STS – Legal Framework
Basic structure of the new regulation
- 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.
Content and control horizon
The new regulations (Securitisation Regulation and CRR) stipulate the following:
- 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.
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.
With the new version of the entire securitisation rules, the EU Commission, EU Parliament and European Council are taking account of the fact that securitisations are an important component of well-functioning financial markets. A solidly structured securitisation is an important instrument for diversifying sources of finance and promotes a broader allocation of risk in the European financial system. Securitisation thus contributes to improving the efficiency of the financial system and to making the conditions of the real economy more stable in a financing environment dominated by banks.
For this reason - as stated in the foreword to the regulation - the establishment of a simple, transparent and standardised securitisation market is a core component of the Capital Market Union and contributes to the EU Commission's priority objective of supporting job creation and the return to sustainable growth in Europe.
The new regulation sets out to regulate securitisation as a capital market instrument consistently, i.e. from the originator of the securitised asset to the investor, in accordance with uniform criteria.
Implementation of new regulations and national legislation
The Securitisation Regulation as Level 1 regulation of the EU applies directly in all EU member states without the need for implementation and concretisation into national law. Nevertheless, the German legislator, for example, has updated relevant areas in an implementation law (e.g. in the Banking Act) and regulated the tasks required by the Securitisation Regulation (e.g. the designation of the competent national supervisory authorities).
In order to achieve a uniform and clear implementation of the new regulation throughout Europe, the Securitisation Regulation requires ESMA and EBA to issue numerous Level 2 regulations in the form of RTS and ITS (Regulatory and Implementing Technical Standards) as well as Guidelines (Level 3 Regulation). In particular, the extensive STS criteria need to be specified in terms of how they are to be interpreted and how compliance with the STS criteria can be demonstrated and, if necessary, verified by an independent third party verifier.
In addition, the three European supervisory authorities EBA, ESMA and EIOPA coordinate their work and that of the competent national authorities within the Joint Committee of European Supervisory Authorities in order to ensure cross-sectoral coherence and to assess practical issues related to the Securitisation Regulation in general and STS securitisations in particular.
All documents at a glance
|Level of regulation||Type||Document/topic||Date||Valid from||English||German|
|1||Regulation||Securitisation Regulation (EU) 2017/2402||28 Dec. 2017||1 Jan. 2019||PDF 1,1MB||PDF 1,2MB|
|2 (ESMA)||RTS/ITS||STS notification, final report||16 July 2018||12.11.2019||PDF 303KB|
|2 (EBA)||RTS||Homogeneity, final report||28 May 2019||6 Nov. 2019||PDF 516KB||PDF 521KB|
|2 (EBA)||RTS||Risk retention, final Draft||31 July 2018||[open]||PDF 459KB|
|2 (ESMA)||RTS||Third party verification, final report||16 July 2018||18 June 2019||PDF 607KB|
|2 (ESMA)||RTS||Disclosure, Final Report (incl. Annexes 1-15)||16 Oct. 2019||[open]||PDF 1,9MB|
|2 (ESMA)||RTS/ITS||Data repository, final report||12 Nov. 2018||[open]||PDF 1,5MB|
|3 (EBA)||Guidelines||Non-ABCP STS criteria||12 Dec. 2018||15 May 2019||PDF 693KB|
|3 (EBA)||Guidelines||ABCP STS criteria||12 Dec. 2018||15 May 2019||PDF 1,1MB|
|(ESMA)||Q&A||On the Securitisation Regulation||31 Jan. 2019||n.a.||PDF 376KB|
Capital markets regulation
|Level of regulation||Type||Document/topic||Date||Valid from||English||German|
|1||Regulation||CRR amendments (EU) 2017/2401||12 Dec. 2017||1 Jan. 2019||PDF 1,6MB||PDF 1,6MB|
|1||Regulation||LCR amendments (EU) 2018/1620||13 July 2018||30 April 2020||PDF 430KB||PDF 352KB|
|1||Regulation||Solvency II STS amendments (EU) 2018/3302||01 June 2018||1 Jan. 2019||PDF 427KB||PDF 359KB|
|1||Regulation||MMF regulation (EU) 2017/1131||14 June 2017||20 July 2017/21 July 2018||PDF 641KB||PDF 660KB|
|1||Regulation||MMF amendments(EU) 2018/990||10 April 2018||21 July 2018/1 Jan. 2019||PDF 566KB|
|1||Regulation||CRR "consolidated"||27 June 2019||n.a.||PDF 2,8MB||PDF 2,8MB|
Overview of all regulatory texts
In the following we have compiled the current regulatory texts in English and - if available - in German:
The new Securitisation Regulation
The Securitisation Regulation
- Defines securitisation-relevant terms uniformly;
- Defines the requirements that apply uniformly to all securitisations;
- Defines the specific requirements applicable to all STS securitisations;
- Regulates the third party verification process and the responsibility of the competent authority for the STS third party verification;
- Establishes the monitoring and sanction process for non-compliance.
