Differentiate simple, transparent and standardised securitisation ('STS' henceforth) products from more opaque and complex ones. This objective will be measured against the difference in price of STS versus non-STS products. If this objective is achieved, this difference should increase. This should also trigger an increase in the supply of STS products, reason for which the achievement of this objective will also be measured with the growth in issuance of STS products versus non-STS ones.

Support the standardisation of processes and practises in securitisation markets and tackle regulatory inconsistencies. This objective will be measured against: 1) STS products' price and issuance, 2) The degree of standardisation of marketing and reporting material and 3) feedback from market practitioners on operational costs' evolution.

4.2) Consistency of the objectives with other EU policies

The identified objectives are coherent with the EU's fundamental goals of promoting a harmonised and sustainable development of economic activities, a high degree of competitiveness, and a high level of consumer protection, which includes safety and economic interests of citizens (Article 169 TFEU).

4.3) Consistency of the objectives with fundamental rights

Future legislative measures on securitisation, including appropriate sanctions, need to be in compliance with relevant fundamental rights embodied in the EU Charter of Fundamental Rights ("EU CFR"), and particular attention should be given to the necessity and proportionality of the legislative measures. Only the protection of personal data (Article 8), the freedom to conduct a business (Art. 16) and consumer protection (Art. 38) of the EU Charter of Fundamental Rights are to some extent relevant. Limitations on these rights and freedoms are allowed under Article 52 of the Charter. The objectives as defined above are consistent with the EU's obligations to respect fundamental rights. However, any limitation on the exercise of these rights and freedoms must be provided for by the law and respect the essence of these rights and freedoms. Subject to the principle of proportionality, limitations may be made only if they are necessary and genuinely meet the objectives of general interest recognised by the Union or the need to protect the rights and freedoms of others.

In the case of the securitisation legislation, the general interest objective which justifies certain limitations of fundamental rights is the objective of ensuring the market integrity and financial stability. The freedom to conduct a business may be impacted by the necessity to follow certain risk retention and due diligence requirements in order to ensure an alignment of interest in the investment chain and to ensure that potential investors act in a prudent manner. As regards protection of personal data the disclosure of certain loan level information may be necessary to ensure that investors are able to conduct their due diligence. It is however noted that these provisions are currently already in place in EU law. As regards the new securitisation legislation it should not impact on consumers, since the instrument are not intended for consumers. However, for all classes of investors STS securitisation would enable better analyse the risks for the products which contributes to investor protection. We have focused our assessment on the options which might limit these rights and freedoms

4.4) Subsidiarity and proportionality

According to the principle of subsidiarity (Article 5 (3) of the TEU), action on EU level should be taken only when the objectives of the proposed action cannot be achieved sufficiently by Member States alone and can therefore, by reason of the scale or effects of the proposed action, be better achieved by the EU. The objective of the initiative is to revive a safe securitisation market that will improve the financing of the EU economy and ensures financial stability and investor protection.

Securitisation products are part of EU financial markets which are open and integrated. Securitisation links different financial institutions from different Member States and non-Member States: often banks originate the loans that are securitised, while financial institutions such as insurers and investment funds invest in these products and they do so across European borders, but also across the Atlantic. The securitisation market is therefore European/international in nature.

Individual Member State action will not be able to remove the stigma. The EU has advocated at international level for standards to identify simple, transparent and standardised (STS) securitisation that performed well during the financial crisis. Such standards will help investors to identify categories of securitisations that have performed well during the financial crisis and which allow them to analyse the risks involved.

Although implementation of these international standards could be done by Member States, it could lead to divergent approaches in Member States, which would hamper the removal of the stigma and would create a de facto barrier for investors which would have to enter into the details of the each Member State's framework. As regards the insufficient risk-sensitivity of the regulatory framework, the relevant framework is currently laid down in EU law, in particular the Capital Requirements Regulation for banks and in the Solvency II Directive for insurers 9 . Making the regulatory framework more risk-sensitive can thus only be achieved by amending these EU legal acts and thus only by EU action. It should also be noted that to be able to define a more risk-sensitive regulatory treatment for STS securitisation requires the EU to define what STS securitisation is, since otherwise the more beneficial regulatory treatment would in different Member States be available for different types of securitisations. This would lead to an un-level playing field, to regulatory arbitrage which in the end could work against the objective to remove the stigma attached to securitisation. As regards the lack of consistency and standardization EU law has already harmonised a number of elements on securitisation, in particular rules on disclosure, due diligence, supervisory reporting and risk retention. Those provisions have been developed in the framework of different legal acts (CRR, Solvency II, UCITS, CRA Regulation, and AIFMD) which has led to certain discrepancies in the requirements that apply to different investors. Increasing their consistency and further standardisation of these provisions can only be done by EU action.

The action proposed would give a clear and consistent signal throughout the EU that certain securitisations performed well even during the financial crisis, that they can be useful investments for different types of professional investors for which regulatory barriers (lack of an appropriate prudential treatment, inconsistent treatment across financial sectors) will be taken away.

Therefore, the objectives of the proposed action cannot be achieved by action of the Member States and can be better achieved by action by the Union.

The options analysed below will take full account of the principle of proportionality, being adequate to reach the objectives and not going beyond what is necessary in doing. The retained policy options are compatible with the proportionality principle, taking into account the right balance of public interest at stake and the cost-efficiency of the measure. The proposed action will create a simple, clear and consistent framework for investments in securitisation based on uniform definitions, including of simple, transparent and standardised securitisation. The prudential treatment will be carefully calibrated on the basis of extensive historical data, so to ensure that the treatment is proportionate to the risks involved and neither over- nor underestimates the risks of securitisation.

The options retained will be implemented by as closely as possible alignment with the existing EU definitions and provisions on disclosure, due diligence, risk retention and definition of STS securitisation in the LCR and Solvency 2 delegated acts. This will ensure that the market can continue to function as much as possible on the basis of the existing legal framework, so to not unnecessarily increase costs and create regulatory disruption, thereby also continuing to ensure investor protection, financial stability, while contributing to the maximum extent possible to the financing of the EU economy.

5) POLICY OPTIONS

In order to meet the first operational objective, this impact assessment analyses 14 different policy options. For ease of reference, these options have been grouped into different headings, such as options on product differentiation, scope of the differentiation, compliance mechanism and the prudential treatment (see table below).

In order to meet the second operational objective, a total of three different policy options has been analysed in this impact assessment (see table below). Notice that, while options aiming at the achievement of the first objective refer to the regulation of STS products, options aiming at the achievement of the second objective aim at setting the optimal provisions that will apply onto all securitisation products, STS and non-STS alike.

6) ANALYSIS OF IMPACTS

This section assesses the impacts of each of the policy options, measured against the criteria of their effectiveness in achieving the specific objectives (differentiating STS deals from more opaque and complex ones; fostering standardisation of processes and practises and tackling regulatory inconsistencies) and their efficiency in terms of achieving these objectives for a given level of resources or at lowest cost. Impacts on relevant stakeholders and the coherence of the options with EU policies are also considered. The retained policy options should be those scoring the highest for the relevant specific objective while imposing the smallest costs and impacts on stakeholders. At the end of each section of options assessment and before the impact summary the views of respondents to the public consultation are presented in the "Stakeholder View" boxes.

6.1) Section 1 - STS differentiation

6.1.1) Policy option 1.1: No further EU action (baseline scenario)

This option would imply no further EU action aimed at defining criteria to identify STS products and distinguish them from other securitisation products. A distinction between the two is however already included in the provisions of the LCR and the Solvency 2 EU delegated acts.

Furthermore, some EU jurisdictions have national legislative frameworks dedicated to securitisation and some of these frameworks include provisions aimed indirectly at promoting the development of simple and transparent instruments.

Finally, the market has started to independently develop differentiation mechanisms. The Prime Collateralised Securities (PCS), for example, aims at defining standards of transparency, simplicity and liquidity in the securitisation market. It does so with the PCS Label, which can be awarded to securitisation deals meeting certain criteria. These criteria have similarities to those identifying STS securitisation in the LCR and Solvency 2 delegated acts. The PCS Label is designed to assist investors and market participants in understanding key aspects of the labelled securities that make them simple, transparent and standardised: the simplicity of the structure, the homogeneity of the assets packaged in the security, the rules incentivising proper underwriting standards and so on. A similar initiative, True Sale International, has developed in Germany.

 (a) Effectiveness - ensuring differentiation of STS deals from more opaque and complex ones

Recognising the specific features of STS securitisation instruments and adjusting accordingly the prudential treatment these instruments are subject to, the two delegated acts introduce an important differentiation in the market. However, beyond banks' liquidity and insurance companies' capital charges, STS and non-STS securitisations are indistinct. Therefore, the current differentiation is a preferential treatment granted to some qualifying products in some limited and specific aspects, rather than the existence of a product immediately recognisable by all types of investors (banks, insurance companies, pension funds, UCITS, AIFs). It follows that the problem of stigma would not be efficiently tackled.

On top of this, the regulatory disincentives currently hindering securitisation (see introduction and section 6.4) would not be removed.

Market-developed differentiating mechanisms such as PCS and TSI are unlikely to fight stigma as they would rely on market associations' opinions that have not been tested by events (i.e. PCS-labelled securitisation were never tested in a stressed scenario). More importantly, even if these differentiating mechanisms between securitisation products would be successful in achieving differentiation and fighting stigma, they could not adjust the prudential treatment attached to securitisations and thus improve the economics of EU deals. Furthermore, the current inconsistencies in EU legislation would continue to affect these markets.

In absence of any EU intervention, deals are thus likely to remain uneconomical and the current state of the securitisation market would be unlikely to be reversed: low issuance and fragmentation would persist.

The absence of macroeconomic factors currently hindering securitisation (see introduction) may be a necessary condition for the full development of the securitisation markets potential but it hardly is a sufficient condition. When the macroeconomic environment will improve, without a more risk sensitive prudential framework banks will cover their increasing funding needs with other sources/channels such as covered bonds or subordinated debt that will remain cheaper than securitisation. Also, non-bank investors such as insurance companies will not find attractive to invest in securitisation markets as current capital charges for them, compared with other available investments, are very onerous. As a consequence, a funding and investment diversification opportunity will not be exploited.

(b) Efficiency and impact on stakeholders

A recognisable product, guaranteeing a high level of simplicity, transparency and standardisation of the securitisation structure and its underlying assets, and allowing for a clear understanding of the risks intrinsic in the transaction, is however what is needed to overcome stigma and inspire investor confidence. Such a product must be recognisable and relevant for all investors beyond banks and insurance companies (e.g. UCITS, AIFM...) and across the European Union, reason for which the limited and differing differentiation incorporated in some national legislative frameworks are unlikely to be an efficient means to the end of rebuilding trust and fighting stigma.

Similar considerations hold for market-led initiatives. While beneficial in rebuilding trust and fighting stigma, they are unlikely to be sufficient because, without the involvement of supervision, investors are unlikely to trust privately-awarded labels. Alone, the LCR and Solvency 2 delegated acts, national frameworks and private initiatives are thus unlikely to lead to the emergence of a clearly identifiable STS product for EU investors and issuers, able to overcome the stigma against securitisations.

6.1.2) Policy option 1.2: EU soft law

The Commission could use soft-law instruments such as codes of conduct, guidelines or recommendations to Member States in order to build on the existing delegated acts, national frameworks and market initiatives (PCS, TSI, DSA). These soft law instruments could encourage Member States to set up specific provisions or to encourage STS within their securitisation frameworks. They could also be used to foster further differentiation via endorsement or support to private initiatives such as the PCS and TSI labels and other initiatives to raise awareness of STS products.

(a) Effectiveness - ensuring differentiation of STS deals from more opaque and complex ones

An advantage of this option is that it could be implemented quickly so that the international consensus on STS criteria could be swiftly promoted among Member States and market participants. In a creditless recovery, such as the one currently experienced by the EU, where there is urgency to restart credit flows to firms and households, this would certainly be an important advantage.

Offsetting the advantage of speed there is, however, a major drawback: limited coordination. It would be up to Member States and market organisations to decide whether and how to implement the recommendation/guidelines. Without a coordinated effort, national initiatives are more likely to develop in different ways, potentially creating a set of different provisions and STS standards across the EU. This would change little from the current situation, falling short of introducing the recognisable STS product needed. Timing would also potentially be an issue. Until the number of countries with a differentiating securitisation framework has reached a critical mass, the effect on the market will be negligible. This could take years. Choosing this option would then most likely lead to the creation of different STS products, implemented at different times or not even implemented. The same stands true for market–led initiatives, which could create a set of similar and overlapping STS labels. Finally, the limitations of market-led initiatives highlighted in the previous section are equally valid under this option.

 (b) Efficiency and impact on stakeholders

Soft law would entail small costs in terms of administrative burden for EU authorities and market participants alike. However, low costs would be accompanied by low effectiveness in achieving the differentiation objective, thereby suggesting this option would be scarcely efficient. Even if Member States were to react quickly and introduce national legislation identifying STS deals, a soft law action would limit considerably the scope and depth of the initiative. This would impact market participants depriving them of a recognisable STS product, thus changing little from the current situation. The change would be even more negligible in the event of slow and non-harmonised implementation of STS product introduction by Member States.

6.1.3) Policy option 1.3: EU legislative initiative to specify applicable STS criteria

Under this option, a harmonised legal framework specifying a set of criteria for STS products generally applicable across financial sectors would be established. Extensive work to identify what features render a securitisation and the risks it entails clearly understandable and, furthermore, what features have empirically been associated with smaller losses during the crisis has been carried out by a host of authorities and organisations (EBA, BCBS-IOSCO). An international consensus has been reached and a set of agreed key criteria has been identified 10 . The STS definition would therefore be based on this set.

(a) Effectiveness - ensuring differentiation of STS deals from more opaque and complex ones

With the introduction of a single legal instrument defining STS products, two important goals would be achieved that would otherwise not be not achievable by the status quo or via soft law. First, it would provide a STS product that, accompanied by an appropriate level of supervision, could be relevant and trusted for all categories of investors, thereby overcoming stigma and fostering a finer distinction among securitised products than the one currently prevalent in the market. Investors would not, however, be relieved from their responsibility to conduct due diligence and credit risk analysis for STS products (cf. chapter 4). Secondly, it would provide a harmonised definition of STS products applicable across all EU jurisdictions and financial sectors, thereby fostering cross-border harmonisation without conflicting with national frameworks, which would not be impaired/hindered.

(b) Efficiency and impact for stakeholders

The single legal instrument envisaged in this option would have limited costs. These consist of a longer EU legislative procedure (compared to a soft law initiative) and the need to revisit various pieces of legislation and technical standards, some only recently adopted. Market participants would also incur administrative costs in adapting to the new legislation. These would, however, be more than offset by the advantages of creating a more transparent and sustainable market for securitised products, giving market participants another source of funding and investment and, in so doing, creating another safe channel of financing for the European economy.

6.1.4) Impact summary and conclusion

Options 1.1 and 1.2 fall short of the need to introduce a recognisable product. Differentiation would be limited to that existing in current EU legislation or, in the case of option 1.2 being chosen, to that eventually introduced by Member States and/or market participants. No guarantee of a standardised EU product setting unified criteria for simple, transparent and comparable criteria that are relevant and recognised by all types of investors would be there. As such, the incentive to issue and invest in STS products would remain limited to certain banks and insurance companies.

By contrast, introducing an STS product that is relevant and, with effective supervision, trusted by all categories of investors is achievable under option 1.3. The STS products should create a harmonised definition of securitisation products whose intrinsic risks can be appropriately analysed, understood and priced by investors. Such a definition would be applicable across all EU jurisdictions and financial sectors. In this way, investors should be able to recognise simple, transparent and standardised products and the indiscriminate stigma against all securitisations should be reduced. Fostering the development of simpler, more transparent and standardised structures, option 1.3 would allow investors, credit rating agencies and supervisors to assess with more precision the risk involved in the assets contained in a securitisations, thereby reducing mechanistic reliance on credit rating to evaluate a deal's riskiness.

In the comparison table below, each option is rated between "--" (very negative), ≈ (neutral) and "++" (very positive) based on the analysis in the previous sections. The benefits are, however, very difficult to quantify in monetary terms. The costs should be understood in a broad sense, not only as compliance costs but also against all the other negative impacts on stakeholders and on the market of alternative options. This is why we have assessed the options based on the respective costs and benefits in relative terms.

In view of the above analysis and the opinion of stakeholders in the public consultation, option 3 (an EU legislative initiative to specify applicable STS criteria), is the preferred option. 

