Report from the Commission on the functioning of the Securitisation Regulation

Ashurst Note

On 10 October 2022, the European Commission published a report on the functioning of the Regulation (EU) 2017/24024 (the Securitisation Regulation). This report provides an update on the development of the securitisation market over the last few years following the coming into force of the majority of the Regulation in January 2019. In its report, the Commission proposes some adjustments which could be made to the existing Securitisation Regulation and related delegated regulations, such as the ITS applicable to the transparency requirements. The Commission also addresses the question of the future framework of "green securitisations" and confirms it concurs to a large extent with the position of the European Banking Authority (EBA), which was expressed in a report released in March 2022. Finally, the Commission gives its position on the jurisdictional scope of the Securitisation Regulation, in particular in the situation where one or several sell-side entities are located outside of the EU, a much disputed topic commonly referred to as the "5(1)(e) question" by practitioners.

This report starts with an assessment of the answers given by 56 respondents to a consultation opened in 2021. These respondents include supervisors as well as private actors. Less than 10% of the respondents agree with the statements that the Securitisation Regulation "improved access to credit for the real economy, in particular for SMEs" and "widened the investor base for securitisation products in the EU". However a majority of the respondents agree that the Securitisation Regulation provides a high level of protection for investors. Even though the reactions are quite reserved on the positive impact of the Securitisation Regulation for the European market, the European Commission does not contemplate any major change to it, either to the general requirements nor to the STS label.

You will find below a summary of some of the most important parts of the report:

• Due diligence and Transparency (Articles 5 and 7 of the Securitisation Regulation): The Commission invites the ESMA to revise the disclosure templates to address some respondents' remarks on the technical difficulties they meet in filling out some fields. The Commission also heard the argument that, because of the bespoke nature of private securitisation, investors in such transactions need more tailor-made information than those present in the ESMA templates. The Commission therefore invites the ESMA to draw up a dedicated disclosure template for private securitisations, which would be more flexible and less complex to complete than the ones used for public transactions. The European Commission also opined that the Regulation should be amended so that reporting on private securitisations should compulsorily take place via securitisation repositories, as for public securitisations.
• Green/Sustainable Securitisations: The European commission reacts to the EBA report on the creation of a specific sustainable securitisation framework and published on 2 March 2022. It broadly agrees with the assessment made by the EBA. First, it recommends that the scope of the obligation to disclose the "principal adverse impact" of the underlying assets (currently applicable to residential loans or auto loans or leases, in STS transactions) should be extended (i) in the short term to non-STS deals and (ii) in the medium term to any kind of underlying assets. Second, it agrees with the EBA that the EU Green Bonds Standard regulation project (still in discussion) should be tweaked so that, for securitisations, the "green use of proceeds" criterion should be appreciated not at the level of the SSPE but at the level of the originator. The idea behind this reasoning is that what matters most should not be the "greenness" of the refinanced assets, but instead what the originator is willing to finance with the proceeds of the bonds issuance (which downstream to it through the purchase price of the underlying exposures). Finally, like the EBA, the Commission rejects the idea of creating a separated framework for green securitisations, i.e. distinct from the EU Green Bonds standard.
• Compliance with Article 7 and Article 9 where some sell-side entities are located outside the EU: The Commission opined that where there are both EU-based sell-side entities and entities located outside the EU in a single securitisation transaction : (i) the risk retention requirement can perfectly be complied with by the sell-side entity(ies) located outside the EU (and not necessarily by a EU-based entity), (ii) it is possible to designate a sell-side entity outside the EU to carry out the reporting requirements of Article 7, but in that case the sell-side entities located inside the EU would be under the obligation to disclose any of that information in case of breach by the non-EU entity(ies), and (iii) Article 9 on the credit granting criteria shall be applicable to all entities, whether or not they are located in the EU.
• Compliance with Article 7 where all sell-side entities are located outside the EU: Article 5.1.(e) of the Securitisation Regulation provides that "Prior to holding a securitisation position, an institutional investor, other than the originator, sponsor or original lender, shall verify that: […] (e) the originator, sponsor or SSPE has, where applicable, made available the information required by Article 7 in accordance with the frequency and modalities provided for in that Article". The Joint Committee of the European Supervisory Authorities (ESAs) suggested that this requirement should be amended to become more flexible, for example by introducing a third country equivalence regime for transparency requirements. Indeed, this due diligence requirement impedes EU investors from participating in deals where all sell-side entities are located outside the EU and do not intend to apply Article 7 of the Securitisation Regulation, and is a minima an important competitive disadvantage compared to non-EU investors which do not have this due diligence constraint. The Commission heard these arguments but nevertheless considers that Article 5(1)(e) was to be applied strictly, and, accordingly, no EU institutional investors may participate in securitisations where Article 7 is not fully complied with. It is however contemplated to adapt the disclosure templates in the future, when all sell-side entities are located outside the EU.
• Clarification of the applicability of the Securitisation Regulation to AIFMs: Article 2(12)(d) of the Securitisation Regulation provides that the definition of "Institutional investors" (i.e. investors to which the regulation is applicable), includes "an alternative investment fund manager (AIFM) as defined in point (b) of Article 4(1) of Directive 2011/61/EU that manages and/or markets alternative investment funds in the Union". The Joint Committee pointed out that it was not clear whether this definition was applicable to certain categories of fund managers, namely (i) non-EU AIFMs that manage alternative investments funds in the EU, and (ii) sub-threshold AIFMs (i.e. which are below a certain threshold and are therefore only required to comply with some provisions of the AIFM directive). The European Commission assessment was that the Securitisation Regulation should indeed be applicable to these two categories of managers.
• Call for Advice on the prudential treatment of securitisation, and changes to the SRT framework: The Commission takes note of the remarks from some investors that the prudential treatment of holding securitisation positions should be less conservative. It notes in the report that it addressed a call for advice on 17 October 2021 to the Joint Committee of the ESAs to analyse the situation in more depth: this could potentially result in the future in an easing of the prudential regime applicable to securitisation. The Commission is also contemplating to amend the SRT framework with the aim of making it more "efficient, transparent and consistent".

Authors 

Global Markets: Agathe Motte, Partner; Martin Kaiser, Partner; Thomas Picton, Partner; Jonathan Walsh, Partner; Annalisa Santini, Partner; Jose Christian Bertram, Partner; Aurélien Fournier, Counsel; Lucien Jarry, Associate.