In February 2018, as reported in this section of Issue no 49 of the ICMA Quarterly Report, ICMA supported AFME in responding to a European Commission consultation on proposals to change some of the details in the EU liquidity coverage ratio (LCR). This industry response particularly called for this refinement of the LCR to include integration into the LCR Delegated Regulation of the new STS criteria for securitisation, including for the LCR treatment of ABCP. Dated 13 July, the Commission has now published its final proposed text for this Delegated Regulation, which shall apply from 18 months after formal publication in the EU’s Official Journal (which, as this proposal is now subject to scrutiny by the European Council and Parliament, will follow in the coming months).

Regarding the link to the STS Regulation, the sixth paragraph of section 1.2 of the Explanatory Memorandum states that: “The last substantive amendment concerns the integration in the LCR Delegated Regulation of the new criteria for simple, transparent and standardised (STS) securitisations. Specifically, it is proposed to count STS securitisations as Level 2B HQLAs if they fulfil the conditions laid down in Article 13 of the LCR Delegated Regulation. The STS Regulation sets a list of criteria which define STS securitisations. Based on the proposal, most of the criteria laid down in the LCR Delegated Regulation would be replaced by a reference to the STS Regulation. Criteria specific to liquidity (such as the criteria regarding the issue size, the types of underlying exposures or the rating) would be kept.”

Related to this, the sixth paragraph in the impact assessment section, at 1.3 in the Explanatory Memorandum, states that: “As regards the alignment with the definition of STS securitisations, the impact is expected to be quite marginal as the total amount of securitisations held as liquid assets is limited due to the cap on Level 2B assets in the liquidity buffer and to diversification requirements.” The related elements within the actual proposed text of the Delegated Regulation are recital (4), on page 7 (8 of the pdf), and Article 1(8), on pages 12-14 (13-15 of the pdf).

This is disappointing, however, as there is no adjusted standard for ABCP. Fully supported ABCP provides funding for companies’ working capital and thereby supports the real economy. Accordingly, the industry continues to consider that it is sensible to propose an LCR approach that better reflects the characteristics of the European ABCP market, in which investors enjoy dual recourse through fully-supported ABCP programmes that are 100% wrapped by a bank liquidity line.

On 16 July, ESMA issued a first set of technical standards under the EU Securitisation Regulation containing both draft regulatory and implementing standards (RTS/ITS):

(i) Notification templates for STS securitisations: ESMA’s draft standards specify the information and format that the originators and sponsors of securitisation products are required to notify to ESMA should a securitisation transaction meet the STS requirements – the STS notification is a necessary step in order to apply for STS preferential capital treatment. The STS notification standardised template distinguishes between non-ABCP securitisation, ABCP transaction and ABCP programme. The STS notification needs to include a confirmation, and a concise or detailed explanation as to why the securitisation transaction satisfies each of the STS criteria – this obligation is proportionate, as some criteria require greater explanation than others. The notification process also includes a cross-referencing system to investment prospectuses, if any, to avoid duplication of disclosure requirements.

(ii) Authorisation of third party assessing STS compliance: the draft standards specify the information to be provided to the competent authorities in the application for the authorisation of a third party assessing the compliance of securitisations with the STS criteria.

These final drafts have been submitted to the European Commission for endorsement, following which there will be a further short period for scrutiny by the European Council and Parliament.

In April 2018, as reported in this section of Issue no 50 of the ICMA Quarterly Report, the EBA launched a public consultation on its draft Guidelines, which will provide a harmonised interpretation of the criteria for securitisation to be eligible as STS – considering both non-ABCP and ABCP STS securitisations. On 19 July AFME duly submitted its comments in response to this EBA consultation and ICMA, noting that ABCP is an important financing tool for the real economy, submitted short letters of support for these AFME responses (on both non-ABCP and ABCP). These AFME responses, which should be read together, include a number of general points, alongside detailed responses to the specific consultation questions.