6.2) Section 2 - Scope of the STS definition

During the financial crisis different asset types within the global securitisation market performed very differently. This raises a question about the scope of securitisations that should be eligible for the STS category. This section considers three main policy options for the scope of STS securitisation. The first option is to limit the scope of STS criteria to 'term' securitisations (asset backed securities with maturities longer than one year) currently included in the LCR and Solvency 2 criteria. The second option would extend this also to ABCP securitisations. The third option would allow term, ABCP and synthetic securitisations to be included in the scope.

6.2.1) Policy option 2.1: Cover only term securitisation

This option is the baseline and builds on the existing differentiation approaches developed by the BCBS-IOSCO working group as well as in the Solvency II and LCR Delegated Acts. The scope of STS securitisations would only be open to 'term' securitisation. Furthermore, to be considered as STS, securitisations would require an effective transfer of ownership of the underlying assets from the originator of such assets to a dedicated and legally separate Special Purpose Vehicle that issues the securitisation. In other words, only "true sale" or "cash securitisations" will be eligible, according to BCBS-IOSCO and EBA criteria, thus keeping synthetic securitisations out of the scope of the criteria. This option would also be consistent with the ECB framework for refinancing operations, where synthetics are not accepted as collateral by the central bank.

The non-inclusion of ABCP would be in line with the developments of the BCBS-IOSCO task force as specific criteria are still under development. However, EBA has already prepared a set of specific criteria which adjust the term criteria for specificities of short-term products 11 .

Chart 14: overview of options

(a) Effectiveness - ensuring differentiation of STS deals from more opaque and complex ones

The criteria set out in the Solvency II and LCR Delegated Acts exclude securitisations containing structured products or derivatives not used for hedging purposes on the basis that this adds an additional layer of complexity and risk (including counterparty credit risk). There is also a list of eligible underlying assets, which covers: residential mortgages; loans to SMEs; auto-loans; leasing; consumer finance and credit card receivables. This list includes only instruments which fulfil the identification criteria. For instance, instruments without common types of underlying assets (such as CDOs), or instruments involving important refinancing operations during the lifetime of the transaction (such as CMBS) cannot qualify. In the latter case it means in practice that investors in the securitisation instrument should be repaid before the underlying loans mature. This implies a need to refinance the underlying assets and thus a significant degree of uncertainty. This feature was the cause of significant losses during the crisis (CMBS generated losses 20 times higher than RMBS – see chart below)

The decision to include or exclude certain asset classes in the LCR and Solvency II delegated acts was based on EU/international standards and market practices (cf. PCS Label scope), which was based in turn on a historical assessment of their credit performance. The credit performance of CDOs (except Collateralised Loan Obligations, CLOs) and CMBS during the crisis was very poor compared to consumer ABS and RMBS (see Chart 15 and discussion in the 'problem definition' section). The BCBS-IOSCO working group and EBA advice continue to follow the same approach. This would clearly be effective in achieving differentiation and in fighting stigma.

6.2.2) Policy option 2.2: - cover term and ABCP securitisations

In addition to criteria for term securitisations, this option would also set out additional criteria for identifying the simplest and safest types of short term securitisations, taking into account the specificities of the ABCP securitisation technique.

ABCP is a type of bond that is typically issued by a conduit sponsored by a bank. The commercial paper issued by the conduit is collateralised by the pool of assets. The maturity on ABCP is typically short (30-90 days), and the liabilities are refinanced at regular intervals. ABCP can be backed by a variety of collateral types but represents a sufficiently distinct structure from term securitisations that it warrants separate consideration. ABCP is a key source of short-term financing for a variety of underlying loan types (Chart 17). According to AFME, the European market for ABCP conduits was just over EUR 80 billon as at the end of Q4 2014. ABCP conduits provide a key alternative to bank funding for European SMEs.

Similar to term securitisations, the outstanding volume and issuance of ABCP have dropped significantly post-crisis. According to BCBS-IOSCO, 12 at the end of 2013, outstanding ABCP in the US amounted to about a fifth of its 2007 peak. In Europe and Australia, the declines have been even more significant, with the outstanding volumes about an eighth to a tenth of the 2007 peaks. However, there has been some modest recovery in 2014 (Chart 18).

(a) Effectiveness - ensuring differentiation of STS deals from more opaque and complex ones

ABCP constitute an important source of short-term financing for European companies, particularly SMEs. The question is whether it is possible to distinguish between different types of ABCP structures and identify ABCP which may be deemed eligible to qualify as simple, transparent and standardised securitisations.

Complex and opaque ABCP structures such as arbitrage conduits and some SIV had a role in the global financial crisis. These structures tended to invest in securitisations of risky assets, rather than "real economy" assets, therefore representing complex re-securitisations. By contrast, simple ABCP structures have "real economy" assets such as trade receivables from SME companies, which performed well during the crisis. Thus, it appears possible to separate out those ABCP structures that are more stable, transparent and beneficial for the economy. Recognising this, the EBA is currently working on the identification of criteria able to achieve such a goal in order to isolate simple, transparent and standardised ABCP structures. This indicates that, as for term securitisations, there is scope to reduce stigma in the ABCP markets, through introducing STS criteria developed to the specific characteristics of this market.

(b) Efficiency and impact for stakeholders

The cost of introducing dedicated criteria for ABCP is likely to be minimal. Inclusion of ABCP criteria should support SME and broader corporate financing. Simple and transparent conduits have become a valuable short-term financing option in various Member States. Introducing them in the scope of STS would allow them to play a key role in alleviating the credit crunch currently suffered by European SMEs.

Strengthening a complementary funding channel for SMEs additional to banks would help protect vulnerable SMEs from experiencing problems relating to the banking sector in periods of financial stress. This is particularly important if one recalls that SMEs are typically short of funding alternatives to bank credit. From a financial stability perspective, a set of robust and detailed identification criteria need to be developed with the objective of avoiding the resurgence of arbitrage and leveraged structures such as SIVs.

6.2.3) Policy option 2.3: cover term, ABCP and synthetic securitisations

This option would widen the scope of STS securitisation and introduce differentiated criteria for both ABCP and synthetic securitisations. At present, synthetic structures do not qualify for preferential treatment under the LCR and Solvency II delegated acts. The policy and regulatory work to date at EU (delegated acts/EBA advice) and global level (BCBS-IOSCO) also excludes synthetics structures from the scope. This has also been the approach of private sector initiatives such as the PCS label. However, as some synthetic structures may be used for supporting infrastructure and SME financing, this option is worth exploring (see also Annex 5 for further details on synthetics).

(a) Effectiveness - ensuring differentiation of STS deals from more opaque and complex ones

Synthetic structures mimic the transfer of ownership of the underlying assets/loans from the originating banks to the securitisation vehicle with a derivative contract, such as a credit default swap (CDS). This introduces an additional counterparty credit risk. The drafting of the CDS is usually not standardised and defines what risks are transferred and under what conditions. This introduces legal uncertainty and risks. Synthetic structures are therefore not simple or transparent. Their inclusion in the STS framework could be seen as contradicting the basic principles of the simple, transparent and standardised approach. This, together with the widely known role synthetic securitisation had in exacerbating the crisis (synthetic CDOs were the most common structure used to securitise subprime US mortgages in the run-up to the crisis), could undermine the credibility of the differentiation exercise and its ability to reduce the stigma surrounding securitisation.

Available data also suggests that EU synthetic securitisation has been substantially more likely to default than securitisation considered within the scope of STS. Synthetic CDOs have shown a default rate 19 times higher than STS products in 2007-2013. Even high-quality synthetics such as those issued by the EIF have generated 4 to 8 times higher losses than STS products.

For these reasons, international institutions (EBA, BCBS, IOSCO) have excluded synthetic products from the scope of STS securitisation and did not carry out work to identify specific criteria for synthetics. While in principle it may be possible to isolate a set of criteria that would allow a distinction between structures used for arbitrage and those intended for proper risk mitigation 13 , the additional complexity of such products requires further work in setting up this criteria.

Crucially, choosing this option would require the EU to move ahead of the global work and to disregard the advice received by the EBA sub-group on securitisation. EBA stated that it has reached the consensus to keep synthetic transactions out of the scope of the currently proposed STS framework, as more time is needed to develop criteria isolating simple and transparent synthetics from the rest. The subgroup acknowledged the relevance of this segment of the securitisation market for banking in the EU and is willing to engage in further work and analysis, for the potential development of an STS synthetic securitisation framework, after the technical advice on STS ‘traditional’ securitisation has been finalised and submitted. By contrast, international work on term and ABCP securitisations is mostly concluded and consensual criteria have been identified.

Considering the complexity of the structures involved, the data available, the lack of work on identifying criteria, and the high degree of consensus among supervisors and regulators, including synthetics in the STS framework would not be an effective option for fighting stigma and achieving differentiation in the securitisation markets.

(b) Efficiency and impact for stakeholders

On SMEs: originating banks often find that their SME customers do not want the bank to sell on their loans, so a traditional cash securitisation is not possible. Enabling synthetic transactions could in theory enable more investors to gain exposure to SMEs, which may in turn support SME financing. However, such exposure can be achieved via ABCPs.

On investors: as discussed, including synthetic structures within the scope of STS securitisation may send a mixed message, diluting the STS differentiation. In addition, synthetic structures do not allow investors to take control of the underlying assets in enforcement scenarios and they allow the risk of the underlying asset to be multiplied many times. This option may lead to less investor clarity and protection, with negative effects for overcoming stigma.

On issuers: while synthetic structures tend to be cheaper to set up than "true sale" securitisations, they provide only capital relief but no funding to the issuer. Therefore, only the revival of a "true sale" securitisation market would provide issuers with a tool to achieve both capital relief and funding.

6.2.4) Impact summary and conclusion

Option 2.1 would build on the international work already carried out and include in the scope of STS securitisation only term products satisfying internationally-agreed criteria and with strong credit performance during the crisis. This would clearly be effective in achieving differentiation and fighting stigma. Nonetheless, two important sources of funding for EU companies and, in particular, SMEs would remain out of the scope: ABCP and synthetic securitisations. Their importance suggests attention should be paid to their possible inclusion.

There are marked differences between these two products on a number of aspects important for their regulation. First, identifying simple, transparent and standardised ABCP conduits used to finance "real economy" assets such as SME loans seems to be an achievable goal. Indeed, EBA's work in this area is almost concluded; criteria for STS ABCP should be available before the summer. On the contrary, as discussed above, identifying STS synthetics is a harder task and no work on criteria has been done so far. Also, synthetics are intrinsically more complex products, meaning that a very strong case must be made to include them in the STS framework if the power of differentiation is to be preserved. Finally, available data shows EU synthetic products underperformed traditional STS securitisation. For these reasons, option 2.2 is preferable to option 2.3.

In view of the above, option 2.3 (include term and ABCP securitisations) is the preferred option. More evidence should be put forward before developing specific criteria for synthetic securitisations. However, the Commission would welcome further work to promote STS synthetic structures going forward.

6.3) Section 3 - Ensuring compliance with STS criteria and consistency in implementation

This chapter describes and assesses three policy options to ensure compliance and consistency in the implementation of the criteria for STS instruments. Compliance will be crucial to the success of this initiative, as differentiation will only work if investors trust these new instruments. Irrespective of the decision taken on the options described in this chapter, five general principles must apply and contribute to the proper implementation of STS securitisation.

a) Ensuring investors' due diligence (investors' responsibility). The compliance mechanism is not intended to provide an opinion on the level of risk embedded in the securitisation. The scope of the compliance assessment should be strictly limited to criteria establishing the 'foundation approach', namely applying to the structure of the instrument. Investors should continue performing careful due diligence of STS instruments before investing. The financial crisis has shown that investor reliance on external credit ratings was excessive (cf. section 1.3.1). This trend led to a general relaxation of due diligence efforts by investors, notably in wrongly AAA-rated tranches.

The main purpose of this initiative is to reassure investors, giving them the transparency needed to assess STS products, without leading to any relaxation of their vigilance. This principle is essential to avoid 'moral hazard' situations where investors would be incentivised to reduce their scrutiny in assessing risks. The STS criteria are intended to make securitisation easier to analyse but not to be a substitute for due diligence. Increasing transparency and simplicity of the securitisation products, the STS initiative should allow investors, credit rating agencies and supervisors to assess with more precision the risk involved in the assets contained in securitisations. It follows that mechanistic reliance on credit rating to evaluate a deal's riskiness should be reduced.

Chart on the assessment's scope

b) Responsibility to comply is first on originators. Originators of STS instruments should be the first responsible in ensuring that a product fulfils the criteria. They will have to attest that the product is meeting all STS criteria. The onus would remain on originators as they are in possession of the most complete information regarding the transactions and are the best placed to make the determination on the characteristics of the instruments. In addition, if the originator is found liable for misleading/false attestation, sanctions on originators would be much more effective than sanctions on the ad hoc securitisation vehicle itself.

c) Sanctions should be in place for non-compliance. There is a need for appropriate sanctioning measures for participants in the STS market to set the right incentives. For originators, the measures would refer to normal supervisory sanctioning powers. Sanctions should be both proportionate and dissuasive to prevent investors being misled and could range from pecuniary fines to a prohibition against issuing new STS securitisation for a pre-determined period of time. There is also a need to consider the implications on investors (e.g. what happens if a securitisation is re-qualified as non-STS). Investors would no longer benefit from incentives attached to the 'STS category'. In this case, a transitional period could be foreseen for investors to prevent fire sales and pro-cyclical effects (avoiding 'cliff-edge' effects). Specific sanctions should also be applied to independent third parties involved in the process.

d) Appropriate public oversight. In the course of their regular assessments of prudential requirements (e.g. onsite/off-site examination of solvency requirements), supervisors will verify that STS instruments fulfil the criteria. This monitoring is important to ensure the accuracy of prudential ratios as 'STS' instruments may benefit from a differentiated prudential treatment. Specific monitoring arrangements should also be defined for originators of STS instruments – especially if they are not banking entities – and for potential third parties.

e) The EU STS market should not be fragmented. The vast majority of stakeholders (broadly represented in all categories – see annex 7) emphasise the need to ensure a consistent implementation of the STS criteria throughout the EU. To ensure investors' confidence and to avoid divergences across financial sectors and Member States, the set of criteria should be defined as clearly and objectively as possible. The credibility of this initiative should not be undermined by leaving the possibility to originators of entering into regulatory arbitrage or 'forum shopping' strategies. Thus an effective coordination mechanism involving the ESAs needs to ensure a clear and consistent interpretation of the criteria and of the prudential consequences. A potential 'race to the bottom' – as to attract new issuing structures in a given jurisdiction – would be detrimental to the whole project. This would in turn reinforce the current stigma and contribute to the fragmentation of the EU market. To ensure clarity and comparability for investors, transparency requirements should be applied to all securitisations.

–6.3.1) Option 3.1 - Establishing a compliance mechanism based on self-attestation

Under this option, the responsibility for determining compliance with 'STS' criteria would lie with originator firms, which would be legally liable for attesting that all criteria were met. They would be required to disclose this attestation in the offer documents after an appropriate assessment of each of the criteria. Ex-post oversight would be carried out as in normal supervisory activities, the STS status of a securitisation (and its corresponding prudential treatment) would therefore still be subject to supervisory checks. Having the final word on the prudential treatment applied to a securitisation deal, the supervisor would also have the final word on the STS status of a deal.

Chart for option 3.1

(a) Effectiveness - ensuring differentiation of STS deals from more opaque and complex ones

The attestation would establish legal liabilities for originators, thus affecting positively investors' views on STS securitisation. This approach would not eliminate investors' concerns about conflicts of interest that may affect the objectivity of originators in making their attestation. Originators would in fact have incentives to attest a deal is STS in order to reassure potential investors of its quality and allow them to enjoy a less burdensome prudential treatment. Misleading self-attestation is therefore the main risk of this approach. Nonetheless, false self-attestation would have serious consequences if unveiled: the sanctions and reputational damage suffered by the originator who attested a deal as STS while this has been rejected by the supervisor would provide a powerful incentive to comply.

This approach would also introduce detailed due diligence requirements by the part of investors on the underlying exposure packaged in the securitisation as well as on its structure. This would give a strong incentive to investors to take full responsibility for their investment decisions and thoroughly perform their due diligence, which is a key ingredient to a safe and sustainable market. Due diligence failings, which led to a mechanistic reliance of investors on credit ratings were indeed a key ingredient in the US subprime securitisation crash.

Supervisory checkes on STS deals would continue to be performed on a regular basis, thus provisind the overarching guarantee to the correct functioning of the system. As already pointed out, the final word on the STS status of a deal would be that of the supervisors.

This approach does not limit in any way the recourse to validation by third parties of a deal's STS status. If the latter will provide value added to investors and originators, they will require it and a market will arise. Giving third parties effective regulatory power (their decision would indeed impact profoundly the prudential treatment of deals) would require third parties to be regulated. It seems therefore more effective to regulate and supervise directly the securitisation deals than third parties "labelling" the latter.

