European Commission Publish Proposals to Improve European Regulatory Framework for Securitisations

The European Commission has published a package of measures to make the EU securitisation framework simpler and more fit for purpose. The proposed measures seek to facilitate securitisation activity in the EU while continuing to safeguard financial stability. A stronger and simpler securitisation framework can help channel more investments into the real economy – supporting economic growth, innovation and job creation across the EU. This review is the first legislative initiative proposed under the savings and investments union (SIU) strategy.

The existing framework entered into application in 2019 and introduced a set of rules which strengthened investor protection, transparency, and financial stability. Based on the implementation of the framework over the past six years, the Commission has identified that some aspects of the existing rules are hindering market developments.

The targeted regulatory changes proposed by the EC aim to address these shortcomings and ultimately boost the EU securitisation market. By eliminating undue barriers to issuance and investment, financial institutions are expected to engage in more securitisation activity and, importantly, to use the capital relief for additional lending to EU households and businesses.

Main proposed changes

The proposal adopted by the Commission includes targeted amendments to the Securitisation Regulation, which lays down a set of requirements applicable to all parties involved in securitisation transactions. These adjustments aim to reduce the high operational costs for issuers and investors in EU securitisations and simplify certain due diligence and transparency requirements. Additionally, amendments are proposed to the Capital Requirements Regulation (CRR), which defines the prudential framework for banks and sets outs how much capital banks need to hold for their securitisation exposures. These measures aim to introduce more risk sensitivity in the prudential framework for banks issuing securitisations. The proposals will now be submitted to the European Parliament and the Council for their consideration and adoption.

Additionally, the package includes draft amendments to the Liquidity Coverage Ratio (LCR) Delegated Regulation.  The LCR sets out the amount of liquid assets that a bank must have to meet its short-term liquidity needs. The draft amendments aim to address inconsistencies in the existing requirements that securitisation need to comply with in order to be eligible for inclusion in banks' liquidity buffer.

In the coming weeks, the Commission also plans to publish draft amendments to the Solvency II Delegated Regulation for feedback. The draft amendments will aim at enhancing the insurance prudential framework to better account for actual risks of securitisation and remove unnecessary prudential costs for insurers when investing in securitisations.

Detailed proposed changes

Interaction and consistency between elements of the package

This proposal for a Regulation makes part of a wider securitisation review which encompasses changes to two Regulations (in addition to the Securitisation Regulation, the CRR) and two Delegated Acts (the LCR Delegated Act and the Solvency II Delegated Act). The proposed changes should be viewed as a package of measures that tackles in a comprehensive manner supply and demand issues in the securitisation market.

1. Proposal amending Securitisation Regulation

Subject-matter and scope (Article 1)

The proposal clarifies that the servicer is an entity that manages a pool of purchased receivables or the underlying credit exposures on a day-to-day basis falls under the scope of Regulation (EU) 2017/2402 (the ‘Securitisation Regulation’).

Definitions (Article 2)

Public and private securitisations are defined Article 2, points (32) and (33). More clear definition of public securitisations.

Due diligence (Article 5)

To facilitate simpler and more streamlined investment in Union securitisations, some amendments are made to Article 5 of Regulation (EU) 2017/2402.

Risk Retention (Article 6)

Risk retention is waived in case the securitisation includes a first loss tranche that is guaranteed or held by a narrowly defined list of public entities and where that tranche represents at least 15% of the nominal value of the securitised exposures.

Transparency (Article 7)

To lower the reporting burden on issuers, the reporting templates in Commission Delegated Regulation (EU) 2020/1224 and Commission Implementing Regulation (EU) 2020/1225 should be reviewed. In particular, the number of required fields should be significantly reduced – by at least 35%, or more where feasible.

Securitisation Repository (Articles 10 and 17)

A differentiation in the immediate and free of charge access to the repository has been proposed. Such access should be granted to the ESAs, the European Systemic Risk Board, the competent and resolution authorities and, upon request, the European Commission. In light of the different nature of public securitisation, access is granted also to investors and potential investors in such securitisations. Restricting the access of investors and potential investors to private securitisations is meant to protect the confidentiality of information in those securitisations.

