STS – Legal Framework

• Regulations on securitisation are combined in a single regulation applicable to all areas of the financial markets - the Securitisation Regulation.
• The Securitisation Regulation entered into force in January 2018 and applies to all new issues from 1 January 2019.
• Securitisation is therefore regulated uniformly throughout Europe, sector-specific regulations such as CRR, SolvV or the MMF Regulation refer to the Securitisation Regulation.
• For transactions issued before 1 January 2019, transitional provisions apply until 31 December 2019 for capital backing in accordance with CRR, in which the old risk weights may still be applied by bank investors.
• From 1 January 2020, the new capital adequacy requirements will then apply uniformly to all bank investors.
• For all outstanding and newly issued transactions, lower risk weights for capital adequacy will apply if an STS notification is made in accordance with Article 27 of the Securitisation Regulation

The new regulation consists mainly of two parts:

First, the ’EU REGULATION 2017/2402 OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 12 December 2017’ (’Securitisation Regulation’) defines a general framework for all securitisations and additionally establishes a specific framework for simple, transparent and standardised securitisations (STS). For the first time, a uniform set of rules for securitisations applies to all financial market segments throughout Europe. Sector-specific regulations (in particular, CRR, SolvV and MMF) refer to the Securitisation Regulation and regulate relevant matters for the respective industry. Issues previously regulated in the CRR on the subject of securitisation that are to apply to all regulated market participants in future have been transferred from the CRR to the Securitisation Regulation.

Second, from the perspective of banks, the ’EU REGULATION 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’, colloquially always referred to as CRR, is particularly relevant. Above all, the hierarchy of rating models and capital weights has been changed.

The new regulations (Securitisation Regulation and CRR) stipulate the following:

Securitisation Regulation

• A detailed framework for all securitisations, whether synthetic or true sale, ABS, or ABCP transactions. This framework includes
  • the essential definitions
  • essential transparency requirements
  • risk retention issues, and
  • basic requirements for the portfolio to be securitised;
• The special requirements for ‘STS securitisations’, separated into requirements for simplicity, transparency and standardisation;
• The rules and procedures to be followed in the ‘notification’ (STS notification) of securitisations as well as the sanctions and sanction paths in the event of non-compliance with the rules.

CRR

• The rules and approaches to be applied for the risk weighting of securitisation positions with banks, whether as originator or investor, differentiated into STS and non-STS securitisations;

• The hierarchy of applicable approaches has changed significantly in comparison with the previously applicable CRR regulations, dependence on external ratings is to be reduced and, by recalibrating the risk weights, clipping effects caused by sudden increases in capital requirements are to be avoided;

The new securitisation rules will apply not only to banks but to all relevant financial market segments where references to the Securitisation Regulation can be found in all other relevant regulations. As a result, there is a uniform Europe-wide set of regulations for funds, insurance undertakings etc.

In the following we have compiled the current regulatory texts in English and - if available - in German:

The preparation of the RTS for risk retention and for the homogeneity requirements for the portfolio to be securitised was delegated to EBA:

Capital adequacy in the CRR

The CRR contents for securitisations have also been amended. All securitisation-relevant definitions have now been uniformly incorporated into the STS Regulation and the rules for capital adequacy for investors in securitisation positions have been fundamentally revised and changed. These rules are contained in the following documents:

On 13 July 2018, the EU Commission published its delegated act on the treatment of STS securitisations in the LCR (Liquidity Coverage Ratio). The possibility of taking STS securitisations into account and including them in the LCR is in line with the objectives formulated by the legislator in the new Securitisation Ordinance.

However, there were also critical comments from the market:

• Transition period:
  The new LCR rules will enter into force Europe-wide upon adoption, are to be applied from 30 April 2020 and require compliance with the STS criteria. Despite this transitional period, however, there is no grandfathering provision for currently LCR-capable transactions that do not involve subsequent STS reporting under Article 27 of the Securitisation Regulation.
• Consideration at Level 2A
  STS as a premium segment rightly places extensive requirements on securitisations, but their exclusive representation in LCR Level 2B does not recognise this approach.
• ABCP
  Under the same rationale, the non-consideration of fully-supported Asset Backed Commercial Paper (ABCP) is not comprehensible.