Future Regulatory Challenges: EU Regulation

A package of two legislative proposals aimed at laying down common rules on securitisation whilst creating a European framework for

simple, transparent and standardised securitisation

Creating Liquidity: Trends in International Securitisation Seminar30 September, 2016

Sephora Scerri, Analyst, Conduct Supervisory Unit

…Market Statistics

…European Securitisation =substantial decrease in marketvolumes over the years!

€213.7billionEuropean securitisation issuance in 2015Source: European Commission

€374billionAverage annual European securitisation issuance in 2001-2008Source: European Commission

€74.5European securitisation issuance during Q2of 2016;

an increase of 30.9% from Q1 2016 (€56.9billion) and an increase of 49.3% from Q22015 (€49.9 billion)Source: Association for Financial Markets in Europe

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Source: Association for Financial Markets in Europe, Securitisation Data Report Q2:2016

“Removing the stigma of securitisation is central to the revival of the market”

European Commission

…Aim of the “Commission Proposal”

“to promote a sustainable, deep, liquid and robust market forsecuritisation, which is able to attract a more stable investor base to help

allocate finance where it is most needed in the economy.”

European Commission

European Commission Securitisation Initiative …the Legislative Process

30 September 2015: European Commission (EC) original proposal announced.

30 November 2015: the European Council agreed on EC proposal, which constitutes a good basis for further discussionswith the European Parliament (EP).

December 2015: the legislative process for the EC proposal moved to the EP.

August 2016: draft / “proposed” amendments to both STS Regulation and CRR Amendments have been released.

December 2016: expected finalisation of EP proposals, following which the three EU legislative institutions will negotiate acommon position (in “trialogue”). Trialogues are expected to start in January 2017.

A final version of the Regulation will be published in the Official Journal of the European Union and will enter into force 20days later.

Not likely to come into effect before mid-2017 or even 2018.

Directly applicable in all EU Member States without transposition into national law as from the day of entry into force.

Follow up: will be subject to a complete evaluation, about 4 years after its implementation deadline.

… the original “Commission Proposal”

30 September 2015“… a Package of two legislative proposals:”

Proposal I: Securitisation Regulation

• First part: lays down common rules applying to all securitisationtransactions with regard to due diligence, risk retention andtransparency;

• Second part: introduces a clear set of criteria to identify ‘simple,transparent and standardised’ (STS) securitisation which should beuniform across the EU;

• investors: responsible for monitoring the level of risk of the product& performing appropriate due diligence before investing in STSsecuritisations;

• originators and sponsors: self-certify compliance with the criteriaand notify it to the European Securities and Markets Authority(ESMA).

Proposal II: Amend the Capital Requirements Regulation

• to make the capital treatment of securitisations more risk sensitive;

• credit institutions and investment firms exposed to securitisationwhich follow STS criteria receive preferential treatment amountingto less capital in their balance sheet.

… the original “Commission Proposal” [Cont.]

Securitisation Regulation … applies to:

[i] institutional investors becoming exposed to securitisation;

[ii] originators;

[iii] original lenders;

[iv] sponsors;“a credit institution or investment firm … other than an originator that establishes and manages an asset-backedcommercial paper programme or other securitisation transaction or scheme that purchases exposures from third-partyentities”

[v] securitisation special purpose entities (SSPE)“a corporation, trust or other legal entity, other than an originator or sponsor, established for the purpose of carryingout one or more securitisations, the activities of which are limited to those appropriate to accomplishing that objective,the structure of which is intended to isolate the obligations of the SSPE from those of the originator …”

… the original “Commission Proposal” [Cont.]

Securitisation Regulation Part I: Common rules for all securitisations

Due Diligence Rules forInstitutional Investors (Article 3)

• for STS securitisations, perform a due diligence on the compliance with STS requirements;

• assess risks inherent to their exposure to the securitisation position;

• assess whether the securitisation is suitable and appropriate for their needs.

Risk Retention Requirements (Article 4)

• Originator, sponsor or the original lender shall retain on an ongoing basis a material net economic interest of not less than 5%;

• replaces the existing, “indirect approach” with a “direct” risk retention requirement;

• a reporting obligation on the originator, sponsor or the original lenders;

• entities established for the sole purpose of securitising exposures (i.e. SSPEs) would no longer be considered as an originator.