STS requirements (Articles 20, 26b, 26c, 26e)

To facilitate the securitisation of SME loans in STS securitisation, the homogeneity requirement in Articles 20(8), (15) and Article 26b(8) of Regulation (EU) 2017/2402, is to be amended to stipulate that a securitisation where at least 70% of the underlying pool of exposures consist of SME loans are deemed to comply with that requirement. The 70% threshold is lower than the current 100% requirement.

To enable insurance and reinsurance undertakings to participate meaningfully in the STS on balance-sheet market, the eligibility criteria for credit protections in Article 26e(8) of Regulation (EU) 2017/2402 are amended to include also an unfunded guarantee by an insurance or reinsurance undertaking that meets certain robustness, solvency and diversification criteria. A number of other technical, but not substantive, amendments facilitate the implementation of the STS criteria.

Third Party Verifiers (Article 28)

The proposal stipulates that Third Party Verifiers of STS compliance need to be supervised in addition to authorised by their respective national competent authority.

Supervision (Articles 29, 30, 32 and 36)

To promote supervisory convergence and prevent fragmentation and differential regulatory interpretations, the proposal strengthens the role of the securitisation sub-committee of the ESAs Joint Committee. In particular, the securitisation sub-committee is mandated to adopt guidelines to establish common supervisory procedures and to develop the reporting templates referred to in Article 7.

To ensure greater accountability and continuity, the EBA is put in the lead of the work of the securitisation sub-committee of the ESAs Joint Committee, will provide the secretariat and a vice-chairperson for it, supporting the chairperson in the exercise of his or her tasks and performing the tasks of the chairperson during the latter’s absence, on a permanent basis.

To ensure efficient and consistent supervision of the STS criteria, Article 29 of Regulation (EU) 2017/2402 should entrust banking national competent authorities with the responsibility to supervise the application of the STS criteria by bank-originated securitisations.

For credit institutions in the Banking Union, that supervision would be carried out by the Single Supervisory Mechanism. To enable supervisors to enforce the due diligence requirements, Article 32 of Regulation (EU) 2017/2402 is amended to explicitly include in the list of situations where NCAs may apply administrative sanctions the failure of institutional investors to meet due diligence requirements in Article 5 of Regulation (EU) 2017/2402.

Reports and Review (Articles 44 and 46)

The rolling mandate in Article 44 of Regulation (EU) 2017/2402 for the ESAs to report on the implementation of this Regulation is updated to require also an assessment of the contribution of securitisation to funding EU companies and economy. The Commission is mandated to review the functioning of this amending Regulation by five years after its date of application. If found appropriate, the review will be accompanied by a legislative proposal.

2. Proposal amending the Regulation (EU) No 575/2013 (CRR III)

This proposal introduces targeted changes to the current prudential framework for credit institutions in order to achieve the following objectives:

1. introduce greater risk sensitivity into the existing framework;
2. reduce unjustified levels of capital non-neutrality;
3. (differentiate between originators/sponsors and investors with regard to the prudential treatment of securitisations;
4. (mitigate undue discrepancies between the standardised approach (SEC-SA) and internal rating-based approach (SEC-IRBA) for the calculation of capital requirements for securitisations; and
5. make the significant risk transfer framework more robust and predictable.

The proposed amendments to the CRR concern the following two areas:

1. the calibration of the two key parameters that set the level of non-neutrality, used in regulatory capital calculations to capture securitisation inherent risks, i.e. the risk weight floor for senior securitisation positions, and the (p) factor, and
2. the framework for significant risk transfer.

A number of additional technical amendments are proposed to address certain technical inconsistencies in the framework, as recommended in the Joint Committee of the European Supervisory Authorities’ 2022 report, and as proposed by the stakeholders in the Commission consultation.