Since securitisation transactions will likely involve banks, insurance companies and asset managers from different countries, in both the issuing and investing side of the deal, a number of supervisors will have to collaborate in the supervision work on securitisations. In some cases it may be the supervisor responsible for the issuer that may challenge an STS self-attestation. In other cases, it may be the supervisor responsible for the investor in such deal. In any case, the first check will be that of the investor, which will perform its due diligence on the STS criteria.

With a vast number of supervisors involved, it is important to limit legal uncertainty, ensuring consistency and speed of implementation of compliance decisions. With this aim, guidelines and technical standards will accompany the legislative initiative. These should ensure consistent interpretation and application of the STS criteria throughout the EU and its different financial sectors. Furthermore, in case of disagreement between supervisors on a specific securitisation deal, a mechanism of binding mediation by ESMA is envisaged.

(b) Efficiency and impact for stakeholders

This option would increase originators' liability in case of wrongdoing. Originators have indeed shown in the responses to the public consultation (see "stakeholders' view" box on page 47) a strong preference for a system where responsibilities for STS attestation are shared with other parties (supervisors, independent third parties). In the absence of external checks on STS criteria, investors would have more incentives to perform robust and detailed assessments before investing. This option would limit moral hazard concerns as supervisors would only be involved ex post when reviewing prudential requirements. In addition, third parties could anyhow be involved in the compliance mechanism if the markets values such an involvement and is therefore willing to pay for it. This option will therefore not limit in any way the development of third party validation schemes. If these will provide value added to investors, these should require it and issuers should adapt.

This approach would have limited financial implications for investors and public budgets, as originators would have to support the self-attestation costs. In the absence of an ex-ante public intervention, this approach would not eliminate regulatory risks for investors as self-attested STS instruments could be re-qualified at a later stage. This option is seen as the most suitable by some supervisory authorities and central banks as long as appropriate public oversight is maintained.

–6.3.2) Option 3.2 - Option 3.1 with the involvement of third-parties

Similar to option 3.1, option 3.2 would rely on self-attestation by originators. It would however be complemented by the mandatory involvement of a third party, for certification and/or for management purposes. As investors may have concerns with the objectivity of the assessment performed by originators, they might view self-attestation as not sufficient to rebuild trust and overcome stigma. A control system relying on independent third parties could thus be established to prevent the issuance of non-compliant STS instruments.

This option could build on EU procedures in place to establish labelling in other areas 14 . 'Control bodies' could be designated to perform specific checks to assess compliance with STS criteria. These bodies would in turn respect requirements defining the nature, frequency and conditions of their controls. Potential conflicts of interest would need to be identified and managed carefully from the outset. Thus a specific oversight/licensing regime would have to be developed in order to authorise and monitor these independent bodies.

Chart for option 3.2

(a) Effectiveness - ensuring differentiation of STS deals from more opaque and complex ones

Under option 3.2, the self-attestation would be complemented by an independent review of the STS criteria. This approach would help address objectivity concerns related to originators' assessments. An independent assessment of the securitisation would provide additional confidence to investors. These independent entities would have to fulfil requirements and detailed procedures to assess the STS instruments correctly. Appropriate safeguards would also be needed to prevent and address potential conflicts of interests with originators especially if third parties were to rely on "issuer-pays" models.

If properly informed and performed, third-party review would give additional assurance to investors in STS products. This would obviously increase effectiveness of the option. Nonetheless, the third-party review may induce lower scrutiny and due diligence by investors. This is precisely what happened in the build-up phase of the US subprime bubble.

(b) Efficiency and impact for stakeholders

This option would rely on private sector entities to perform independent assessments of STS securitisations. Several entities may enter into this market and competition could limit the costs for issuers. Involving private entities would make the mechanism more flexible and scalable to market activities. However, it would also imply additional costs.

The fees currently charged by "labelling" entities may offer a proxy for potential prices here (e.g. initial fees to award a label are typically around EUR 12 000 plus annual maintenance fees of around EUR 6 000). In addition, these entities would need to act under public oversight. Setting up such an oversight process would also imply additional costs. If oversight were to be done at national level, there would be costs for national supervisors, plus for ESAs for the necessary coordination. If oversight were to be organised at EU level, it would be more efficient, but would still need adding resources to the existing and constrained agencies.

Also, choosing third party validation as an option would not avoid the need for coordination among supervisors. In fact, with or without mandatory third party validation, securitisation transactions will likely involve banks, insurance companies and asset managers from different countries, in both the issuing and investing side. As such, a number of supervisors will have to collaborate in the supervision work on securitisations. The mechanism of binding mediation envisaged in the previous option would be need under this option as well.

This approach would have similarities with other EU policy, in particular the procedures for EU labelling. Public oversight of the independent entities could also build on the approach developed for the registration and oversight of credit rating agencies. It is important to note that this approach may present similar issues and risks causing 'overreliance' on third parties such as credit rating agencies. Originators and investors are globally supportive of this option though, if they would share part of the liabilities with third parties. However, as the latter would often have limited activities and resource ("not for profit"), involving their liability may be an issue. In addition, investors would never get full regulatory certainty as the final prudential determination would remain in their hands.

–6.3.3) Option 3.3 - Option 3.1 complemented by ex-ante supervisory checks on each issuance

Similar to option 3.1, option 3.3 would rely on the self-attestation of originators, complemented by ex-ante checks by supervisory authorities. This option would offer a higher degree of credibility due to the specific status of supervisory authorities. Furthermore, prudential authorities benefit from a wider overview of market practices and are less likely to be subjected to 'asymmetry of information' issues. Moreover, with no "issuer-pays" model, no conflicts of interest should arise.

This approval mechanism would be developed for each securitisation instrument. This would ensure that each individual instrument meets the STS criteria. Compared to the previous options it would, however, imply higher compliance costs for issuers as they would have to request that all issuances are checked. In this case, securities regulators would be better placed to perform this task.

Alternatively, an 'issuer-based approach' could be developed. This would mainly focus on processes implemented by originators/sponsors to ensure compliance with the STS criteria. This would result in a kind of license granted by authorities. The initial licensing/approval would be comprehensive and detailed but it would reduce the compliance costs for large originators as they would not be required to renew approval for every new transaction.

 (a) Effectiveness - ensuring differentiation of STS deals from more opaque and complex ones

Instead of relying on independent third parties, supervisors would directly assess the compliance of STS securitisation. This approach would be the most powerful to ensure investors' confidence and overcome current stigma. This option would contribute to a sustainable development of the STS market while preventing the emergence of new financial stability risks.

However, reliance on supervisors would reduce substantially investors' incentives to perform a thorough due diligence. Also, this would reduce the responsibility of issuers, as supervisory approval would be necessary. To counterbalance this, supervision would have to be very detailed and vigilant for every deal issued in the EU. This would require substantial new resources and EU coordination for supervisors relevant in the securitisation markets. While supervisory approval is necessary for prospectuses, because they concern products sold to retail investors, securitisation products would only be sold to institutional investors.

(b) Efficiency and impact for stakeholders

This option would be the most efficient in terms of ensuring the credibility of differentiation between different types of securitisation. However, it would require considerably greater public resources as supervisory authorities would have to establish new teams and develop new expertise to carry out these new tasks. A supervisory approach relying on a large number of authorities would generate risks of diverging interpretations and forum shopping in the absence of a strong coordination mechanism.

Supervisory authorities gave limited support for this option as they may face additional liabilities and are concerned with moral hazard issues. Investors and originators expressed appreciation for the legal certainty associated with a supervisory review, but a majority of them expressed concern with potential delay and a lack of timely reaction from public entities during the issuance process.

Chart for option 3.3

–6.3.4) Impact summary and conclusion

The attestation by originators (option 3.1)would ensure that originators remain liable for issuing instruments meeting STS criteria and should incentivise investors to perform appropriate due diligence. Issuers should face appropriate sanctions if they make wrong declarations. This approach would be combined with option 2 but on a non-mandatory basis. Originators would still have the possibility to ask for a review by an independent third party if they consider that this would provide added value.

In addition, to ensure a clear and consistent interpretation of the STS criteria and of the prudential consequences attached to this category, an effective coordination mechanism between supervisory authorities, involving binding mediation, is needed at EU level (ESMA, EIOPA and EBA). This would help ensure a high degree of consistency and lead to a common EU approach in the interpretation of STS standards.

6.4) Section 4 - Banking and insurance prudential treatment

This section examines the effectiveness of the identified options in achieving the specific objective of ‘differentiating STS products from more opaque and complex ones’ as well as the general and the specific policy objectives.

The current framework for credit institutions investing in securitisations has been in force since 2007, implementing the ‘Basel II’ Accord. It has only been subject to small targeted changes in the 2013 Capital Requirements Regulation ("CRR"), which provides for specific credit risk capital charges for exposures to these instruments.

Under the CRR, a "securitisation" is defined by reference to two key features: the stratification or tranching of the credit risk associated with a pool of assets and the subordination between the securitisation "tranches" such that the performance (and risk) of the tranched securitisation exposures is dependent upon that of the underlying pool of asset and the relative position of the tranche in the payment waterfall.

These two key characteristics are the main drivers for the dedicated capital treatment for securitisation exposures. Other specific features that the current framework takes into account include the so-called "model risk" which is more relevant for securitisations than for other types of transactions because of the specific aspects of the securitisation structure (e.g. the correlations of underlying exposures, bespoke cash-flow waterfalls, trigger mechanisms that can alter cash flows, etc.).

The calculation of capital requirements is underpinned by the following key features of the framework:

there are two overarching types of approaches: the standardised and the internal ratings based approach. For their investments in securitisations, banks have to use the same type of approach that they are allowed to use to calculate credit risk for direct investments in the relevant underlying securitised asset;

within each type of approach, there is in turn a so-called "hierarchy of approaches". This hierarchy requires banks to always apply a "ratings based approach" where the securitisation tranches have been given an external rating. The framework allocates capital requirements on the basis of the external rating given to each tranche, which for the highest rated senior tranches must be no less than 0.56 Euro per 100 exposure under the Internal Ratings Based Approach and 1.60 Euro under the standardised approach. For mezzanine and junior tranches, risk weights increase as ratings lower, down to full deduction (100 Euro capital for 100 Euro of exposure); this is typically required for the "first loss piece" or most junior tranche.

for unrated securitisation tranches or positions (which is very often the case of the first loss piece in a rated transaction), the investor bank must either deduct its investment from capital or, if certain conditions are met, may be able to apply one of the alternative approaches to avoid deduction. For example, banks using the internal ratings based approach may use the "supervisory formula", in which the input to the calculation of capital requirements is determined by a formula provided for by the framework itself which has regard to the capital that must be held in relation to the underlying assets before being securitised. However, the conditions to allow the use of the supervisory formula are fairly stringent and require previous permission of the bank's supervisor.

The current framework, hence, treats all securitisation transactions in the same manner, relying on the tranche external rating (and regardless of the structural features of the transaction) as the key factor to allocate regulatory capital requirements.

However, certain securitisation transactions characterised by complex structures, bad underwriting practices, excessive leverage and maturity transformation performed significantly worse than the models underlying the external rating calibrations had assumed at their inception. These securitisation transactions suffered heavy and sudden downgrades during the 2007-08 financial crisis which resulted in a rapid increase of capital requirements for banks that had invested in them. Although STS securitisations performed strongly compared to those more complex transactions, the market as a whole became tainted and stigmatised and issuance levels slowed down to a fraction of the pre-crisis levels from which it has not recovered yet.

In December 2014, the BCBS adopted a revision of the securitisation framework with a view to addressing some shortcomings of the Basel II standards 15 . As part of that work, the Committee is discussing the merits of a dedicated framework for STS products reflecting their lower complexity and greater transparency. Quantitative work on a potential calibration for STS securitisations is ongoing and the Committee might at best disclose available options for public consultation by the third quarter of 2015. The calibration of STS securitisation is also being explored at EU level and the EBA is expected to finalise their advice to the Commission in the coming weeks. The industry has singled out regulatory capital treatment of securitisations as the most influential factor in the efforts by public authorities to encourage a recovery of these markets.

For the purposes of this Impact Assessment, we have assumed the following two policy options regarding the regulatory capital treatment for STS securitisations:

6.4.1) Option 4.1: - no change to the existing securitisation framework as set out in the CRR

Under this option, no changes would be made to the current securitisation framework in the CRR. Accordingly, all securitisations (both STS and non-STS) would continue to be subject to the same prudential treatment.

(a) Effectiveness - ensuring differentiation of STS deals from more opaque and complex ones

The disadvantage of maintaining the status quo would be that, as noted above, the current securitisation framework has proved to be insufficiently risk sensitive to take into account properly the risks that materialised during the crisis for non-STS securitisations. The absence of a framework setting a clear distinction between STS and non-STS transactions would not help remove the stigma currently attached to all securitisations.

(b) Efficiency and impact for stakeholders

This option would have the benefit of not imposing transitional costs or additional burden on market players. Banks would avoid the costs of having to adapt to a new regulatory environment, while supervisors would not have to adopt new supervisory approaches.

6.4.2) Option 4.2: - develop a preferential capital treatment for STS securitisations

The Commission would amend the existing requirements in the CRR differentiating between STS and non-STS securitisations for regulatory capital purposes, with a risk-sensitive treatment for the former (e.g. lower capital requirements) relative to the latter. The new prudential treatment would be based on the advice to the Commission provided by EBA on July 6, 2015.

On the basis of both theoretical arguments and empirical evidence over the default and loss performance of different securitisation instruments throughout the crisis period, the EBA advises the Commission to re-calibrate the new Basel 2014 Securitisation Framework for STS securitisation positions in the following way:

lower the risk-weight floor (i.e. the minimum capital requirement) for senior STS securitisation positions from 15% (1.20 Euro per 100.00 Euro) value to 10% (0.80 Euro per 100.00 Euro) 16 ; and

reduce the capital requirements under all 3 approaches of the new Basel framework (IRBA-ERBA-SA) reflecting the greater transparency and simpler structure of STS securitisations.

Focusing on the approaches based on external ratings, the table below compares the capital requirements of the current CRR/Basel II with the capital requirements under the new Basel framework and the EBA approach for STS securitisations. It is worth noting that the new Basel framework (and accordingly, the EBA approach) gives priority (and provides incentives) to the use of the IRBA approach whenever possible. However, IRBA capital requirements cannot be directly compared with the current CRR/Basel 2 capital requirements since these mainly depend on external ratings.

Table 1: Examples of capital requirements in Euro per 100.00 Euro of securitisation exposure (senior position)

Under all three approaches (IRBA-ERBA-SA) the lowest possible capital requirement (80 cents per 100 Euro of exposure) remains slightly above the current CRR levels under the IRB approach (56 cents per 100 Euro of exposure/tranche rated AAA and 64 cents per 100 Euro of exposure/tranche rated AA). However, it should be noted that:

- this is in line with the capital requirements of 80 cents per 100 Euro of exposure for AAA rated covered bonds under the CRR and would ensure a level playing field between comparable funding instruments, as advocated by the majority of market participants as well as regulators;

- such increase would be largely compensated by the substantial reduction of capital charges for less well-rated tranches. For instance, the ERBA capital requirement for BB+ rated tranches capital requirements would be more than halved when compared with capital requirements under current CRR/Basel II. This would also mitigate the risk of (pro-cyclical) cliff effects; and

- finally, in all cases where banks are allowed by their supervisor to use the IRBA, they would benefit from generally lower requirements than under the ERBA, although the 0.80/100 Euro floor would apply in any case. According to EBA calculations on a sample of securitisations issued in the EU in the period 2000-2014, the use of the IRBA for STS would imply a reduction (on average) of the magnitude of 83% when compared to the current CRR treatment (IRB approach).

The increase in capital charges for non-STS securitisations which results from the revised Basel framework relative to the current CRR would enable the Commission to address the consensus among supervisors about the insufficient conservativeness of the current framework for non-STS securitisations. From the industry’s perspective, this increase would be largely compensated by the decrease of capital charges for STS securitisations (which is the large majority of current and prospective EU securitisations) and address concerns regarding the alleged excessive conservativeness of the new Basel framework for these securitisations only.

Accordingly, adopting the approach proposed by the EBA would strike the right balance between the need to protect financial stability and to encourage economic growth through a safer, more transparent and sustainable securitisation market and therefore it is suggested as the way forward to implement option 4.2.