Transparency Rules (Article 5)

• Allow investors to act as prudent investors and do their due diligence;

• Standardised disclosure templates;

• Originators, sponsors and SSPE’s should make freely available the information to investors, via standardized templates, on a website;

• Role of Competent Authorities: ensure that information is properly provided to investors and that the website responds to the required characteristics.

… the original “Commission Proposal” [Cont.]

Securitisation Regulation Part II: STS Securitisation

SIMPLE

• Securitisation assets must be homogeneous & originated in the ordinary course of business;

• Re-securitisation is excluded;

• Underlying portfolio of assets should not be actively managed;

• only allows ‘true sale’ securitisation to become STS ownership of the underlying assets must have been transferred to a securitisation special purpose entity.

TRANSPARENT

• Originator, sponsor and SSPE must provide historical data on default and loss performance to investors;

• Originator or sponsor must provide investors with a liability cash flow model;

• External verification of a data sample by an appropriate and independent party.

STANDARD

• interest rate and currency risks must be mitigated and the mitigation measures disclosed;

• referenced interest payments must be based on generally used market interest rates.

… Proposed Amendments

Risk Retention: “skin in the game”

increase in the risk retention level from 5% to 20%;

the originator, sponsor or the original lender of a securitisation will need to retain, on an ongoing basis,a material net economic interest in the securitisation of not less than 20%;

Rationale: assure a better alignment of interests, avoid moral hazard and make the securitisationmarket more stable during times of crisis.

The Originator, Sponsor or Original Lender needs to be a Regulated Entity

European Securitisation Data Repository

the establishment of a data repository for underlying loans in securitisations to enhance markettransparency

ESMA shall publish the information on the underlying loans in an anonymised way on a dedicatedwebpage, to be known as the “European Securitisation Data Repository”

ESMA to charge the originator, sponsor and SSPE of a securitisation in order to recoup the costs ofsetting up and maintaining this repository.

… Proposed Amendments [Cont.]

Disclosure Requirements on Investors

investors to notify ESMA after buying a securitisation investment

the quarterly investor reports required under the Commission Proposal should include “information on theinvestors in the securitisation and their ultimate beneficial owner, the size of their investment and to whichtranche of the securitisation it relates”;

Rationale: for transparency reasons, to assure an overview of the market and to know where the transferredrisk precipitates.

Ban on Re-securitisation

the underlying exposures used in a securitisation will not be able to include securitisations.

Key role for ESMA

ESMA should, together with the national securities regulators, be responsible for supervising compliancewith the STS criteria;

develop guidelines to ensure a common and consistent understanding of the STS requirements throughoutthe EU.

… Proposed Amendments [Cont.]

Only Regulated Institutional Investors are to be able to Invest in Securitisations

Investors in securitisation need to be “institutional investors”, which term refers to specific types of EUregulated entities, in order to “exclude the shadow banking sector”!

The Originator, Sponsor and SSPE in an STS Securitisation need to be established in the EU

To avoid importing substantial risks from third countries and ensure better supervision!

No Transfer of STS Certification to a Third Party

Prohibits the originator, sponsor or SSPE from transferring the STS certification of securitisations to a thirdparty.

… Proposed Amendments [Cont.]

Restrictions on Entities that can be SPVs

SSPEs cannot be established in non-EU countries which:

(a) are tax havens (i.e. a country that “promotes itself as an off-shore financial centre or one in whichthere are no or nominal taxes”);

(b) lack effective exchange of information with foreign tax authorities;

(c) lack legislative, judicial or administrative transparency;

(d) have no requirement for a substantive local presence;

(e) are listed as a “Non-Cooperative Country and Territory”; or

(f) have not signed an agreement to share tax information.

Concluding Remarks

Successful revival of the European securitisation market depends on the results of the "trialogue" discussionsbetween the European Commission, Council and Parliament

level of due diligence to be undertaken by investorsChallenge: availability of relevant data to investors!

clarification of some STS criteria - further guidance on how to interpret the criteria requiredChallenge: ensure that these are not too narrow for practical application!

importance of certification by an independent third party - should not be underestimatedThe issuer and the originator or sponsor are obliged to notify ESMA about the criteria being satisfied, however ESMA will not berequired to check the accuracy of this information!

“These markets are not aimed at retail investors…”

European Commission

Sephora Scerri

Analyst, Conduct Supervisory Unit, MFSA

Contact Details

E-mail: SScerri@mfsa.com.mt

Thank you!

Note: This presentation has been designed for information purposes only. It does not purport to provide legal advice thereon.