Introduced in 2018, the Securitisation Regulation (SR) is part of the wider Capital Markets Union package, aimed at bringing about more harmonisation in the EU’s securitisation market.
The rules aim to help invigorate European securitisation activity, which had already been waning before Covid-19 hit. It will do this by providing preferential risk weighted capital treatment on securitisations which meet the STS (safe, transparent, standardised) eligibility criteria. Regulators are also imposing new tough risk retention measures on lenders, originators and sponsors by requiring them to hold a 5% stake in their securitisation transactions. SR also demands investors conduct thorough due diligence to corroborate that lenders, originators and sponsors have this for skin in the game.
In September 2020, the European Securities and Markets Authority (ESMA) published its regulatory technical standards and details on implementing technical standards which originators, sponsors and SSPEs (securitisation special purpose entities) need to provide in their reporting templates. ESMA’s clarity on reporting has been widely accepted by the industry, especially as until September, there was much uncertainty about the disclosure obligations. Panellists at Global ABS were also bullish about the regulation’s impact in the EU, adding there were a growing number of diverse securitisation issuances coming to market with STS accreditation including RMBS, auto-loans, credit cards, non-ABCP (asset backed commercial paper) and ABCP.
However, the new SR reporting regime is not without its challenges. The regulation demands market participants report on any ‘significant event,’ which is defined as ‘an event that would be likely to materially impact the performance of the securitisation as well as have a significant effect on the prices of the tranches/bonds of the securitisation. For instance, if borrowers default on their loan payments owing to Covid-19 disruption, this could impact the securitisation’s income and performance, thus triggering the requirement for a disclosure to be made. This disruption, says Jason Connery, head of Trust and Agency Services, EMEA at Deutsche Bank “is forcing market participants to reassess their portfolio and risk characteristics and consider whether any event or anticipated future events require disclosure as a significant event under SR”.