On 31 July, the EBA published two final draft regulatory technical standards (RTS) for securitisation transactions. These have been submitted to the European Commission for adoption, which should happen within three months. The Commission can either adopt these RTS without changes or suggest amendments for the EBA to make. Once the Commission concludes this process and publishes its adopted proposals, the RTS will be subject to scrutiny by the European Parliament and Council, during a period of one or more months, before being published in the EU’s Official Journal and then entering into force 20 days thereafter. Hence, it remains possible for these RTS to enter into force before the 1 January 2019 start date of the EU’s STS regime, but this is far from certain.

1. RTS specifying the requirements for originators, sponsors and original lenders related to risk retention as laid down in the new EU securitisation framework (STS Regulation): These final draft RTS, which will replace the current Commission Delegated Regulation on risk retention, aim to provide clarity on the requirements to ensure that the originators, sponsors or original lenders maintain their ‘skin in the game’ and retain at least 5% of material net economic interest in each securitisation. In addition, these RTS include various new provisions, in particular relating to when an entity shall be deemed not to have been established or to operate for the sole purpose of securitising exposures, transfers or hedging of the retained interest, circumstances under which the retainer should be changed and adverse selection of assets. However, due to the narrower mandate on risk retention under the STS Regulation, as opposed to the previous mandate, certain provisions from the existing Delegated Regulation were not included in these final draft RTS, in particular those relating to due diligence requirements, policies for credit granting and disclosure of materially relevant data. The new STS Regulation also contains transitional provisions regarding the application of the existing Delegated Regulation to those securitisations whose securities were issued before its application date. Specific textual references to ABCP are made in Articles 3.4(a) and (b); 3.5(a); 5.1(b); and 8.1(a).

2. RTS setting out conditions for securitisation to be deemed homogeneous: Homogeneity is one of the crucial requirements for a securitisation transaction to be assessed as STS and to be eligible for more risk-sensitive risk weights under the new EU securitisation framework. Homogeneity is also a key element for investors when assessing the underlying risks and performing their due diligence. According to the conditions specified in the RTS, homogeneous exposures need to be underwritten according to similar underwriting standards and serviced according to similar servicing procedures. In addition, they need to fall within the same asset category. To facilitate the assessment of homogeneity, the RTS specify a non-exhaustive list of the most common asset categories, reflecting the market practice. Finally, for the majority of these asset categories, the underlying exposures need to be homogeneous with reference to at least one of the homogeneity factors, such as type of obligor, ranking of security rights, jurisdiction, or type of immovable property. The RTS are applicable to both ABCP and non-ABCP securitisations.

On 22 August, ESMA issued a set of final draft RTS/ ITS under the EU Securitisation Regulation, which is the regulation for STS securitisations. These RTS, which distinguish between non-ABCP securitisation and ABCP securitisation, specify information to be provided regarding the underlying exposures; investor report information; any inside information on insider dealing and market manipulation relating to the securitisation that is obliged to be made public; and information on significant events affecting the securitisation (annexes 11, 13, 15 and 17 are ABCP specific). The RTS also distinguish between all securitisations and those securitisations that are required to make information available via a securitisation repository. The draft ITS specify the format and templates that are expected to be used by originators, sponsors and SSPEs for making this information available.

ESMA has submitted these draft RTS/ITS to the European Commission for endorsement and the Commission now has three months to adopt or reject ESMA’s final draft. Once the Commission has duly accepted a version of these RTS/ ITS, they will then be subject to a short period of scrutiny by the European Parliament and Council, ahead of then being published in the EU’s Official Journal and entering into force on the twentieth day thereafter. It is hoped that this adoption process can now be completed as soon as possible, thereby affording market participants as much time as possible to understand these requirements and to appropriately adapt their reporting systems.

Circulated on 12 September, AFME’s Second Quarter 2018 Securitisation Data Report shows that European ABCP issuance was €109.4 billion in the second quarter of 2018. This is an increase of 60.3% versus the prior quarter and an increase of 59.9% versus the same quarter in the prior year. Multi-seller conduits (98.8% of total), particularly from France (64.5% of total) and Ireland (27.8% of total), continue to dominate as the largest issuance category in the ABCP market.

Contact: David Hiscock david.hiscock@icmagroup.org