Proposed changes in EU securitisation guidelines pose challenges to cross-border deals

The proposed new guidelines (93-page / 790KB PDF) aim to ensure the harmonised interpretation of the STS criteria as they apply to on-balance sheet (synthetic) securitisations in the EU. Securities that meet over 100 separate STS criteria benefit from a special categorisation, under which lower capital charges are applied to the investors who buy them.

The EBA’s existing guidelines on the STS criteria only concern ‘traditional’ securitisations: asset-backed commercial paper (ABCP) and non-ABCP transactions. On-balance sheet or ‘synthetic’ securitisations, where the transfer of credit risk on the underlying assets being securitised is achieved by the use of credit derivatives or other risk transfer mechanisms, rather than a ‘true’ sale, were left out when the STS criteria were first set out in the 2019 EU Securitisation Regulation and only included at a later stage when the regulation was amended during the Covid-19 pandemic.

The proposed new guidelines would help transaction parties interpret the STS criteria for on-balance sheet securitisations. They include guidance around aspects specific to these securitisations, such as the credit protection agreement and the requirements for the use of synthetic excess spread.

In the consultation paper, the EBA has also made targeted amendments to the guidelines for ‘traditional’ securitisations in several areas, such as to the ‘at least one payment’ requirement, verification of exposures, environmental and sustainability disclosures, and requirements for competent authorities to coordinate their supervision of compliance with the risk retention and disclosure rules.

Securitisation regulation expert Katie McCaw of Pinsent Masons said that the amendments mean that aspects of the existing EU guidelines will change for all securitisations, but it is not certain that the UK will follow the amendments. Existing guidelines from the European supervisory authorities are not legally binding and so were not formally ‘onshored’ at the time of Brexit.

“As the proposed new guidelines and other post-Brexit developments demonstrate, the EU and UK securitisation regimes are continuing to develop and expand separately post-Brexit. This is unhelpful for both issuers and investors and the ongoing recovery of the securitisation market generally,” said McCaw.

Structured finance expert Edward Sunderland of Pinsent Masons added: “Once finalised, the guidelines are expected to assist EU transaction parties in interpreting the STS criteria for on-balance sheet securitisations, as with the original guidelines on the STS criteria for non-ABCP and ABCP transactions. However, deviations in the interpretation of the existing STS criteria between the EU and UK are unhelpful for transaction parties and their investors, particularly when structuring transactions aimed at cross-border investors”.

In addition to recent developments in the EU, the UK government’s wide-ranging ‘Edinburgh reforms’ are going to widen the differences between the financial services regulatory landscape in the UK and the EU.

“With the direction of travel indicated by the Edinburgh reforms, the UK securitisation regime is itself set for a complete overhaul. The bulk of what is the existing onshored version of the Securitisation Regulation is to be repositioned as FCA and PRA rules. It is clear that the post-Brexit regulatory landscape for securitisation in the UK will look very different to its EU origins in the near future,” said McCaw.

The EBA is proposing to publish three separate sets of guidelines following this consultation: one for on-balance-sheet securitisation; and new, consolidated versions of the existing guidelines for non-ABCP securitisation and for ABCP securitisation. The deadline for responses to the consultation paper is 7 July 2023.