the FCA templates.

The Securitisation Regulations Framework take a less prescriptive approach to the disclosures that UK institutional investors must verify have been provided. Unlike under the EU Rules of the UK Securitisation Regulation, UK institutional investors must ensure relevant sell-side parties have “made available sufficient information to enable the institutional investor independently to assess the risks of holding the securitisation position and has committed to make further information available on an ongoing basis, as appropriate” together with a list of what that information must include as a minimum. As a result, a UK investor can rely on ESMA templates as the UK requirements are less stringent.

UK originators, sponsors or SSPEs are still required to report using the UK reporting templates.

Pricing/Commitment to invest

The current EU Rules require institutional investors to obtain certain documents information prior to “pricing” and do not refer to “commitment to invest”.

The UK Securitisation Regulation required institutional investors to obtain certain information prior to “pricing” and do not refer to “commitment to invest”.

The Securitisation Regulations Framework states that where information is provided in relation to "primary market investments" it should be provided in draft/initial form "before pricing or commitment to invest". This timing clarifies the position as regards private transactions where there is no acknowledged pricing date.

Secondary market investors are only required to conduct due diligence on the most up-to-date information available at the time of commitment to invest, as opposed to documents from the time of ‘pricing’.

Delegation

Where an institutional investor has delegated to another institutional investor the authority to make investment management decisions and has instructed such managing party to fulfil that institutional investor’s due diligence obligations, any sanction imposed as a result of such failure may be imposed on the managing party and not on the delegating party.

Where an institutional investor has delegated to another institutional investor the authority to make investment management decisions and has instructed such managing party to fulfil that institutional investor’s due diligence obligations, any sanction imposed as a result of such failure may be imposed on the managing party and not on the delegating party.

The Securitisation Regulations Framework clarifies that where an institutional investor has delegated to a managing party the authority to make investment management decisions, such managing party is responsible for any failure to comply with the relevant due diligence obligation if it is an institutional investor. If the managing party is not an institutional investor, the delegating institutional investor remains liable for compliance with the relevant due diligence obligations. To note that non-UK AIFMs no longer fall within the definition of “institutional investor”.

Trade Receivables

Under the EU Rules the exclusion of trade receivables not originated in the form of a loan from the requirement to verify credit-granting standards is included as a recital in the Eu Securitisation Regulation.

Under the UK Securitisation Regulation, the exclusion of trade receivables not originated in the form of a loan from the requirement to verify credit-granting standards was included as a recital.

Trade receivables not originated in the form of a loan are explicitly excluded from requirement to verify credit-granting criteria under the Securitisation Regulations Framework (previously only stated in a recital in the UK Securitisation Regulation).