(a) Effectiveness - ensuring differentiation of STS deals from more opaque and complex ones

A framework that provided for a clear distinction between STS and non-STS securitisations by giving a preferential capital treatment to the former would have a number of positive effects, namely:

the resulting securitisation framework would be more risk-sensitive and better balanced: preferential capital requirements would be available for more transparent and simpler structures, which are less risky and typically back the flow of long term finance to the real economy (as opposed to highly risk and speculative investments);

capital requirements would incentivise banks to comply with differentiated STS criteria; such criteria would promote better behaviour and market discipline at all stages of securitisation transactions (e.g. structuring, execution...), thus reducing overall risk in the system and strengthening financial stability. Indeed, the STS criteria are designed to encourage simple, transparent and comparable securitisation structures with a sound and robust execution by all parties involved, features which the current framework fails to address;

investors would be encouraged to re-enter the securitisation market, as a differentiated framework would send a clear signal that risks are now better calibrated and, therefore, the likelihood of a systemic crisis reoccurring would have been reduced;

this option would reduce the negative effects of sovereign rate caps (see section 3.2.2 for a discussion of the problem). This is because for STS products the capital charges would be lower for all ratings and increasing more gradually as the rating declines. Therefore, an STS securitisation issued in a country where a sovereign rating cap is having an impact at present would face a smaller capital charge than it does currently.

(b) Efficiency and impact for stakeholders

A preferential regulatory capital treatment for STS securitisations would require a recalibration of the current capital requirements, which the EBA is currently assessing with a view to putting forward a proposal to the Commission in short order. The recalibration could be limited to the most senior tranche of each STS-compliant transaction, that is, only such a tranche would be STS for regulatory capital purposes. Alternatively, the recalibration could be carried out across the whole waterfall structure, such that all tranches of an STS-compliant transaction would receive a beneficial regulatory capital treatment compared to non-STS securitisations. The latter option would be more likely to encourage the broadening of the investor base for STS securitisations, insofar as banks would not be unduly penalised from a regulatory capital perspective for holding mezzanine positions.

The obvious disadvantage of this option would be the transitional costs that would be avoided with option 1.

Prudential treatment of insurers' investments into STS securitisation

In the context of the Solvency II standard formula, the following options regarding differentiated capital requirements for insurers' STS versus non-STS securitisation positions can be considered:

option 4.3 (baseline): keep the Solvency II standard formula unchanged, which already provides for a tailored treatment of insurers' investments in senior tranches of STS securitisation deals, but treats other tranches just as any non-STS securitisation.

option 4.4 : refine the existing approach, without changing the scope of the differentiated approach (i.e. improve the risk-sensitivity of the calibrations for senior tranches only).

option 4.5: (in addition to the actions in 4.4) extend the differentiated approach to insurers' investments in non-senior tranches of STS securitisation deals (so that non-senior tranches of STS securitisation deals are not treated like any tranche of non-STS securitisation).

6.4.3) Option 4.3 – baseline: no further action

The Solvency II delegated act 17 already includes a definition of STS securitisation, which affects the amount of capital that insurers must hold against the risk of fluctuation of prices of such investments (spread risk). For the purpose of calculating capital requirements, the delegated act divides insurers' investments into securitisation in two types: Type 1 securitisation positions, which only include the most senior tranches of STS deals, and Type 2 securitisation positions, which cover everything else, including non-senior tranches of STS deals and generate significantly more onerous capital requirements (see chart below). 

Chart 19: allocation of tranches between the existing Type 1 and Type 2 positions in Solvency II (Type 2 is more onerous).

(a) Effectiveness - ensuring differentiation of STS deals from more opaque and complex ones

Stakeholders (bank issuers, insurance companies as well as supervisors) have criticised the existing division for not being risk sensitive enough, and preventing insurers from fully supporting the growth of the STS securitisation market, given that insurers would rather be incentivised to invest in top tranches.

Stakeholders have nevertheless welcomed the fact that capital requirements for Type 1 positions were set no higher than those applicable to the typical underlying assets (unrated loans) on the basis of a look-through reasoning. Indeed, senior tranches are mechanically less credit-risky than the whole of the underlying pool of securitised assets if they were held directly. But stakeholders complain that the delegated act does not entirely follow the logic of this look-through approach, as certain loans held directly, such as residential mortgage loans, would still enjoy a less onerous treatment than the senior tranche of an STS securitisation backed by the same loans.

The limited differentiation present in the current approach (baseline) can therefore be improved in two ways: either refine the treatment of Type 1 securitisation (namely by fixing the inconsistencies in the look-through approach) without changing the dividing line between Type 1 and Type 2 or amend the Solvency II delegated act more substantially by providing a differentiated treatment for all tranches of STS securitisation.

6.4.4) Option 4.4 – modify treatment for senior tranches only

This policy option would improve the risk sensitivity of the existing calibration for Type 1 securitisation positions in 3 ways:

fixing the inconsistencies in the look-through approach between the capital requirements applicable to senior STS tranches and the underlying assets;

introducing some risk-sensitivity regarding external ratings, as the current capital requirement is identical for positions rated AA, A and BBB. This results from capping the calibration at the level of that applicable to underlying assets (3%) which was decided at the time of adoption of the delegated act 18 . Risk factors could be interpolated between the existing figures for AAA and BBB rated securitisation positions as shown below.

the increase of risk factors with duration could be mitigated compared to the current proportional increase 19 . The same "kinking" pattern as for the risk factors applicable to corporate bonds could be translated in the risk factors for securitisation. However, this amendment may have a limited impact given that securitisation instruments are seldom very long-dated.

(a) Effectiveness - ensuring differentiation of STS deals from more opaque and complex ones

This option is helpful in fostering differentiation and supporting the development of the market for STS securitisation products, but only partially: insurers would be mostly incentivised to invest in senior tranches, with non-senior tranches not enjoying as large an investor base. From the point of view of a securitisation issuer, non-senior tranches would remain as hard to place as they are now (where the overwhelming majority of non-senior tranches are retained by the issuer). Since the almost totality of the risk is borne by non-senior tranches, issuers would continue to be unable to transfer risk to investors. Securitisation would therefore remain confined to a tool to raise funding but not a risk-transfer tool. With cheaper sources of funding available (central bank repo operations, covered bonds..), securitisation will continue to be a scarcely appealing technique for EU issuers.

(b) Efficiency and impact for stakeholders

As all the refinement to the calibration under this option can be done relatively quickly, the option does not require a major administrative and legislative effort. Nevertheless, in terms of impact, the benefits of this option (namely, fixing the look-though approach) would be limited and accrue mostly to the market for residential mortgage backed securities. There is no impact on insurers in terms of administrative burden or costs.

6.4.5) Option 4.5 – modify treatment for senior and non-senior tranches

This policy option addresses the criticism that treating non-senior tranches of STS securitisation deals in the same was as any other non-STS securitisation is not appropriate. It is a more ambitious option since it would require calibrating from market data a specific set of risk factors for such non-senior STS tranches. The calibration would follow a look through approach based on the capital charge for the underlying exposures increased by a non-neutrality factor to capture the model risk of the securitisation. The capital charges of the underlying exposures would be based on the current Solvency II delegated act and the non-neutrality factor would be aligned with the average factors from the banking approach based on the EBA advice.

(a) Effectiveness - ensuring differentiation of STS deals from more opaque and complex ones

By creating a broad investor base for all tranches (not only senior), this option would address the concern that if insurers only invest in senior STS tranches, this may not be enough to stimulate the development of STS securitisation deals. The problems for non-senior tranches described above would indeed be tackled.

Furthermore, since STS structures would present lower modelling risk and thus render all tranches (senior and non-senior) less risky with respect to similar tranches in non-STS structures, recalibrating all tranches capital charges would better reflect the risk profile of the securitisation deal.

(b) Efficiency and impact for stakeholders

By allowing STS securitisation to perform both of its key roles (funding and risk transfer), this option would allow the differentiation to have a tangible effect, fostering the emergence of an STS market able to attract (and transfer risk to) non-bank investors as well, thus helping the EU economy to have a more balanced (bank and non-bank) funding structure. A more balanced funding structure would reduce risks to financial stability as the effects of a financial shock on the access to credit of EU firms and households would be less immediate and strong.

The higher effectiveness of this option compared with the previous offsets the higher costs in terms of time and effort required to design a specific calibration for non-senior tranches of STS products. There is no impact on insurers in terms of administrative burden or costs.

6.4.6) Impact summary and conclusion

Taking into account the weaknesses of the current banking prudential framework to calibrate properly the risk of non-STS securitisations and the potential advantages of developing a preferential capital treatment for STS transactions, option 4.2 with a full recalibration of all tranches, based on the EBA advice received by the Commission on 6 July 2015 should be followed.

Similar considerations are valid for the capital treatment of insurers' exposure to securitisation. While the no action option (4.3) would entail some differentiation of STS products, this would be far too limited to render STS products recognisable and economically viable to invest in. As things stand, insurers would still be incentivised to invest in top tranches alone. This problem would therefore not be eliminated by improving the capital treatment of senior tranches of STS deals alone (option 4.4). Recognising that simplicity, transparency and standardisation are features of a deal and not just a tranche, recalibrating capital charges for all tranches of an STS securitisation would be more justifiable and, even more importantly, it would create a broad non-bank investor base for all tranches and allow STS securitisation to perform both of its key roles (funding and risk transfer). This option is more effective than the previous one, as it would incentivise insurers to invest in all tranches of STS products, depending on their risk appetite, with risk-sensitive calibrations for each level of tranches.

Should the recalibration of prudential capital charges lead to overheating of the securitisation market, macro prudential tools can be used to reduce issuance and cool down the market. For example, loan-to-value limits could be tweaked for mortgage markets. These represent the vast majority of issuance and outstanding amounts in securitisation markets. Slowing down their growth would thus go a long way in reducing risks to financial stability arising from eventual overheating. As noticed in the introduction, the initiative is likely to impact Member States in different degrees, depending on the development and structure of their markets, as well as their macroeconomic environment. For this reason, (if needed) macro prudential tools should be set on a national basis.

6.5) Section 5 - Standardisation and harmonisation

This chapter describes and assesses three policy options aiming at fostering the standardisation of processes and practises as well as tackling regulatory inconsistencies. The absence of standardisation is frequently perceived as one of the main obstacles to the development of securitisation markets within and across the EU. The vast majority of stakeholders of all categories (see annex 7) express their support for addressing current inconsistencies in the regulatory framework and for further standardisation of securitisation in the EU. This would increase legal clarity and comparability across asset classes, it would ease investors' assessments and it would facilitate and reduce issuance costs for originators. This standardisation may also help supervisory authorities to monitor the risk profile of financial intermediaries and macro-prudential risks. Greater standardisation of the instruments would also increase market liquidity and help the development of secondary markets.

Description of policy options to foster standardisation and address inconsistencies

This section considers three main policy options to foster standardisation and address regulatory inconsistencies. The first option is the baseline option, where the EU would not intervene and rely solely on reforms adopted in the past years and on what market operators and Member States may decide to implement. The second option would result in an EU legislative initiative setting up a single consistent EU securitisation framework based on existing EU legislation defining securitisation, transparency, disclosure, due diligence and risk retention rules. Building on this horizontal legislation, the EU would encourage market participants to develop further standardisation of securitisation documentation. The third option would go further than the second option adopting – on top of the horizontal legal instrument - an EU securitisation framework harmonising Member States' legal frameworks for securitisation vehicles (including modalities to transfer assets to SPVs and the rights and obligations of note holders).

6.5.1) Option 5.1 – Baseline - No EU action

Under this option, the main focus would be on finalising the implementation of the agreed reforms and addressing the remaining issues such as completing some of the missing pieces of the securitisation framework. It would notably imply finalising the establishment of a centralised website collecting and disseminating detailed information of all securitisation instruments as required by the Credit Ratings Agencies Regulation (CRA3, article 8.b) 20 . Having this infrastructure being operational in a reasonable period of time is key to ensure transparency. This option could also include the development of additional templates to collect data of specific securitisation market segments which are not yet covered by the CRA3 Regulation.

Under this option, other limited initiatives would also be envisaged such as implementing risk retention rules in areas where this requirement is not yet in place (for example for mutual funds, under UCITS) and adjusting the modalities of implementation (cf. EBA recommendations of December 2014).

(a) Effectiveness - Fostering standardisation and addressing inconsistencies.

This option would help in reducing some regulatory inconsistencies and fixing a limited set of issues such as impediments to the development of a centralised website for securitisation instruments. The main assumptions beyond this approach are that i) the effects of past reforms (e.g. Solvency II, Liquidity Coverage Ratio delegated acts, CRA3) have still to materialise and that ii) the market will organise itself in the medium to long term to promote standardisation. However, since the agreed reforms tackle only some sector-specific standardisation issues, their effect in reducing inconsistencies across financial sectors and foster standardisation will remain very limited. Administrative burden associated with current inconsistencies and lack of standardisation would continue represting a considerable hindrance to a sustainable revival of securitisation. Thus, this option scores poorly in achieving the standardisation objective.

(b) Efficiency and impact for stakeholders

This approach would imply limited costs for public finance. No budget has indeed been foreseen for the setting up of the centralised ESMA securitisation website, casting doubts of the feasibility of such website. Coordination costs for the private sector are likely to be significant, whereas potential long terms benefits would remain uncertain. In addition, the administrative burden will remain important as most of the current inconsistencies will not be tackled (cf. current inconsistencies regarding originators' disclosure and investors' due diligence requirements as highlighted by the ESAs Joint-Committee report). The expected impacts on stakeholders will remain limited. Most investors/originators as well as supervisory authorities are concerned with existing overlaps and inconsistencies across financial services regulations and sometimes within the same sector (e.g. on disclosure/due diligence requirements, as highlighted in the Joint-Committee report). These elements and the lack of standardisation would not be addressed by potential market initiatives.

6.5.2) Option 5.2 – Establishing a single consistent EU securitisation framework and encouraging market participants to develop further standardisation

Under this option, the objective would be to develop a uniform set of criteria and rules underpinning the numerous pieces of EU legislation dealing today with securitisation. This approach would not be limited to 'STS securitisation' but encompass all securitisation instruments. It would notably introduce a list of common definitions (e.g. securitisation, special purpose entities, originator…) applying across EU financial sectors. This single legal instrument covering all securitisation instruments, would also include common provisions governing transparency, disclosure, due diligence and risk retention requirements. This horizontal text would build on existing EU rules and address as much as possible current inconsistencies and gaps across financial sectors. Under this approach, corresponding provisions in sector-specific texts would be repealed and cross-references to the horizontal act introduced. If the decision to introduce in a general manner STS securitisation in EU law were to be taken, this single text would also lay down all STS criteria for the EU financial sector. This common set of consistent rules would clarify and simplify the EU regulatory framework for originators, investors and supervisors. This would help market participants to launch further standardisation initiatives. Building on the positive outcome of the Private Placement initiative, the EU could encourage efforts in two specific areas:

i) The development of standardised securitisation documentation - The reporting requirements introduced by several central banks in Europe have been a major achievement to standardise loan-level information on securitisation instruments. This has already contributed to providing investors with many more elements on underlying risks. However, this initiative could be complemented by further standardisation efforts. For instance the lack of harmonisation in definitions within and across Member States is an impediment to assessing and comparing instruments. Promising initiatives have been launched in certain Member States such as in the Netherland for the RMBS segment (e.g. the Dutch Securitisation Association initiative).

ii) The development of standardised contracts/framework - Some stakeholders also suggest developing standardised contracts (e.g. "master agreements") to be used as a reference for securitisation issuances. This could constitute the main corpus of securitisation documentation and be complemented by ad hoc provisions which may not be applied in all transactions or in all Member States. Entities would only need to refer to such agreements instead of reproducing the full list of provisions. Any deviations should be made immediately visible and should be explained. The existence of material deviations from the standardised documentation would be an indication as to whether the instruments comply or not with the "simplicity, transparency and standardised" features. This initiative would rely on the private sector to develop these market standards. Similar initiatives as for Private Placement or for Derivatives (ISDA protocol) could be used as examples.

(a) Effectiveness - Fostering standardisation and addressing inconsistencies

This option would ensure legal and regulatory clarity for originators and investors. This would simplify the current piecemeal approach in EU regulations for originators and investors and tackle potential ambiguities generated by the current juxtaposition of sometimes almost identical – but not identical - sets of rules in sector-specific regulations (e.g. on risk retention, disclosure). This approach would also help in addressing some unnecessarily diverging rules across financial sectors (e.g. on due diligence requirements for investors). This would also reduce risk arbitrage opportunities and simplify monitoring by supervisory authorities monitoring. In addition, this option would offer opportunities to address existing inconsistencies or implementing problems of adopted legislation such as for the transparency website. This would allow increasing the effectiveness of already agreed reforms and interventions in the field such as the Solvency II, Liquidity Coverage Ratio delegated acts and CRA3.

