Background and objectives
It is the aim of the European Union, as part of its policy of strengthening the European credit and capital markets, to provide a secure legal framework for simple, transparent and standardised securitisations known as STS (‘simple, transparent, standardised‘) securitisations. The creation of such a legal framework presupposes, on the one hand, that such products can be clearly identified and, on the other, that they can be unequivocally distinguished from other securitisations. To this end, the legislator defined generally applicable criteria in the Securitisation Regulation, which are supplemented by regulatory standards and guidelines of the financial supervisory authorities EBA and ESMA. Although originators and institutional investors have primary responsibility for ensuring that STS securitisations are properly declared, the legislator provides for the possibility of involving independent third parties in the verification of compliance with STS criteria. Such verification supports the originators, sponsors and investors in their evaluation and generally has a confidence-building effect on the markets. Not only does it create an important authority between the market participants themselves, it also contributes to the proper interpretation and consistent application of the STS criteria vis-à-vis the supervisory authorities.
Third party verification is therefore an important contribution to the consistent, uniform and correct implementation of the new Securitisation Regulation and the STS criteria it contains. The interaction between the third-party verification body, the supervisory authority and the relevant market participants ensures that the criteria are interpreted and applied properly and without contradiction, and thus in accordance with the central idea of the new Securitisation Regulation. Thus, in line with the objectives of the EU Capital Market Union, this ensures that the great potential of securitisation as a financial instrument can be tapped even further in the future.
The basis for the activities of SVI is mainly set by external standards. First and foremost are the Securitisation Regulation and the delegated legal acts of the competent supervisory authorities that are based on it.
In addition to the statutory requirements, SVI is bound by the company's Code of Conduct, which makes a significant contribution to ensuring the independence and professionalism of the verification process.
On this basis, SVI examines whether the legal requirements are complied with and points out any deficiencies identified during verification in order to give the originator the opportunity to remedy the deficiencies in compliance with the law.
In the performance of its duties, the management of SVI is primarily committed to the legal framework, the Code of Conduct and its statutory mandate.
Scope of verification
The verification process is based on a thorough analysis of the securitisation transaction under review. All relevant elements of the Securitisation Regulation are considered in the verification process. The verification includes in particular the verification of compliance with the STS criteria pursuant to Articles 19 to 22 of the Securitisation Regulation for term transactions. The verification includes in particular the verification of compliance with the STS criteria pursuant to Articles 19 to 22 of the Securitisation Regulation (for non-ABCP securitisations, i.e. term ABS transactions) and Articles 23 to 26 (for non-ABCP securitisations), respectively.
The verification process involves the inspection of transaction-specific and company-related documents and records and includes on-site inspections (see ’Required documents’ below).
The verification process is based on the SVI verification manual. It describes the verification process and the individual inspections in detail. The verification manual is authoritative for all parties involved in the verification process and its application ensures an objective and uniform verification of transactions to be verified.
Materials underlying the verification process typically include the documents listed below, although the type, title and scope of the documents may vary significantly depending on the originator and the transaction-specific scope of verification. The determination as to which of these documents should be requested and considered in a particular transaction is at the discretion of SVI's management and will be documented in the Transaction Verification Catalog or Verification Report:
a) Transaction-specific materials
These include the prospectus (‘Red herring’ as the preliminary prospectus and the ’black prospectus’ as the final prospectus) including the other transaction documents and other documents listed here as examples:
- Loan Receivables Purchase Agreement
- Legal opinion (true sale)
- Servicing Agreement
- Trust Agreement
- Deed of Charge and Assignment
- Note Purchase Agreement
- Paying Agency Agreement
- Account Agreement
- Swap Agreement
- Receivable Assignment Letter
- Servicing Agreement
- Security Account Agreement
- Data Protection Trust Agreement
- Subordinated Loan Agreement
- Corporate Services Agreement
- Ratings by rating agencies (presale report, true sale, swap)
- Standard business terms, unless part of the Loan Contracts
- Sample Inspection Report
- Liability cash flow model pursuant to Art. 22 (3)
b) Business-related materials
This information may, for example, cover the following points, which may be requested and added to the documents as necessary:
- Due diligence presentation for arrangers, rating agencies and investors
- Internal materials showing how the credit assessment and monitoring of credit risks is carried out
- Descriptions of the IT programs used in the credit process; access rights, data record structures and structures[CS1]
- Descriptions of task structures and workflows
- Job descriptions and qualification profiles of employees working in the securitisation/credit area;
- Information on the underlying regulatory requirements and the relevant supervision;
- Description of the preparation/legal review of credit agreements and general terms and conditions
- Risk indicators for non-securitised and securitised portfolios
The verification methods described below specify how individual criteria are checked by SVI:
a) REG (regulatory): Existence of regulatory and other legal provisions with recognised supervisory mechanisms (in particular banking supervisory aspects)
If an originator can demonstrate that compliance with a particular criterion is normally ensured due to its regulatory status in a particular country and within the framework of the resulting obligations and verification actions (by banking supervision, external or internal audit), no further detailed verification actions at this point are required.