Level 2 Regulations (RTS)
Furthermore, the Securitisation Regulation contains various authorisations for what are known as Level 2 regulations for the European supervisory authorities ESMA and EBA commissioned by the EU Commission to prepare drafts for Regulatory Technical Standards (RTS), which are to be put into final effect by the EU Commission once they have been issued.
The ESMA drafts relate to the implementation of the Regulation and thus cover the requirements for third-party verification, the STS notification by the originator, sponsor or securitisation special purpose vehicle and the implementation of the transparency requirements as laid down in the Securitisation Regulation:
The preparation of the RTS for risk retention and for the homogeneity requirements for the portfolio to be securitised was delegated to EBA:
Level 3 Regulation (Guidelines)
Furthermore, it is the responsibility of the EBA to ensure that STS requirements are interpreted and applied uniformly throughout Europe.
Questions & Answers
In order to assist market participants in the uniform and compliant application of the new rules, the supervisory authorities are expected to publish Q&A Reports on a monthly basis and in an updated version.
|ESMA||Questions and Answers, On the Securitisation Regulation||31 January 2019||Monthly update||PDF 376KB|
Securitisation Regulation and other regulations
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:
The Solvency II Directive (2009/138/EC (1)) introduced a modernised and risk-based supervisory framework for insurance and reinsurance undertakings in the European Union. A delegated Commission Regulation containing dedicated implementing provisions for Solvency II, including risk calibrations for the calculation of capital requirements for certain categories of assets, was adopted by the Commission on 10 October 2014.
This legal framework already contained provisions for securitisations, differentiating between Type 1 and Type 2 securitisation products. However, the requirements for Type 1 products were not necessarily in line with the market, with the result that only a few transactions could meet them at all. In contrast, the capital requirements for Type 2 products were prohibitively high.
With the aim of a uniform legal framework for securitisations under the new Securitisation Regulation, a number of amendments to the delegated act on Solvency II have also become necessary:
- First, the definitions of securitisation used in the delegated Solvency II act had to be adapted to the definitions of the Securitisation Regulation.
- Second, due to the direct applicability of the provisions on risk retention and due diligence in the Securitisation Ordinance, the corresponding provisions in Solvency II had to beamended.
- Third, the capital calculations for insurance investments in securitisations had to be amended.
Money Market Fonds (MMF)
Regulation (EU) 2017/1131 on Money Market Funds (MMFs) was published on 14 June 2017. Its objective is to preserve the integrity and stability of the internal market. It aims to make money market funds more resilient and to limit contagion to other financial institutions. The 2017 MMF Regulation already contains references to STS securitisations as eligible investments.
At the time of the adoption of the Money Market Funds Regulation, the Securitisation Regulation had not yet been completed. The Commission was therefore empowered to adopt additional requirements for STS investments with regard to reverse repo transactions, credit quality assessment and criteria for eligible STS ABS or ABCP investments. This has since been implemented with the MMF STS Amendments of 10 April 2018.
|European Parliament and the European Council||Ordinance (EU) 2017/1131 Money Market Funds, MMF 14 June 2017||14 June 2017||In force||PDF 641KB||PDF 660KB|
|European Parliament and the European Council||Money Market Funds Regulation STS-amendments 10 April 2018||10 April 2018||In force||PDF 566KB||PDF 424KB|
STS securitisations in the LCR
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.
Under the same rationale, the non-consideration of fully-supported Asset Backed Commercial Paper (ABCP) is not comprehensible.