This approach would rely on market participants and trade association to foster greater standardisation of securitisation. This bottom-up approach will ensure greater consistency and accuracy in the harmonisation process. It would also reflect the best practices and limit the risks of introducing provisions which may have unintended consequences on the market. This approach has been successful in the Netherlands for the RMBS market. However, the likelihood of reaching an agreement at the EU level would be more challenging as national specificities and constraints (e.g. contract, property and insolvency law) would be much more important. However, difficulties may also be important for some market segments, RMBS being quite standardised instruments.

(b) Efficiency and impact for stakeholders

This approach would have a limited impact on public finance. This option will reduce administrative burden for market participants mainly originators and investors as they would obtain greater clarity on the applicable rules. It would also reduce their regulatory/compliance risks and it would become easier to standardise securitisation on the basis of the harmonised framework. Stakeholders generally support the simplification of the current EU framework for securitisation as a single legal instrument could further contribute to the development of a robust securitisation market.

As regards the standardisation of securitisation documentation, this approach may take longer as it implies market participants will need to get organised and to agree on a consensual set of rules. Incentives to develop these frameworks may also be limited in the short term. It would imply administrative and legal costs for the private sector and the collective gains may take time to materialise ("free rider" behaviour). However, among stakeholders there is a consensus on the merits of encouraging further standardisation in the documentation of securitisations without imposing a "straitjacket" framework which may not be suitable for certain segments of the market.

6.5.3 Option 5.3 – Adopting a comprehensive EU securitisation framework

This option would build on option 2 and be complemented by the adoption of an EU legal framework harmonising Member States' frameworks for securitisation. It would be a wide-encompassing initiative including notably common rules for the setting-up of the special purpose vehicle, the modalities to transfer assets to SPVs and the rights and obligations of note holders. While some Member States have legal frameworks for securitisation (cf. box and annex 8), important national markets rely on contractual arrangements (e.g. UK, NL). Introducing this approach would result in the adoption of an EU legal framework which may supersede current national arrangements or be optional (i.e. a 29th regime).

For investors, such an EU securitisation structure could reduce unnecessary burden in the due diligence process and save time spent in analysing country-specific securitisation practices. In turn, a harmonised framework may increase their confidence to invest in securitised instruments. The objective would be to establish a structure that helps issuers as well as boosts investor appetite in EU securitised products.

(a) Effectiveness - ensuring differentiation of STS deals from more opaque and complex ones

This option would score very highly in achieving standardisation of securitisation markets in the EU. It may contribute to the greater harmonisation of securitisation practices, help create economies of scale, and provide access to securitisation for smaller lenders in Member States where securitisation markets are underdeveloped.

(b) Efficiency and impact for stakeholders

This approach would have structural effects on some Member States especially those that do not rely on a legal framework for securitisation. Unintended consequences could be important for some local markets which remain active in some segments. A number of stakeholders see the theoretical merits of such an initiative. However, most stakeholders have doubts as to the possibility of developing an EU harmonised legal framework to support the establishment of securitisation vehicles, the transfer of assets or the subordination among noteholders in the short to medium term. The vast majority of stakeholders – especially from the financial sector - highlighted that while standardisation efforts would be beneficial in the long term, regulators should not jeopardise short/medium term benefits by delaying the whole initiative.

6.5.4) Impact summary and conclusion

Option 5.1 would leave the administrative burden associated with current inconsistencies and lack of standardisation across financial sectors unchanged. Establishing a single and consistent EU securitisation framework (option 5.2) would instead increase legal certainty for originators and investors and reduce current regulatory inconsistencies. This would be achieved will limited impact on public finances. Option 5.3 would potentially achieve higher standardisation than option 5.2, and have similar effects on legal clarity and the reduction of inconsistencies. However, progress on key files such as insolvency laws and taxation regimes is likely to be slow and would depend chiefly on Member States actions, with uncertainty on the scope, depth and timing of the initiative. Such uncertainty is indeed shared by most stakeholders (public and private) that responded to the consultation.

Establishing a clear and consistent EU legal framework for securitisation (option 5.2) would ensure greater clarity for investors and originators. Having this horizontal EU instrument in place would aid market participants in launching initiatives to further standardise securitisation frameworks especially for harmonising securitisation documentation. This approach is seen as more flexible and practicable than the third option, as the final outcome is not depending on standardisation in other complex areas such as insolvency law and taxation regimes.

7) THE RETAINED POLICY OPTIONS AND INSTRUMENT

7.1. The retained policy options

Based on the analysis above, the first objective (to differentiate simple, transparent and standardised securitisation products from more opaque and complex ones) is best fulfilled by a combination of options 1.3, 2.2, 3.2, 4.2 and 4.5. These are therefore the retained options. These options together should introduce an immediately recognisable STS product in EU securitisation markets. Backed by an efficient compliance mechanism, STS products will be trusted by investors and can thus provide the legal basis for an amended capital treatment. This will indeed reflect more closely the risk profile of STS products, thereby allowing investors and issuers to reap the benefits of simple, transparent and standardised structures.

The most effective and efficient policy option to achieve the second objective (to foster the spread of standardisation of processes and practises in securitisation markets, tackle regulatory inconsistencies) is option 5.2, which is therefore retained. Establishing a single and consistent EU securitisation framework and encouraging market participants to develop further standardisation will increase legal clarity for originators and investors and reduce current regulatory inconsistencies. This will in turn positively impact investors' and originators' administrative burden.

7.2. The choice of the instrument

The proposed legislative measures aim in particular at creating a sustainable market for Simple, Transparent and Standardised (STS) securitisation products. To this end the legislative measure will stipulate the criteria to be met by securitisation products in order to be considered STS, create a specific prudential treatment for these products and harmonise existing provisions in EU law on securitisation related to risk retention, disclosure and due diligence.

STS securitisation products will have to meet a number of criteria that should be uniform across the EU. Comparable criteria with a more limited scope are currently in place in two delegated regulations adopted by the Commission (the LCR and Solvency II delegated acts). The prudential treatment of securitisation instruments is laid down in the Capital Requirements Regulation (CRR) and the SII Delegated Act. Finally, the substantial rules on disclosure, risk retention and due diligence are laid down in a number of different EU regulations (CRR, Solvency II Delegated Act, the CRA delegated Regulation and the AIFM delegated Regulation).

Article 114(1) TFEU provides the legal basis for a Regulation creating uniform provisions aimed at the functioning of the internal market. STS securitisation products, their prudential treatment and the harmonisation of the existing provisions in EU law on securitisation related to risk retention, disclosure and due diligence will underpin the correct and safe functioning of the internal market. A directive would not lead to the same results, as implementation of a Directive might lead to divergent measures being adopted at national level, which are likely to lead to distortion of competition and regulatory arbitrage. Moreover, the EU provisions already in place in this area have been adopted in the form of Regulations.

The creation of this legal framework will require the adoption of a number of legal acts. First, a securitisation Regulation that will create uniform definitions across financial sectors and harmonised rules on risk retention, due diligence and disclosure. The same regulation will stipulate the criteria for STS securitisation for all financial sectors. This regulation should also repeal provisions in sectoral legislation that will become superfluous due to the introduction of the securitisation regulation. Secondly, legal acts for a more risk-sensitive prudential treatment of securitisation for banks and insurers will have to be adopted. For banks the current prudential framework is laid down in CRR and for insurers in the Solvency II delegated act. For the banking treatment a proposal for amending CRR should be adopted, while for insurers the Solvency II delegated act will be amended to revise the prudential treatment once the new securitisation regulation enters into force.

7.3. The impact on SMEs

The policy options chosen should have several positive effects on SME financing (see Annex 6 for a detailed analysis). First of all, the inclusion of ABCP in the STS framework, with consequential improvement in their capital treatment, will foster the growth of this important source of short-term SME financing.

Secondly, the initiative should provide banks with a tool for transferring risk off their balance sheets. This in turn means that banks should free more capital that can then be used to grant new credit. While in recent years banks have tended to use their resources to buy government bonds and other debt rather than providing new credit to firms and households, this is more likely to happen now in an environment of minimal (if not negative) interest rates paid by government bonds and similar assets. As a consequence, freed capital should be increasingly used by banks to provide new credit to households and firms, most of which are SMEs in the EU.

Finally, by introducing a single and consistent EU securitisation framework and encouraging market participants to develop further standardisation, the initiative should reduce operational costs for securitisations. Since these costs are higher than average for the securitisation of SME loans, the fall should have an especially beneficial effect on the cost of credit to SMEs. Several respondents to the Commission's public consultation on securitisation have highlighted the importance of documentation and product standardisation to render SME securitisation more economically viable (see Annex 6).

7.4. Social impact

To the extent that the proposed policies will create a new channel of financing for the EU economy, one that is less dependent on banking sector conditions, they will reduce the effect of financial crises on credit provision and thus on growth and employment. The social costs of such crises will be reduced. Furthermore, by fostering the spread of securitisation structures whose risks can be analysed, understood and priced, the policy options will foster a securitisation market conductive to better funding of the economy in a context of financial stability.

7.5. Environmental impact

Nothing would suggest that the proposed policy will have any direct or indirect impacts on environmental issues.

7.6. Impact on third countries

As described in section 1.4, the work on securitisation has an important international angle. International standards to identify simple, transparent and standardised securitisations are being developed by a Task Force led by the Basel Committee on Banking Supervision (BCBS) and the International Organisation of Securities Commissions (IOSCO) and are close to finalisation. The criteria to be adopted in the EU should be based on this international standard, but will be more operational.

As described in section 3.1.1 there is a strong consensus among European and international supervisors, regulators, central banks and market participants that the post-crisis reputation of securitised products issued in Europe was severely tarnished by practices and events taking place in the US: US securitisation products performed far worse than EU products.

At this point of time it is not clear whether other jurisdictions will implement STS standards in their legal frameworks. The US, as the largest securitisation market in the world, requires special attention, because EU investors invest in these US products and are thus interested in their prudential treatment.

The STS criteria will be based upon international standards developed by BCBS-IOSCO and would in principle allow issuers of securitisation products from third countries to comply with the criteria and thus be qualified as STS securitisation. The attestation by originators that the products comply with the STS criteria will be complemented by a certification by independent third-parties. Those third parties should be supervised by a public authority from the EU. Where third countries implement the criteria in their legal framework, equivalence could be considered for their rules and the certification of STS products.

The preferential prudential treatment offered to EU bank and insurers investing in STS securitisation should also be open for non-EU products, which would ensure that no barriers are created for third countries products. As regards the risk retention, due diligence and disclosure rules these would be based on existing EU law provisions.

The new STS framework may moreover provide third country investors with an interesting category of investments in which to invest, while for third country regulators it might be an interesting avenue to further develop their own legal frameworks.

8) MONITORING AND EVALUATION

Ex-post evaluation of all new legislative measures is a priority for the Commission. Evaluations are planned about 4 years after the implementation deadline of each measure. The forthcoming Regulation will also be subject to a complete evaluation in order to assess, among other things, how effective and efficient it has been in terms of achieving the objectives presented in this report and to decide whether new measures or amendments are needed.

In terms of indicators and sources of information that could be used during the evaluation, data on the price and characteristics of securitisation deals prevailing in the market will be obtainable from the European DataWarehouse, which already covers the vast majority of the market and whose quality is checked preiodically by the ECB. Private financial data providers such as Bloomberg or Reuters may also be useful.

The most important indicator for the achievement of the first objective (Differentiate simple, transparent and standardised securitisation products from more opaque and complex ones) will be the difference in the price of STS versus non-STS products. If the objective is achieved, this difference should increase from today, with STS products being more highly valued and thus more highly paid than non-STS ones by investors. Of course, this could and should trigger an increase in the supply of STS products, reason for which the achievement of this objective will also be measured with the growth in issuance of STS products versus non-STS ones.

The second objective (Foster the spread of standardisation of processes and practises in securitisation markets, tackle regulatory inconsistencies) will instead be measured against three criteria: 1) STS products' price and issuance growth (since a decline in operational costs should translate in higher issuance and/or higher prices for STS products), 2) The degree of standardisation of marketing and reporting material and finally 3) feedback from market practitioners on operational costs' evolution (hard data on this may not be publicly available).

ANNEX 1 – Glossary

ABCP: Asset backed commercial paper. It is a form of commercial paper (short-term credit to companies) that is collateralized by other financial assets.

ABS: Asset backed security. A financial security backed by a loan, lease or receivables against assets other than real estate and mortgage-backed securities.

AFME: Association for financial markets in Europe

AIFMD: Alternative Investment Fund Managers Directive

BCBS: Basel committee for banking supervision

BOE: Bank of England

CDO: Collateralised debt obligation. A structured financial product that pools together cash flow-generating assets– such as mortgages, bonds and loans – that are debt obligations themselves.

CDS: Credit default swap

CLO: Collateralised loan obligation. A security backed by a pool of debt, usually corporate loans.

CMBS: Commercial mortgage backed security. A type of mortgage-backed security that is secured by the loan on a commercial property.

CRA: Credit rating agency

CRA3: Credit rating agency directive 3

CRR: Capital requirements regulation and directive

EBA: European banking authority

ECB: European central bank

EIF: European investment fund

ERBA: External rating based approach of the Basel framework for bank prudential capital regime adopted in December 2014

GDP: Gross domestic product

IG: Investment grade. A rating that indicates that a bond has a relatively low risk of default. 'AAA' and 'AA' (high credit quality) and 'A' and 'BBB' (medium credit quality) are considered investment grade.

IMF: International monetary fund

IOSCO: International Organization of Securities Commissions

IRB: Internal rating based approach of the previous Basel framework for bank prudential capital regime

IRBA: Internal rating based approach of the Basel framework for bank prudential capital regime adopted in December 2014

LCR: Liquidity coverage ratio

MBS: Mortgage backed security. A type of asset-backed security that is secured by a mortgage or collection of mortgages

PCS: Prime collateral security

RMBS: Residential mortgage backed security

SA: Standard approach of both the pre- and post-2014 Basel frameworks for bank prudential capital

SC: Structured credit

SF: Structured finance

SME: Small and medium enterprise

SPV: Special purpose vehicle. A "bankruptcy-remote entity", usually a subsidiary company, with an asset/liability structure and legal status that makes its obligations secure even if the parent company goes bankrupt.

STS: Simple, transparent and standardised

TSI: True sale international

UCITS: Undertakings for the collective investment in transferable securities

WBS: Whole business securitisation. A specific type of synthetic securitisation.

ANNEX 2 – Stylised facts on securitisation markets

ANNEX 3 – BCBS-IOSCO survey on "Impediments to sustainable securitisation markets" 21

ANNEX 4 – STS criteria in the LCR and Solvency II delegated acts

The criteria to identify highly transparent, simple and standardised securitisation instruments set out in the Solvency II and Liquidity Coverage Ratio delegated acts are based on recommendations from the European Insurance and Occupational Pensions Authority (EIOPA) and a detailed analysis of the liquidity of different instruments from the European Banking Authority (EBA). 22  

These criteria do not include any risk retention requirements (i.e. requirements that the originator, sponsor or original lender should retain a material net economic interest in the transaction). This is because risk retention requirements are already implemented in EU law and apply across the board, to all types of securitisation instruments (whether high-quality or not) held by insurance undertakings 23 and credit institutions 24 .

As set out in paragraph 1 below, most criteria are common to the Solvency II and LCR delegated acts. However, as the purpose is different in each act – the Solvency II standard formula concerns capital requirements, while the LCR delegated act prescribes rules for the assets held by banks in their liquidity buffer – some criteria are specific to the LCR delegated act, to ensure that high-quality securitisation instruments are also highly liquid.

1. Requirements common to the Solvency II and LCR delegated acts

1.1. Maximum seniority

The tranche must be the most senior in the securitisation transaction, and it must remain so at all times, even after events that may impact the relative seniority of tranches, such as the delivery of an enforcement or acceleration notice. This criterion ensures that the credit quality of the tranche is indeed enhanced as compared to the credit quality of the entire pool of underlying exposures. Maximum seniority is among the more relevant features justifying a prudential treatment that is aligned to the underlying exposures.

1.2. Homogeneous eligible underlying exposures

Homogeneity in the type of underlying exposures increases soundness, simplicity and transparency (in particular, loan-level reporting is easier to produce and interpret). All underlying exposures must belong to only one of the following types:

Residential loans: securitisation positions may be backed by loans secured by a first-ranking mortgage and/or by fully-guaranteed residential loans as referred to in Article 129(1)(e) of the Capital Requirements Regulation. In both cases, the pool of loans must feature on average a loan-to-value ratio lower than or equal to 80%. In the case of mortgage loans only, it is possible to derogate from this loan-to-value requirement, provided that instead, the national law of the Member State where the loans are originated provides for a maximum loan-to-income ratio not higher than 45%, and each loan in the pool complies with this limit. The relevant national law must be communicated to the Commission, and EBA and/or EIOPA.