b) LEG (legal): Existence of contractual obligations according to transaction documentation
Many criteria require the originator (or service provider or issuer) to include a specific legal consequence/certainty or contractual obligation in the transaction documentation. Whether the wording is sufficient to constitute the existence of a legal consequence or a contractual obligation , or whether (i) a more extensive review of the validity of a legal consequence should be performed on the basis of a legal opinion or (ii) compliance with the contractual obligation should be verified is to be decided by the SVI management for each individual transaction and each individual criterion and documented in the transaction verification catalogue, including a brief explanation and justification of the course of action, unless required by law. In addition to the external legal opinion of the Transaction Attorney or other law firm, an opinion of the originator's legal department or the opinion of another qualified party may also be considered.
c) DD (Due Diligence): Due Diligence information and actions that can be collected or performed in different ways.
i. Written evidence based on data and tables, internal manuals and work instructions, written documents such as due diligence presentations.
Compliance with criteria may require, among other things, requesting documents from the originator such as relevant parts of internal manuals, work instructions, due diligence presentations or individually prepared data, tables, evaluations or written expert estimates (from senior management or management from specialist departments), reviewing them for the criteria to be verified, and filing them. Instead of conducting a detailed verification of facts, the verification may also be based on the originator's written audit opinions.
ii. Oral evidence by management or responsible specialist departments in the context of due diligence presentations by the originator or expert interviews.
Similarly, the oral presentation and discussion of the relevant information can be used to check compliance with criteria.
In the case of critical issues, the verification may be based on the originator's written audit opinions.
d) DAT (data): Verification on the basis of own data evaluation, to be distinguished into
i. Verification by means of complete surveys (relevant population)
In the case of individual criteria, it may be useful to check compliance with them using evaluations of the population (for example, all securitised receivables).
ii. Sampling verification
As an alternative to (d) the verification of criteria against a randomly selected and statistically significant sample may be appropriate.
What verification result is achieved regardless of the choice of verification method?
a) Yes / No (digital assessment)
b) Hard evidence (100% collection and verification)
c) statistical evidence (sample based on the required confidence level)
d) plausible evidence (assessment and plausibility check on the basis of verification of internal consistency and on the basis of predecessor transactions and market practices)
When preparing the transaction verification catalogue for each individual transaction, management will determine the verification methods to be used, taking into account the achievable verification result.
The verification process
Time horizon for implementation
We recommend involving SVI early on as a third party verifier - ideally directly when the planned transaction is set up. In terms of scheduling, SVI’s verification process runs mostly in parallel with the rating and other structuring process. In addition to initiating the contract and preparing and coordinating the detailed verification planning, a time frame of 3-4 weeks must be provided for the pure verification actions in the case of initial verifications.
The timeframe is significantly influenced by the availability and quality of the documentation provided and the complexity of the transaction.
The results of the verification are summarised in a preliminary STS verification report, which is published on the SVI website no later than the announcement of the transaction. The final STS verification report will then be prepared for the closing of the transaction on the basis of the final transaction documentation, which will also be made available to market participants on the SVI website.
Overview of the verification process
The individual steps of the verification process in detail
- Initiation: the application form, general terms and conditions of verification and indicative transaction verification catalogue are sent to the originator
- Originator submits application to SVI on the basis of the term sheet and indicative transaction verification catalogue
- SVI accepts the application
- Adoption of the transaction-specific transaction verification catalogue by the management and dispatch to originator
- If applicable, commissioning of the outsourcing partner on the basis of the transaction verification catalogue, the framework service agreement and the fixed remuneration agreement
- Carrying out and documenting verification activities by SVI and outsourcing partners
- Draft preliminary or final verification report (’interim report’) is sent to the originator; interim discussion (in writing, if appropriate)
- STS-compliant rectification option is granted
- Verification of STS conformity of the rectifications
- Evaluation of the verification results by management and decision regarding compliance with the STS criteria
- If requested: provision of a preliminary verification report at the time of the announcement of a transaction for disclosure to potential investors
- Outstanding verification actions are performed and documented on the basis of the final transaction documentation and the completed closing of the transaction
- Final discussion (in writing if necessary)
- Originator and other relevant parties are notified and final verification report is circulated. There is no subsequent monitoring over the term of the transaction.
