Simpler, more transparent and more standardised securitisation
Regulation (EU) 2017/2402 — general framework for securitisation and creating a specific framework for simple, transparent and standardised securitisation
It aims to restart a high quality securitisation* market that will:
improve the financing of the EU’s real economy;
enhance private risk sharing; and
ensure investor protection.
It creates a general system to simplify rules for all securitisations and to identify simple, transparent and standardised securitisations. This includes:
common definitions for all key concepts in a securitisation;
requirements for due diligence*, risk-retention*, transparency and credit-granting criteria;
requirements for the sale of securitisations to retail clients;
a ban on resecuritisation*;
rules for securitisation special purpose entities* (SSPEs) and securitisation repositories*;
a structure for simple, transparent and standardised (STS) securitisation;
a system for administrative sanctions and remedial measures in cases of non-compliance.
Investors in a securitisation position* must first carry out certain tests to:
assess all the risks involved before taking on the responsibility (due diligence);
ensure the product is suitable for the client before selling it on.
Issuers of a securitisation must:
retain a net economic interest of at least 5% of its value (risk-retention);
provide detailed information and underlying documents to holders of a securitisation position, the relevant authorities and, if asked, potential investors so they understand the transaction (transparency);
apply the same sound and well-defined criteria for granting credit as they do for non-securitised products.
Securitisation special purpose entities must not be based in a high-risk non-EU country.
Securitisation repositories must:
register with the European Securities and Markets Authority which has powers to withdraw their licence;
collect and keep all details of the securitisation and make these available free of charge to investors and competent authorities.
Issuers may use the term STS (simple, transparent and standardised) when the securitisation, whether short- or long-term, meets a clear set of criteria. This is to distinguish it from more complex and opaque ones and enables some institutional investors to apply a more risk-sensitive capital treatment.
Various European and national authorities, with powers to investigate and apply administrative and criminal penalties, supervise implementation of the legislation and work closely together.
By 1 January 2021, and then every 3 years, the Joint Committee of the European Supervisory Authorities publishes a report on experiences with the regulation.
The European Commission:
by 2 January 2020, on the basis of a report published by the European Banking Authority, presents a report to the European Parliament and the Council on the feasibility of creating an STS framework for synthetic securitisations;
by 1 January 2022, presents a report to the European Parliament and the Council on the legislation with proposals for amendments if necessary;
has the power to adopt delegated acts to amend non-essential elements of the regulation.
Securitisation products played a significant role in the US subprime mortgage crisis beginning in 2007. The market in the EU has been slow to recover since.
The legislation, which also amends the capital requirements regulation (Regulation (EU) 2017/2401), is designed to remedy this by introducing clear and effective rules to restore market confidence.
A framework for securitisation is the first major building block of the EU’s plan, launched in 2015, to develop a fully functioning capital markets union by the end of 2019. Developing a securitisation market helps create new investment possibilities and provide an additional source of finance, especially for small- and medium-sized enterprises and start-ups.
For more information, see:
Securitisation (European Commission)
A European framework for simple and transparent securitisation — Fact sheet (European Commission).
Securitisation: a transaction that enables a lender — often a bank — to refinance a set of loans/assets (e.g. mortgages, car leases, consumer loans, credit cards) by converting them into securities that others can invest in.
Due diligence: an institutional investor should be able to show that the necessary verifications of the due-diligence requirements laid down in detail in Article 5 of the regulation have been met.
Risk-retention: planned acceptance of losses where some, but not all, risk is consciously retained rather than transferred.
Resecuritisation: securitisation where at least one of the underlying exposures is a securitisation position.
Securitisation special purpose entities: a body carrying out one or more securitisations and whose structure is intended to isolate the SSPE’s obligations from those involved in the original agreement.
Securitisation repositories: centrally collect and maintain records on securitisations to help improve transparency in the market.
Securitisation position: exposure to a securitisation.
Regulation (EU) 2017/2402 of the European Parliament and of the Council of 12 December 2017 laying down a general framework for securitisation and creating a specific framework for simple, transparent and standardised securitisation, and amending Directives 2009/65/EC, 2009/138/EC and 2011/61/EU and Regulations (EC) No 1060/2009 and (EU) No 648/2012 (OJ L 347, 28.12.2017, pp. 35-80)It has applied since 1 January 2019.
Regulation (EU) 2017/2401 of the European Parliament and of the Council of 12 December 2017 amending Regulation (EU) No 575/2013 on prudential requirements for credit institutions and investment firms (OJ L 347, 28.12.2017, pp. 1-34)