Loans, leases and credit facilities to undertakings, in particular SMEs: securitisation positions may be backed by commercial loans, leases and credit facilities to undertakings to finance capital expenditures or business operations other than the acquisition or development of commercial real estate, provided that at least 80% of the borrowers in the pool in terms of amount are small and medium-sized enterprises at the time of issuance of the securitisation.

Auto loans or leases: securitisation positions may be backed by a loans or leases for the financing of a broad range of vehicles. Such loans or leases may include ancillary insurance and service products or additional vehicle parts, and in the case of leases, the residual value of leased vehicles 25 . All loans and leases in the pool shall be secured with a first-ranking charge or security over the vehicle or an appropriate guarantee in favour of the securitisation special purpose vehicle.

Consumer loans and credit card receivables: securitisation positions may be backed by loans and credit facilities to individuals for personal, family or household consumption purposes. As a consequence of this closed list of eligible underlying exposures, commercial mortgage backed securities (CMBS) and collateralised debt obligations (CDOs) 26 are excluded. This is justified given their poorer performance, as shown in EIOPA's advice and other studies of CMBS. 27  

No re-securitisations, no synthetic securitisations: re-securitisations are explicitly excluded, as they are typically complex and less transparent structures, where the cascading of investor losses is very difficult to understand due to re-tranching.

The same goes for synthetic securitisations, where the underlying exposures are not transferred to the special purpose vehicle. Instead, the transfer of risk is achieved by the use of credit derivatives or guarantees, while the exposures being securitised remain with the originator. The transfer of the assets to be securitised ensures that securitisation investors have recourse to those assets should the Securitisation Special Purpose Entity (SSPE) not fulfil its payment obligations. Such recourse cannot be granted in synthetic transactions, due to the fact that only the credit risk associated with the underlying assets, rather than the ownership of such assets, is transferred to the SSPE. Such a structure also adds counterparty risk on derivatives or guarantees, and hampers investors' rights to the proceeds of the underlying exposures. In addition, most synthetic structures add to the complexity of the securitisation in terms of risk modelling.

1.3. Restricted use of derivatives and transferable financial instruments

Derivatives can only be used for hedging currency and interest rate risk. This also excludes the synthetic securitisations described in the above paragraph. The pool of underlying exposures must not include transferable financial instruments (this effectively means CDOs are excluded), except financial instruments issued by the securitisation special purpose entity itself, in order to accommodate master trust structures.

1.4. 'True sale' and absence of severe 'claw back' provisions

The transfer of the underlying exposures to the securitisation special purpose vehicle must be sufficiently certain from a legal point of view:

the transfer must be enforceable against any third party and the underlying exposures be beyond the reach of the seller (originator, sponsor or original lender) and its creditors, including in the event of the seller's insolvency ('true sale' requirement);

the transfer of the underlying exposures to the SSPE may not be subject to any severe clawback provisions in the jurisdiction where the seller is incorporated because such provisions induce legal insecurity on investors' rights.

1.5. Continuity provisions for the replacement of servicers, derivative counterparties and liquidity providers

The underlying exposures must have their administration governed by a servicing agreement which includes servicing continuity provisions to ensure, at a minimum, that a default or insolvency of the servicer does not result in a termination of servicing. Where applicable, the documentation governing the securitisation must also include continuity provisions to ensure, at a minimum, the replacement of derivative counterparties and liquidity providers upon their default or insolvency.

The aim of these two criteria is to mitigate credit risk with different counterparties involved in the securitisation transaction, whose default or insolvency could jeopardise the smooth running of the transaction.

1.6. Absence of credit-impaired obligors

At the time of issuance of the securitisation or when incorporated in the pool of underlying exposures at any time after issuance, the underlying exposures must not include exposures to credit-impaired obligors (or where applicable, credit-impaired guarantors). The definition of credit-impaired obligors or guarantors is both backward-looking (e.g. the obligor has declared bankruptcy, or has recently agreed with his creditors to a debt dismissal or reschedule, or is on an official registry of persons with adverse credit history) and forward-looking (e.g. the obligor has a credit assessment by an external credit assessment institution or has a credit score indicating a significant risk that contractually agreed payments will not be made compared to the average obligor for this type of loans in the relevant jurisdiction). This criterion effectively excludes 'sub-prime' loans from the high-quality securitisation category.

1.7. Absence of loans in default

At the time of issuance of the securitisation or when incorporated in the pool of underlying exposures at any time after issuance, the underlying exposures must not include exposures in default, as defined in the banking prudential rules in Article 175 of Regulation (EU) No 575/2013. This criterion ensures that the securitisation does not contain loans or leases already in default when the securitisation transaction begins or when new exposures are transferred to the SSPE.

1.8. Reliance on the future sale of assets securing the exposures

The repayment of the securitisation position must not be structured to depend predominantly on the sale of assets securing the underlying exposures; however, this shall not prevent such exposures from being subsequently rolled over or refinanced.

The point of this criterion is to exclude transactions where the ability of the SSPE to repay the securitisation notes is subject to an unacceptable level risk of risk, due to overreliance on the proceeds of the sale of assets securing the underlying exposures such as used cars when an auto lease securitisation transaction matures. While recognising that auto lease securitisations including residual values may be eligible as high quality (see paragraph 0), the repayment of those securitisations should not rely predominantly on the future realisation of those residual values.

1.9. Pass-through requirement for non-revolving structures

Cash proceeds from the underlying exposures should flow in a simple and transparent way to investors. Structures where a significant amount of cash is retained within the SSPE (for example, securitisations with bullet payments) would not comply with this pass-through profile and, therefore, are excluded.

1.10. Early amortisation provisions for revolving structures

Where the securitisation has been set up with a revolving period, the transaction documentation provides for appropriate early amortisation events, which shall include at a minimum all of the following:

a deterioration in the credit quality of the underlying exposures;

a failure to generate sufficient new underlying exposures of at least similar credit quality;

the occurrence of an insolvency-related event with regard to the originator or the servicer.

High-quality securitisations should ensure that, in the presence of a revolving period mechanism, investors are sufficiently protected from the risk that principal amounts may not be fully repaid. Sufficient protection should be ensured by the inclusion of provisions which trigger amortisation of all payments at the occurrence of adverse events such as those mentioned in the criterion.

1.11. At least one payment at the time of issuance

At the time of issuance of the securitisation, the borrowers (or, where applicable, the guarantors) must have made at least one payment. This is intended to exclude securitisation backed by newly-originated loans. However, this requirement would not be proportionate in practice for the securitisation of credit card receivables. Hence there is a derogation for this type of securitisation.

1.12. Absence of self-certified loans

In the case of securitisations backed by residential loans, the pool of loans must not include any loan that was marketed and underwritten on the premise that the loan applicant or, where applicable intermediaries, were made aware that the information provided might not be verified by the lender.

This requirement is essential to exclude loans where the applicant and, where applicable, intermediaries, might be incentivised to misrepresent essential information, e.g. to overstate their income. This criterion also helps exclude 'sub-prime' lending.

1.13. Assessment of retail borrowers' creditworthiness

In the case of securitisations where the underlying exposures are residential loans, auto loans or leases, consumer loans or credit facilities, the creditworthiness of the borrowers must be assessed thoroughly, in accordance with the Mortgage Credit Directive (Directive 2014/17/EU) or the Consumer Credit Directive (Directive 2008/48/EC) or equivalent rules in third countries, where applicable. This requirement effectively excludes flawed securitisation business models, relying on unsound underwriting practices.

1.14. Transparency and disclosure of loan-level data

Where either the originator or sponsor of a securitisation is established in the Union, they must comply with transparency requirements set out in the Capital Requirement Regulation. Furthermore, in accordance with Article 8b of Regulation (EU) No 1060/2009, the European Securities and Markets Authority (ESMA) will in 2017 set up a website centralising the publication of information regarding structured finance instruments, i.e. securitisations. Through this website, the issuer, originator or sponsor of the securitisation will be able to publish information on the credit quality and performance of the underlying assets of the structured finance instrument, the structure of the securitisation transaction, the cash flows and any collateral supporting a securitisation exposure as well as any information that is necessary for investors to conduct comprehensive and well-informed stress tests on the cash flows and collateral values supporting the underlying exposures.

Where neither the issuer, nor the originator, nor the sponsor of a securitisation is established in the Union, comprehensive loan-level data in compliance with standards generally accepted by market participants must be made available to existing and potential investors and regulators at issuance and on a regular basis.

1.15. Listing requirement

Both the Solvency II and LCR delegated acts require that high-quality securitisation positions should be listed on a regulated market/recognised exchange, or admitted to trading on another organised venue, with a robust market infrastructure. The drafting of this criterion could not be strictly aligned in the two acts because of legal constraints stemming from differences in the corresponding 'level 1' legislation 28 . In addition, under the LCR delegated act, securitisation positions may be deemed highly liquid if they are tradable on generally accepted repurchase markets. This was not included in the Solvency II delegated act as repurchase transactions to generate liquidity are not typical for insurers.

1.16. Credit quality

Both the Solvency II and LCR delegated acts require that high-quality securitisation positions receive a minimum external credit assessment, on issuance and at any time thereafter. The minimum external credit assessment is one of the elements for high-quality securitisation positions and does not constitute sole and mechanistic reliance, in accordance with the principles of the Financial Stability Board for reducing reliance on CRA ratings 29 .

In Solvency II, the position should be investment grade, i.e. be assigned to credit quality step 3 at least. In order to ensure that the securitisation position is highly liquid, the LCR delegated act requires that it is assigned to credit quality step 1. The mappings of external credit assessments onto the respective scales of credit quality steps applicable in banking and insurance legislation is prepared by the Joint Committee of the European Supervisory Authorities.

2. Requirements specific to the LCR delegated act

The LCR delegated act includes all the requirements for high quality securitisations set out in the Solvency II Delegated Act but adds some additional requirements specifically for liquidity purposes. It would not be justified to assume that all high quality credit securitisations would be sufficiently liquid in a market stress scenario.

2.1. Minimum issue size

The larger the issue size, the deeper the secondary market. Therefore, the LCR delegated act provides for a minimum issue of EUR 100 million.

2.2. Maximum weighted average time to maturity

Securitisations with a short-weighted average life and high prepayments have proven to enjoy good liquidity during periods of stress, as they convert into cash in a short time span (this is the case of auto loan ABSs, for example). Accordingly, the LCR delegated act will only recognise positions in securitisations where weighted average time to maturity is less than 5 years, assuming call or certain prepayment options are exercised.

ANNEX 5 - Synthetic securitisation

This annex is aimed at explaining the basics of synthetic securitisation, its benefits and risks.

What is a securitisation process?

In its most basic form, securitisation involves two steps. Firstly a company (the "originator") with loans or other income-producing assets—identifies assets it wants to remove from its balance sheet and pools them into what is called the reference portfolio. It then sells this asset pool a special purpose vehicle (SPV), specifically set-up to purchase the assets and realize their off-balance-sheet treatment for legal and accounting purposes. Secondly, the issuer finances the acquisition of the pooled assets by issuing tradable, interest-bearing securities that are sold to capital market investors. The investors receive cash flows generated by the reference portfolio.

Source: IMF 2008 30  

What is a synthetic securitisation?

In synthetic structures there is no transfer of ownership of the underlying assets/loans from the originating banks to the securitisation vehicle. Instead, a derivative contract, such as a credit default swap (CDS), is used to gain credit risk exposure to a specified pool or portfolio of underlying assets.

Synthetic structures provide the issuer with capital relief (i.e. lower capital charges), as the credit risk of the assets underlying the securitisation (e.g. bank loans to SMEs) is transferred to a third party with the CDS contract. Synthetic structures do not provide funding however, as the assets (in the previous example, SME loans) remain on the issuer's balance sheet, they are not sold. That is a main difference with "true sale" securitisation, which provides both credit risk transfer and funding for the issuer.

What are the potential risks of synthetic securitisation?

A synthetic structure introduces more complexity and uncertainty in the transactions. This type of structure creates an additional counterparty credit risk, on top of a "true sale" securitisation, that must be managed. The nature of this additional counterparty risk is dependent on the way it is structured (e.g. risks attached to the entities providing protection via the CDS, nature of the collateral).

Source: True Sale International 31

A key additional risk lies in the legal drafting of the derivative used to mimic the asset transfer from the originator to the issuer of the securitisation. Such drafting is usually not standardised and defines what risks are transferred and under what conditions. This introduces legal uncertainty and risks that must be taken into consideration. By contrast, a "true sale" securitisation has a clear and standardised form of risk transfer, as the asset underlying the securitisation are effectively sold to the issuer of such securitisation.

Synthetic structures were abused in order to reduce prudential capital requirements, rather than used in order to obtain genuine transfer of risk. In the run-up to the 2007-2008 financial crisis, there was an emergence of "arbitrage structures" that generated important losses for investors. The US Financial Crisis Inquiry Report concluded that "the synthetic CDOs proliferated, in part because it was much quicker and easier for managers to assemble a synthetic portfolio out of pay-as-you-go credit default swaps than to assembly a regular cash CDO out of mortgage backed securities (…) and they tended to offer the potential for higher returns on the equity tranches." When the bubble burst, hundreds of billions of dollars in losses in mortgages and mortgage-related securities shook markets as well as financial institutions. The synthetic structuring, through derivatives, magnified these losses. There are famous examples such as the deal arranged by Goldman Sachs called ABACUS 2007-AC1. The German bank IKB lost almost all of its $150 million investment in this instrument.

In Europe too, synthetic structures generated losses that are a multiple of those generated by simple and transparent structures. Based on historical data, the probability of a synthetic CDOs defaulting is 19 times higher than that of simple structures such as RMBS and credit cards ABS (see table below, from AFME). 

Table A.1 – losses generated by EU term securitisations 2007 to 2013

Source: AFME

Simpler synthetic structures such as those issued by the EIF generated losses of 0.8% on average. This level is identical to that of average EU structured credit products (see Figure 6 in the main text). While these losses were considerably smaller than those of their US counterparts, structured credit and EIF synthetics have nonetheless underperformed traditional securitisations considerably. Traditional EU securitisations such as RMBS and ABS generated losses of 0.0% and 0.1% respectively. The available data does not support the introduction of synthetics in the STS scope.

What is the current state of play in the policy discussions?

The financial sector globally agrees that more work is needed in order to develop STS criteria for synthetic securitisation. They acknowledge the political sensitivity of this segment due to the financial crisis and the higher complexity of such products, both requiring caution. For instance the main private body developing a label for high quality securitisations - Prime Collateralised Securities (PCS) - has excluded synthetic securitisations from their list of eligible securitisation instruments. They are likely to develop criteria but only in the medium-term.

Synthetics are neither eligible for ECB/BoE refinancing operations. It follows that central banks do not accept synthetics are safe collateral against which to lend funds to banks. Also, the ECB excludes synthetics from the list of assets purchasable under its ABS Purchase Programme.

No work on identifying criteria for simple and transparent synthetics has been carried out by international organisations. Neither the BCBS-IOSCO nor the EBA did include synthetics in the scope of simple, transparent and standardised securitisation. They do not plan to develop criteria to identify simple for synthetics in the near future.

Two MS with sizeable securitisation markets are reluctant to progress quickly. A few other MS are more open to integrate synthetics but only at a later stage, recognising that further work is needed if there is to be properly defined additional specific criteria for synthetics.

An overwhelming majority of respondents to the Commission's public consultation on securitisation agreed with the exclusion of synthetic products from the STS scope. Notably, the majority of industry associations and private companies also agreed. A detailed breakdown of responses by category is presented in the table below. Under the column "YES" is presented the percentage of respondents who agreed on the criteria excluding synthetics while under "NO" is the percentage that argued against the exclusion.

Table A.2 – Percentage of respondents agreeing with STS criteria excluding synthetic securitisations

Source: European Commission

ANNEX 6 - Financing SMEs with the securitisation tool

State of play

Recent changes in the regulation for securitisation include preferential rules for SME securitisation. First, the (LCR) Delegated Act allows SMEs securitised products to be included in the liquid asset pool for the LCR. This should support financing of SMEs. However, only senior tranches are eligible, which implies that the amount of SME ABS to be included in the LCR pool will be small.

Secondly, the Delegated Regulation for Solvency II includes a definition of high-quality securitisation (simple, sound, transparent, comparable) with a more favourable capital treatment including loans to SMEs as admissible underlying asset (Article 177(2)(h)(iii) of the Delegated Regulation). Whether or not that's enough to significantly change the extent of investment in SMEs by insurers will also depend on relative yields to other products.

Promotional banks have supported the development in SME ABS in their countries and more generally in Europe through special programs. KFW, for example, was very successful with the PROMISE infrastructure for SME securitisation (72 transactions with a volume of € 126bn from 2000 to 2012). However, the majority of transactions under this scheme are currently short term ABS (ABCPs) rather than SME ABS.