- Complaints and deficiencies reported by third parties as well as deficiencies identified by SVI are processed during the term of the transaction.
Services and fees
As a third-party verifier authorised and supervised by BaFin, SVI uses a standardised procedure to verify whether securitisations meet the STS criteria laid down in Articles 19 to 22 of the Securitisation Regulation (for non-ABCP securitisations, i.e. term ABS transactions) and Articles 23 to 26 (for ABCP securitisations), respectively. The result of the verification is summarised in an STS verification report, which is made publicly available to the client, investors and other market participants on the SVI website.
As an additional service, SVI offers verification clients the option to have all transaction documentation and investor reports published on the SVI website over the term of the transaction.
The fee schedule of STS Verification International GmbH (‘SVI’) applies uniformly to all asset classes and jurisdictions, but differs for non-ABCP securitisations and for ABCP securitisations.
The fees are set by SVI to comply with the requirements of Article 28 of Regulation (EU) 2017/2402 („Securitisation Regulation“), in particular the requirement for the third party verifier to only charge non-discriminatory and cost-based fees to the originators, sponsors or SSPEs involved in the securitisations which the third party verifier assesses, see Article 28 (1) (a) of the Securitisation Regulation.
Fees for non-ABCP securitisations
The SVI fees for non-ABCP securitisations for initial verifications range from EUR 30,000 to EUR 40,000 plus VAT. To determine the exact fee, a factor of 0.005% will be applied to the total volume of the transaction on the basis of the tranches issued. No distinction is made if the tranches are rated or unrated, placed or retained. If the fee determined on the basis of the volume is outside the corridor of EUR 30,000 to EUR 40,000, a minimum fee of EUR 30,000 plus VAT or a maximum fee of EUR 40,000 plus VAT is charged. As an alternative to the up-front pagement of the fee, an economically equivalent fee with an annual payment method or a combination of upfront and ongoing fee can be agreed.
For subsequent verifications, a discount of 10 - 25% on the initial verification fee will be granted. Subsequent verifications are generally transactions of an originator that are commissioned within a period of up to 12 months after a previous transaction for the same asset class. The discount must be determined individually and depends on the type and scope of the verification activities, which are mainly determined by deviations in the transaction structure compared with the initial verification or possible on-site inspections (’due diligence’). For subsequent verifications of transactions that have a repeat deal character (in particular an unchanged transaction structure and legal documentation), the discount can be increased up to 30% (where SVI has verified at least two prior transactions), up to 35% (where SVI has verified at least three prior transactions) and up to 40% (where SVI has verified four or more prior transactions), provided that the applicable verification fee shall not exceed the verification fee charged for the previous transaction. The classification as initial or subsequent verification and repeat deal and the setting of the discount shall be made by SVI's management. In case of doubt, the SVI Supervisory Board may be involved.
The publication of the STS Verification Report on the SVI website (www.sts-verification-international.com) is covered by the verification fee.
Fees for ABCP securitisations
The SVI fee for ABCP transactions consists of an initial verification fee and an annual fee. The fee for the initial verification per ABCP transaction is typically within a range of 8,000-10,000 Euro plus VAT. The additional annual fee per ABCP transaction is in the range of 4,000-6,000 euros plus VAT. Where the nature, scope and structure of an ABCP transaction is equivalent to that of a non-ABCP transaction, it is at the discretion of the SVI to apply the fee schedule of a non-ABCP transaction to an ABCP transaction as well.
The exact fee (for initial verification and annual fee) per ABCP transaction is determined by the management of SVI, in case of doubt the supervisory board of SVI may be involved. The type and scope of the preparatory work by the sponsoring bank, the complexity and volume of the respective ABCP transaction as well as the number of ABCP transactions in the respective ABCP conduit, for which verification is simultaneously sought, are decisive.
The fee for verification on an ABCP programme level shall be determined by the management of the SVI on a case-by-case basis and specifically for the ABCP programme under consideration ('programme fee') depending on the specifics of the ABCP transactions, the ABCP programme and the ABCP programme sponsor. A prerequisite for the verification of an ABCP programme is the successfully completed or simultaneously assigned verification of the ABCP transactions within the ABCP programme by SVI.
The publication of the STS Verification Report on the SVI website (www.sts-verification-international.com) is covered by the verification fee.
Fees for optional services
Additional transaction-relevant documents (e.g. investor reports) as well as the entire transaction documentation can optionally be published on the SVI website as individual files in PDF format over the term of the transaction. The additional annual fee for this service is EUR 1,500 plus VAT.