While beneficial, the LCR and Solvency II rules are unlikely to fight stigma and revive the market for securitisations alone (see section 6.1.1). The same stands true for SME securitised products. Regarding promotion banks' schemes, while these have met some success, they have not been able to counteract the decline seen in SME securitisation issuance since the crisis. It appears that the problems that have affected securitisation markets in general, analysed in the previous chapter, have prevented such schemes to reach their full potential.

Introducing STS and a risk-sensitive prudential framework

Differentiating between STS products and the rest, and applying such differentiation in the capital treatment applied to securitisations, the Commission's initiative would allow the securitisation technique to perform both its funding and risk transfer functions. This would help banks to free up capital currently needed to fund existing credit exposures. In this way, banks would be able to extend new credit.

In a context of improving macro conditions and extremely low interest rates paid by other assets (e.g. government bonds), banks are incentivised to give new credit to firms, which are mostly SMEs. Reviving the securitisation market should then help easing credit conditions for SMEs and improving their access to credit.

It is not easy to provide a reliable estimate on the additional provision of loans a revival of the securitisation market could provide. This depends indeed on a multitude of factors: a) monetary policy, b) demand for credit, c) developments in alternative funding channels (covered bonds, unsecured credit to name a few). All of these are likely to change through time, affecting the final outcome. With these caveats in mind, one can say however that, all things equal, if the securitisation market would go back to pre-crisis issuance levels, banks would be able to provide an additional €157bn of credit to the private sector. This would represent a 1.6% increase in credit to EU firms and households (this is still 4.7% below its peak).

Such an increase in loans provision would be likely distributed among all types of loans, including loans to SMEs. This is an important point because it makes clear that by freeing up capital, securitisation revival would indirectly help SME credit access. Assuming stable shares of SME loans to total loans (18.5% in OECD jurisdiction, with wide variations, e.g.: 49% in Greece), this would imply a 1.6% increase in SME loans.

On top of the indirect effect described, the direct effect of the Commission initiative on SME lending should be sizeable as the more risk sensitive capital treatment would reduce capital charges to STS SME securitisation, increasing the returns of such products compared to the returns generated by keeping the SME loans on the bank's balance sheet. This problem has been highlighted by the IMF as a key obstacle to SME securitisation (see page 21 for more details).

Furthermore, the inclusion of ABCP conduits satisfying criteria of simplicity, transparency and standardisation in the STS perimeter will foster the growth of this key source of financing for SMEs. It is worth recalling that an average €240bn of ABCP have been issued in the last five years and that 63% of these instruments fund trade receivables, floorplan loans and equipment leases, which are primarily granted to SMEs.

Finally, promoting securitisation market as a whole will develop investor and issuer expertise and build an effective infrastructure around assessing, pricing and trading securitisations. This in turn should reduce due diligence and credit analysis costs, helping SME loans to become a more viable asset as investors seek higher yields and issuers seek diversification of their funding structure and balance sheet management.

Public guarantee schemes

SME securitisation could also be supported through public schemes such as those ran by EIF or various Member States in the past. Guarantees normally are time-limited and targeted on specific asset segments (e.g. SME ABS).

Such schemes could help implementing the STS securitisation agenda aimed at helping SME access to credit without prejudice to a legislative programme at a later stage. They would also increase incentives for products standardisation (e.g. example of the US mortgages agencies) and would promote liquidity.

The costs involved in such schemes are however high. For the guarantee scheme to have a meaningful effect at an EU level, substantial fiscal costs would have to be borne by Member States, in a context where budget reduction is a binding constraint across many EU jurisdictions. Additional risks on taxpayers as well as moral hazard issues would also have to be considered.

Such schemes would also overlap with the various guarantee schemes existing in EU jurisdictions as well as carried out by the EIB/EIF group such as the SME initiative (SMEI). This is an EU-wide joint financial instrument of the EIB Group, the European Commission and the Member States, approved by the European Council in 2013 and aiming at supporting SMEs through risk-sharing financial instruments. In practice it relies either on guarantee facilities and securitisation tools. In 2015 an €800mn scheme was launched in Spain under the umbrella of SMEI. This is expected to set the base for future financial instruments to support SMEs.

ANNEX 7 – Summary of responses to the Commission's public consultation on securitisation

The Commission held a public consultation between 18 February and 13 May 2015 to explore the challenges and opportunities related to an EU framework for simple, transparent and standardised securitisation (STS securitisation).

This consultation was part of the Commission’s Green Paper on the Capital Market Union (CMU) and aimed at collecting views on 18 specific questions, grouped in 10 sections:

Identification criteria for qualifying securitisation instruments

Identification criteria for short term instruments

Risk retention requirements for qualifying securitisation

Compliance with criteria for qualifying securitisation

Elements for a harmonised EU securitisation structure

Standardisation, transparency and information disclosure

Secondary markets, infrastructures and ancillary services

Prudential treatment for banks and investment firms

Prudential treatment of non-bank investors

Role of securitisation for SMEs

120 responses to the public consultation were received from:

Member States government and financial authorities;

Issuers and originators of securitisation;

Investors in securitisation;

Financial institutions and their associated bodies;

Service providers to securitisation;

Non-financial institutions; and,

Individual citizens, academics and associations.

The list of public contributors to the consultation is annexed to this document. Please note that 10 respondents asked for their contributions to be kept confidential.

2. STATISTICS ON RESPONDENTS

Categories of respondents

Confidentiality request

Type of organisations:

Type of public authorities

Geographical origin of respondents

Role in securitisation markets

Field of activity or sector (multiple replies were possible):

3. SUMMARY OF THE RESPONSES

1. Identification criteria for qualifying securitisation instruments

Question 1:

A. Do the identification criteria need further refinements to reflect developments taking place at EU and international levels? If so, what adjustments need to be made?

B. What criteria should apply for all qualifying securitisations ('foundation criteria')?

2. Identification criteria for short term instruments

Question 2:

A. To what extent should criteria identifying simple, transparent, and standardised short-term securitisation instruments be developed? What criteria would be relevant?

B. Are there any additional considerations that should be taken into account for short-term securitisations? "

3. Risk retention requirements for qualifying securitisation

Question 3:

A. Are there elements of the current rules on risk retention that should be adjusted for qualifying instruments?

B. For qualifying securitisation instruments, should responsibility for verifying risk retention requirements remain with investors (i.e. taking an "indirect approach")? Should the onus only be on originators? If so, how can it be ensured that investors continue to exercise proper due diligence?

4. Compliance with criteria for qualifying securitisation

Question 4.A and 4.B

How can proper implementation and enforcement of EU criteria for qualifying instruments be ensured? How could the procedures be defined in terms of scope and process?

Question 4.C

5. Elements for a harmonised EU securitisation structure

Question 5:

A. What impact would further standardisation in the structuring process have on the development of EU securitisation markets?

B. Would a harmonised and/or optional EU-wide initiative provide more legal clarity and comparability for investors? What would be the benefits of such an initiative for originators?

C. If pursued, what aspects should be covered by this initiative (e.g. the legal form of securitisation vehicles; the modalities to transfer assets; the rights and subordination rules for noteholders)? (60 replies)

D. If created, should this structure act as a necessary condition within the eligibility criteria for qualifying securitisations?

6. Standardisation, transparency and information disclosure

Question 6:

A. For qualifying securitisations, what is the right balance between investors receiving the optimal amount and quality of information (in terms of comparability, reliability, and timeliness), and streamlining disclosure obligations for issuers/originators?

B. What areas would benefit from further standardisation and transparency, and how can the existing disclosure obligations be improved?

C. To what extent should disclosure requirements be adjusted – especially for loan-level data – to reflect differences and specificities across asset classes, while still preserving adequate transparency for investors to be able to make their own credit assessments?

Question 7:

A. What alternatives to credit ratings could be used, in order to mitigate the impact of the country ceilings employed in rating methodologies and to allow investors to make their own assessments of creditworthiness?

B. Would the publication by credit rating agencies of uncapped ratings (for securitisation instruments subject to sovereign ceilings) improve clarity for investors?

7. Secondary markets, infrastructures and ancillary services

Question 8.A: For qualifying securitisation, is there a need to further develop market infrastructure?

Question 8.B

Question 8.C

8. Prudential treatment for banks and investment firms

Question 9: "With regard to the capital requirements for banks and investment firms, do you think that the existing provisions in the Capital Requirements Regulation adequately reflect the risks attached to securitised instruments."

Question 10: If changes to EU bank capital requirements were made, do you think that the recent BCBS recommendations on the review of the securitisation framework constitute a good baseline? What would be the potential impacts on EU securitisation markets?

Question 11: How should rules on capital requirements for securitisation exposures differentiate between qualifying securitisations and other securitisation instruments?

Question 12: "Given the particular circumstances of the EU markets, could there be merit in advancing work at the EU level alongside international work?"

9. Prudential treatment of non-bank investors

Question 13: Are there wider structural barriers preventing long-term institutional investors from participating in this market? If so, how should these be tackled?

Question 14.A: For insurers investing in qualifying securitised products, how could the regulatory treatment of securitisation be refined to improve risk sensitivity? For example, should capital requirements increase less sharply with duration?

Question 14.B: Should there be specific treatment for investments in non-senior tranches of qualifying securitisation transactions versus non-qualifying transactions?

Question 15:

A. How could the institutional investor base for EU securitisation be expanded?

B. To support qualifying securitisations, are adjustments needed to other EU regulatory frameworks (e.g. UCITS, AIFMD)? If yes, please specify.

10. Role of securitisation for SMEs

Question 16:

A. What additional steps could be taken to specifically develop SME securitisation?

B. Have there been unaddressed market failures surrounding SME securitisation, and how best could these be tackled?

C. How can further standardisation of underlying assets/loans and securitisation structures be achieved, in order to reduce the costs of issuance and investment?

D. Would more standardisation of loan level information, collection and dissemination of comparable credit information on SMEs promote further investment in these instruments?"

11. Miscellaneous

Question 17:

To what extent would a single EU securitisation instrument applicable to all financial sectors (insurance, asset management, banks) contribute to the development of the EU's securitisation markets? Which issues should be covered in such an instrument?

Question 18A:

For qualifying securitisation, what else could be done to encourage the further development of sustainable EU securitisation markets?

Question 18B: In relation to the table in Annex 2 are there any other changes to securitisation requirements across the various aspects of EU legislation that would increase effectiveness or consistency?

4. LIST OF RESPONDENTS

Advisory Committee of the CNMV (Spanish National Securities Market Commission)

AMAFI

AMUNDI

APG Asset Management N.V.

Asset Management and Investors Council (AMIC) at the International Capital Market Association (ICMA)

Association for Financial Markets in Europe

Association Française de la Gestion financière (AFG)

Association française des Sociétés Financières

Associazione Bancaria Italiana

Assogestioni

Austrian Federal Economic Chamber, Division Bank and Insurance

Austrian Federal Ministry of Finance, Austrian Financial Market Authority

Autorité des Marchés Financiers

AXA INVESTMENT MANAGERS

Banking & Payments Federation Ireland (BPFI)

Banque de France/Autorité de Contrôle Prudentiel

Barclays Bank

BBVA

Better Finance

BlackRock

BNY Mellon

British Bankers Association

Building Societies Association

Bundesarbeitskammer Osterreich

Bundesverband der Deutschen Industrie, Deutscher Industrie- und Handelskammertag, Deutsches Aktieninstitut

Casey Campbell

CNCIF

Commercial Real Estate Finance Council (CREFC) Europe

Confederation of Finnish Industries EK ry

Czech Ministry of Finance

Danish Bankers Association

Deutsche Bank

Deutsche Bundesbank

Dr Orkun Akseli

Dutch Securitisation Association

EACB - European Association of Co-operative Banks

EIOPA

EMPLOYERS OF CONSTRUCTION OF ARAGON CONFEDERATION

EURONEXT

European Association of Public Banks

European Banking Federation

European Central Bank

European Fund and Asset management Association (EFAMA)

European Mortgage Federation

European Savings and Retail Banking Group (ESBG)

European Securities and Markets Authority (ESMA)

Fédération Française des Sociétés d'Assurances (FFSA)

Federation of Finnish Financial Services

Finance & Leasing Association

Finance Norway

Finance Watch

Financial Law Committee of the City of London Law Society

French banking Federation

German Banking Industry Committee

German Federal Ministry of Finance

Gouvernement Français

Groupe GTI

HM Treasury

ICI Global

Insurance Europe

INTERMONEY TITULIZACION, SGFT,S.A.

International Capital Market Association

Irish Debt Securities Association

Irish Department of Finance (Ministry)

Irish Securitisation Industry Working Group

Irish Stock Exchange

K&L Gates LLP

Leaseurope and Eurofinas (joint response)

Loan Market Association

Luxembourg Investment Fund Association (ALFI)

M&G Investment Management Ltd.

Magyar Nemzeti Bank (Central Bank of Hungary)

Managed Funds Association

MEDEF

Ministry of Finance

Ministry of finance of the Slovak republic

Moody's Investors Service

Nomura International plc

ORRICK, HERRINGTON & SUTICLIFFE

Osterreichischer Sparkassenverband

PensionsEurope

Philippe CREPPY

Prime Collateralised Securities (PCS)

Realkreditraadet (Association of Danish Mortgage Banks)

REGULATION PARTNERS

Risk Control Limited

RJM Consulting

Schroders

Scope Ratings AG

Société française des Analystes Financiers

Spanish National Securities Market Commission (Comision Nacional del Mercado de Valores - CNMV)

Standard & Poors Rating Services

State Street Corporation

States of Guernsey

Structured Finance Industry Group

Swiss Finance Council

The Alternative Investment Management Association (AIMA)

The Association of Corporate Treasurers

The Investment Association

The Luxembourg Bankers Association - The ABBL

The Netherlands Ministry of Finance, also on behalf of the Netherlands Authority for the Financial Markets (AFM) and the Dutch Central Bank (DNB)

The Swedish Government and the Swedish authorities (Finansinspektionen and Riksbanken)

Thomas Zmugg

True Sale International GmbH, Frankfurt am Main, Germany

UBS AG

UEPC

UniCredit

Union Asset Management Holding AG

Verband der Automobilindustrie e.V. (VDA)

William J. Harrington, Experts Board - Key Expert on Structured Finance Topics, Wikirating

ANNEX 8 – Findings from the COM Questionnaire to FSC Members on securitisation

The European Commission has received 17 replies on the FSC questionnaire on simple transparent and standardised securitisation (Austria, Bulgaria, Croatia, the Czech Republic, Estonia, Finland, France, Germany, Greece, Italy, Latvia, Lithuania, the Netherlands, Portugal, Romania, Spain and the United Kingdom).

A. General

The EU framework for EU securitisation is composed of a large number of EU legal acts. These include the Capital Requirements Regulation for Banks, the Solvency II Directive for insurers and the UCITS and AIFMD Directives for asset managers. Legal provisions, notably on information disclosure and transparency, are also laid down in the Regulation on Credit Rating Agencies and the Prospectus Directive.

Question 1

a) Are there in addition to the transposition measures of the EU legal acts mentioned above specific legislative and regulatory provisions in your country that create a legal framework for securitisation? Is there any specific soft-law or guidance that covers this issue?

Ten respondents (Austria, Bulgaria, Croatia, the Czech Republic, Estonia, Finland, Germany, Lithuania, the Netherlands and the United Kingdom) indicated that they do not have in place specific legislative and regulatory provisions for securitisation, besides the measures transposing the relevant EU legal acts. Some of these respondents pointed out that despite the inexistence of a specific legal framework, guidance, regulations and guidelines relevant to securitisation have been issued by regulators as well as market sponsored bodies.

Seven respondents (France, Greece, Italy, Latvia, Portugal, Romania and Spain) noted that they have established a legal framework regarding securitisation.

b) If there are such specific provisions, soft-law or guidance, what has been the impact of these on the market? Please include, where possible, references to data or studies that underpin your analysis.

With regard to the impact of the securitisation legal framework on the market two respondents (Latvia, Romania) pointed out that such impact cannot be estimated due to the lack of securitisation activity in the country, while Greece replied that such data are not available. Spain indicated that even though the existence of a solid regulatory framework has shielded the market from episodes of financial instability, securitisation activity has been subdued for the past 7 years. Finally, France noted that the solid legal framework helps securitisation structures remain simple.

c) Do you believe that any evolutions in these rules, soft-law or guidance are needed to re-boot securitisation markets taking notably into account developments at international and EU levels?

There is no consensus on the need for evolution of the established national legal framework to re-boot the securitisation market. Three respondents (France, Greece and Portugal) noted that the framework currently in force is reliable and resilient, pointing out other obstacles (such as the rating caps imposed by the rating agencies and the increased capital charges for investments in securitisation), which inhibit the development of securitisation. Romania and Latvia indicated that a review of the national securitisation framework, in light of the developments at the EU and international level, is necessary and fitting. Italy explained that the Italian securitisation framework will be revised to reflect the developments agreed at international and European level especially as to the initiatives for developing a simple and transparent securitisation market. Spain indicated that they have already adopted a new legal framework, which updates the regime on securitisation.

B. Harmonisation of securitisation structures

Question 2:

a) Are there any specific legislative and regulatory provisions in your country that create a specific legal framework for the structure of securitisation transactions? Please describe the main characteristics of this framework.

Six respondents (France, Greece, Italy, Portugal, Romania and Spain) provided details of the specific legislative provisions which create a framework for securitisation and regulate issues such as: the establishment of a special purpose vehicle, the transfer of receivables, the taxation of the transfers and the SPVs, the insolvency of the originator and data protection. Three respondents (Germany, the Netherlands and the United Kingdom) explained that there is no specific framework for securitisation and transactions are carried out under general law provisions.

b) What best practices from your market could in your view be useful at EU level in order to help issuers as well as boost investor appetite in EU securitised products?

 France stated that establishing a vehicle that is supported by a strong legal framework, is subject to strong regulatory requirements and is monitored by a responsible actor with legal personality acting in the best interest of investors, is a good practice that could be useful at EU level. Germany indicated as a best practice from its market, the True Sale International GmbH (TSI), which was founded on the initiative of 13 German banks. The TSI has established standards for transparency, investor information, lending and loan processing and also provides certification services for a corresponding and widely accepted German securitisation standard. 32 In addition to that, a wholly owned subsidiary of the TSI provides special purpose vehicles (SPVs) under German law that have been used since 2005 in almost 100 securitisations transactions. Portugal highlighted the fact that under its law the same STC (credit Securitisation Company) may be used by different originators to issue an unlimited number of separate transactions is often seen as an efficient solution for originators. Spain mentioned as good practices the favouring of true sale operations (compared to synthetic operations), that only credit claims can transferred to the SPV (other types of movable and immovable property are not allowed) and the especially demanding transparency requirements. The United Kingdom indicated that the flexibility of its regime which has enabled innovation in securitisation and the securitisation of a wide range of asset classes is well regarded by market operators.

c) Are there in you jurisdiction any obstacles for the transfer of pools of assets to SPVs established outside your jurisdiction?

Ten respondents (Austria, Czech Republic, Germany, Greece, Italy, Latvia, Lithuania 33 , the Netherlands, Spain and the United Kingdom 34 ) reported no specific obstacles that would prevent the transfer of pools of assets to SPVs established outside the country’s jurisdiction. Romania indicated that such transfers are only permissible to SPVs authorised by the national financial supervision authority. France stated that the origination or purchase of non-matured receivables as regular business practice is regarded under French law as a credit activity and thus requires licensing as a credit institution in France (or the use of a European passport). SPVs subject to French law are allowed to acquire these non-mature receivables to conduct business without having to apply for a licence.

d) In terms of harmonisation, are there are any other initiatives in your country that would deserve a specific attention?

Germany referred to the TSI initiative discussed in its reply under question 3b. Romania noted that amendments aimed at strengthening the regulation of prudential supervision of the quality of debts portfolio used to back-up the issued financial instruments and the issuance activity, are currently in progress. The United Kingdom indicated that while there are no initiatives, there is a degree of harmonisation of the business models and securitisation programmes of the major securitisation issuers brought about by market pressure and market discipline. In addition to that, common standards have been introduced at the underlying assets level. Finally, the introduction of transparency criteria by the Bank of England and the ECB, has led to greater standardisation between issuers.

e) Regarding infrastructures (for example trading/issuing venues) related to securitisation, are there any initiatives in your country that would deserve specific attention? If specific infrastructures have been developed, please describe them and specify their importance (for example share of total transactions being traded/issued on each venue).

Ten respondents (Austria, Croatia, Germany, Greece, Latvia, Lithuania, the Netherlands, Romania, Spain and the United Kingdom) indicated that there are no initiatives related to securitisation infrastructure that deserve specific attention. France stated that a scheme has been developed for securitising loans to SMEs but no other specific infrastructure has been developed; Spain noted that securitisations can be traded both in regulated markets and multilateral trading facilities (Mercado Alternativo de Renta Fija).

C. SME securitisations

Question 3:

What is the current situation as regards SME securitisation in your country?

Ten respondents (Austria, Bulgaria, Croatia, Czech Republic, Estonia, Finland, Greece, Latvia, Lithuania, and Romania) indicated that there is no SME securitisation activity within their jurisdiction at the moment. Four respondents (France, the Netherlands, Portugal and the United Kingdom) noted that while there is some activity, SME securitisation never developed widely within their territory, with volumes being subdued. Spain stated that there is an operation in place that involves the securitisation of SMEs trade receivables. This operation takes place in the Spanish multilateral trading facility for fixed income.

Please describe your national schemes (if any) and/private sector initiatives for SME securitisation.

Four respondents (France, Germany, Italy and the United Kingdom) indicated that there have been initiatives for SME securitisation.

In France the main French banks, with the support of the Banque de France, have created the Euro Secured Notes Issuer (ESNI). This vehicle issues secured notes backed by bank loans to SMEs meeting the eligibility criteria for Eurosystem refinancing operations, measured by the Banque de France rating (FIBEN). Private loans transferred as part of a collateral arrangement in favor of ESNI shall nonetheless remain managed by the banking groups that granted them (each credit institution participating in ESNI has its own independent compartment) and the securities are not issued in tranches. These issues will provide a liquidity value to financing granted to SMEs and mid-tier companies and allow capital market participants to benefit from high quality collateral. The financial instruments issued may be used as collateral between capital market participants and as a new investment asset class for investors.

Another initiative is currently being developed by the Banque Publique d’Investissement (BPI France). In this structure, banks could sell a portion of their SME loans to a SPV (in order to allows for a correct alignment of interests, banks must keep between 60 and 80% of each loan), and BPI France would then guarantee the portion of the loans in the SPV. This would allow banks to deconsolidate their loans, while maintaining a commercial relationship with their clients. For BPI France, the structure ensures that its interventions focusing on addressing identified market failure in SMEs access to credit can be implemented without imposing constraints on the funding model of the banks.

In Germany the KfW PROMISE platform for synthetic securitisations of SME loans is structured as follows: a bank transfers the credit risk of a reference portfolio of SME loans to KfW via a credit default swap. The credit risk of the reference portfolio is then being tranched and KfW receives credit protection for the super senior tranche by a credit default swap with an investment bank acting as protection provider. The remaining risk of the reference portfolio is then first transferred to a German SPV via a certificate of indebtedness or a credit default swap which is then finally transferring the credit risk to securitisation investors by issuing various credit linked notes. The proceeds from issuing the credit linked notes are then used to collateralise KfW’s claims towards the issuing SPV resulting from the credit default swap. Main benefits of the PROMISE programme are its standardised structure and documentation and the reduction in capital requirements achieved by the originator due to KfW’s favourable risk weight.

In Italy, there is the Confidi initiative (Confidi is an Italian non-bank financial intermediary providing SMEs with credit guarantees) and the tranched cover system where credit protection is directly bought from investors, in the form of a financial guarantee backed by cash collateral or personal notes or tranching the underlying portfolio using the Supervisory Formula Approach (SFA). This structure can also cover the risk of a new origination portfolio, thus facilitating new securitisations, which in turn would provide substantial new lending to the real economy

In the United Kingdom the British Business Bank has undertaken two initiatives under the Enable programme: Enable Funding and Enable Guarantees.

Enable funding. Under this scheme, the BBB will "warehouse" newly-originated asset finance receivables from different originators, who are generally not large enough to issue securitisations on their own. Once a stock has been built up, the BBB will seek to refinance by issuing a securitisation. This initiative is aimed at improving the provision of asset and lease finance to smaller UK businesses, and enabling smaller asset finance providers to access capital markets.

Enable guarantees. Under this scheme, the BBB can provide a guarantee to cover a portion of a designated portfolio’s net credit losses in excess of an agreed threshold. The first transaction of the enable guarantee programme was completed with Clydesdale and Yorkshire Banks in March 2015. While this scheme does not involve a public securitisation, securitisation technology is used in tranching the risk of the asset portfolio, and in assessing the credit risk of the portfolio.

D. Miscellaneous

Question 4: Are there any specific issues related to your national experience on securitisation you would like to highlight?

Lithuania noted its support for a harmonised framework for securitisation in the EU; Portugal highlighted the negative impact the post-crisis regulatory changes and the behaviour of credit rating agencies has had on the issuance and sale of ABS. The Netherlands pointed out the regulatory uncertainty and the high prospective capital charges as the main reasons behind the lack of activity in the RMBS market. France also highlighted the high cost of securitisation as opposed to other funding options and the need for standardisation and innovation. Italy noted that certain synthetic securitisation transactions aimed at SMEs can be as clear and transparent as traditional securitisation and offer significant added value in the bank management of risk and capital. Therefore, they should not be excluded from the framework of STS securitisation. The United Kingdom finally indicated that the small number of large banking institutions, which have similar business models leads to economies of scale which benefit not only banks but also investors. In addition to that, the government’s initiatives have enabled smaller banks to access the securitisation markets.

ANNEX 9 – Bibliographical references

Abiad, A., Dell'Ariccia, G., & Li, B. (2014). "What have we learned about creditless recoveries?" In: Claessens, S., Kose, M. M. A., Kose, M. A., Laeven, M. L., & Valencia, F. (2014). Financial Crises: Causes, Consequences, and Policy Responses. International Monetary Fund.

AFME (2014). "Securitisation Data Report Q4:2014", December 2014.

BCBS-IOSCO Joint Forum (2011). "Report on asset securitisation incentives" July 2011.

BoE-ECB (2014). "The case for a better functioning securitisation market in the European Union". Joint BoE-ECB paper, May 2014.

Coval, J., Jurek, J., & Stafford, E. (2009). "The economics of structured finance". The Journal of Economic Perspectives, 3-26.

EBA (2014). "EBA discussion paper on simple, standard and transparent securitisations".

EBA (2015) "Prudential treatment of securitisations" Staff working document, 18 March 2015.

ECB (2011). "Determinants of credit-less recoveries", ECB WP n. 1358 by Bijsterbosch, M., & Dahlhaus, T.

Fitch (2014). "Global structured finance losses: 2000-2014 issuance"

Giovannini, A., Mayer, C., Micossi, S. (2015): "Restarting European long-term investment finance", CEPR Press

Gorton, G. B. (2008). "The panic of 2007". National Bureau of Economic Research WP 14358

IMF (2014) "SME securitisation in the Euro Area: a policy proposal"

IMF (2014b) "Euro Area policies, 2014 Article IV consultations, selected issues" in IMF Country Report No. 14/199

IOSCO (2012) "Global developments in securitisation regulation", November 2012.

JC (2015) "Draft final report on securitisation prepeared by the Joint Committee Task Force on Securitisation" 23 March 2015

Laas, D. and Siegle, C. (2014) "Basel Accords versus Solvency II: Regulatory Adequacy and Consistency under the Postcrisis Capital Standards", mimeo, University of St. Gallen.

Shin, H.S., (2009), "Securitisation and financial stability", The Economic Journal vol. 119, pp. 309-332

(1)

US issuance has instead restarted growing after a substantial drop in 2008. US 2014 issuance was still less than half than in 2007 but a positive trend is clearly visible. This is mostly ascribable to public guarantees from state agencies (Fannie Mae, Freddie Mac and Ginnie Mae), which cover the vast majority of the market.

(2)

The chart shows outstanding balances by country of collateral. This is a proxy for country of issuance. Precise and complete data on the latter are unfortunately not available.

(3)

The chart shows all data provided in the EBA study, which covers the 2001-2010 period. Throughout the impact assessment the full time-span of data available has been shown.

(4)

One of the weaknesses of the securitisation framework revealed during the global financial crisis is the fact that the capital requirements framework for securitisation places undue mechanistic reliance on external ratings. The G20 Leaders called on jurisdictions to address adverse incentives arising from the use of credit rating agency (CRA) ratings in the regulatory capital framework (communiqué available at www.g20.utoronto.ca/2010/to-communique.html)

(5)

The only key exception being re-securitised products (such as CDOs, CDO-squares), which have higher capital requirements due to their more complex structure.

(6)

Commercial Mortgage-Backed Securities (ABS backed by commercial mortgages)

(7)

CDO stands for Collateral Debt Obligations; "CDO-squared" are CDOs of CDOs

(8)

SME loans tend to have lower returns than, for example, credit card receivables.

(9)

  Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 648/2012  ( 1 ): OJ L 176, 27.6.2013 and Directive 2009/138/EC of the European Parliament and of the Council of 25 November 2009 on the taking-up and pursuit of the business of Insurance and Reinsurance (Solvency II)  ( 1 ): OJ L 335,17.12.2009

(10)

BCBS-IOSCO criteria are available at http://www.bis.org/bcbs/publ/d304.pdf ; EBA criteria at https://www.eba.europa.eu/documents/10180/950548/EBA+report+on+qualifying+securitisation.pdf

(11)

These are available at https://www.eba.europa.eu/documents/10180/950548/EBA+report+on+qualifying+securitisation.pdf

(12)

  http://www.bis.org/bcbs/publ/d304.pdf  

(13)

The deals with an arbitrage purpose are normally sold by investment banks to replicate exposures to certain assets that they do not own and to give investors an indirect exposure to those assets. In deals with proper risk mitigation intentions the owners of the reference assets are instead typically the originator and the assets are normally those originated as part of its ordinary business.

(14)

For instance for organic products (i.e. Council Regulation n°834/2007)

(15)

 These evolutions address especially i) the mechanistic reliance on external ratings, ii) increase risk weights for highly-rated securitisation exposures; iii) reduce risk weights for low-rated senior securitisation exposures; iv) reduce cliff effects; and v) enhance the risk sensitivity of the framework. See http://www.bis.org/bcbs/publ/d303.htm  

(16)

     For non-senior tranches under the ERBA the floor would be lowered from 20% to 15%

(17)

Article 177 of Commission Delegated Regulation (EU) 2015/35

(18)

See the Solvency II impact assessment report, section 5.1, preferred policy option #4 http://ec.europa.eu/finance/insurance/docs/solvency/solvency2/delegated/141010-impact-assessment_en.pdf  

(19)

The Solvency II capital charges for spread risk on bonds and loans are higher for instruments with longer maturities. The charges do not increase linearly with maturity though; instead the additional charge per year of maturity reduces in order to avoid excessive capital charges for longer maturities. The spread charge for securitisations, in contrast, currently increases linearly with maturity.

(20)

As of today, there are important impediments to be fixed in order to have this website effective. Specific efforts should notably be performed to make this website economically viable as there is currently no funding to allow this website to be developed.

(21)

Survey conducted in summer 2014. More details can be found in the original document: http://www.bis.org/bcbs/publ/d304.pdf

(22)

This analysis examined the liquidity of some asset backed securities against a number of metrics. However, this work was not sufficient for EBA to recommend the inclusion of ABS (apart from RMBS) as HQLA for the purposes of LCR.

(23)

By virtue of Article 135(2) of Directive 2009/138/EC (Solvency II).

(24)

By virtue of Article 405 of Regulation (EU) No 575/2013 (CRR).

(25)

 Auto loans or lease securitisations including residual values must however comply with paragraph 0 below, which prevents the repayment of the securitisation depending predominantly on the sale of the vehicles.

(26)

 CDOs are also excluded by virtue of the criteria in point 0 because their underlying exposures usually include transferable debt instruments, such as non-investment grade bonds.

(27)

 See page 121 of EIOPA's technical report (2013).

(28)

On the one hand, the Solvency II Directive uses the concept of a "regulated market" as defined in Article 13(22). On the other hand, the Capital Requirements Regulation uses the concept of a "recognised exchange" as defined in Article 4(1)(72). While the latter is also based on the concept of a "regulated market", the CRR definition also includes clearing mechanism requirements.

(29)

Available at: http://www.financialstabilityboard.org/publications/r_101027.pdf  

(30)

  http://www.imf.org/external/pubs/ft/fandd/2008/09/pdf/basics.pdf  

(31)

  http://www.true-sale-international.de/en/abs-im-ueberblick/wasistabs/  

(32)

Originate to distribute securitisations are explicitly excluded from the potential scope of application of these standards

(33)

The transfer would have to comply with the requirements set forth by general laws.

(34)

However the transfer of certain types of receivable may give rise to additional requirements, for example a transferee of consumer receivables requires a license from the UK consumer credit regulator, whereas a buyer of residential mortgage loans may require authorisation from the FCA.