Background
Homogeneity requirements were developed to facilitate due diligence by investors on the risks of the underlying assets by ensuring that the underlying exposures of a securitisation share similar risk profiles. The 2019 RTS, in force since 26 November 2019, were mandated under the Articles 20(14) and 24(21) of the European Union Securitisation Regulation (“EUSR”)[1], to specify homogeneity requirements for underlying exposures in ABCP and non-ABCP securitisations. The EBA was mandated to develop the Draft RTS following amendments to the EUSR by the Capital Markets Recovery Package ("CMRP")[2]. The Draft RTS aims to extend the existing homogeneity requirements to on-balance-sheet securitisations and to also make some changes to the current 2019 RTS requirements for consistency.
What has happened?
On 28 July 2022, the EBA published a Consultation Paper on draft RTS specifying the criteria for the underlying exposures in on-balance-sheet simple, transparent and standardised (“STS”) securitisation to be deemed homogeneous (the "Draft RTS"). The Draft RTS will amend the existing RTS set out in Commission Delegated Regulation (EU) 2019/1851 (the "2019 RTS")[3] and will be applicable to asset-backed commercial paper (“ABCP”), non-ABCP and on-balance-sheet securitisations; whilst the 2019 RTS apply only to ABCP and non-ABCP securitisations. The Draft RTS will apply homogeneity criteria to on-balance-sheet securitisations for the first time, implementing necessary changes to the STS framework required by the EUSR, as amended by the CMRP to cater for the possibility of on-balance-sheet securitisations qualifying as STS securitisations.
What are the key changes for STS securitisation?
The key changes relate to the relevant asset type and include:
-
extension of the existing requirements to on-balance-sheet securitisations;
-
ensuring consistency of homogeneity criteria for ABCP, non-ABCP and on-balance-sheet securitisations;
-
adjustments to the homogeneity factor relating to the “type of obligor” for large corporate and small and medium-sized enterprise ("SME") loans, reflecting current market practices and the credit risk assessment approaches applied to those asset types. The EBA has taken into account the different credit risk underwriting standards and methodologies applied by originators, for example an originator might apply a similar credit risk assessment for SMEs and individuals and credit risk assessments might vary between large corporates, other corporates and SMEs. For consistency, similar changes are made to the “type of obligor” for all relevant asset types of loans;
-
further to the modifications relating to the type of obligor, the Draft RTS provide a specific amendment for the asset type for credit facilities provided to enterprises (e.g. SMEs), where similar underwriting standards are applied as for individuals; and
-
for the definition of large corporates EBA refers to the definition as set out in the Commission's CRR III proposal which has not yet been adopted.
What is the impact for existing STS transactions?
Grandfathering provisions are proposed, however the EBA queries whether grandfathering provisions are necessary and seeks guidance in this respect. As currently drafted the grandfathering provisions would allow ABCP and non-ABCP STS transactions which meet the requirements of the 2019 RTS to comply with such requirements for the lifetime of the transaction. For outstanding STS on-balance-sheet securitisations a deferred application date of the RTS is proposed.
What is the relevance for UK STS securitisations?
The United Kingdom on-shored[4] the EUSR with effect from 1 January 2021 (UKSR) and the requirements of the 2019 RTS[5], with minimal changes. However, the Draft RTS does not form part of this onboarding and it is unclear to what extent the UK would seek to draw from the Draft RTS once published. This could therefore result in divergence in this area between the EU and the UK unless the UK adopts similar provisions.
Once the outcomes of the Future Regulatory Framework Review: Proposals for Reform[6] are implemented later this year and when the Financial Services and Markets Bill is concluded, there should be more clarity on proposed UK legislative measures.
Next steps
The consultation runs until 28 October 2022. After any further reviews, final draft RTS will be sent to the European Commission. Once endorsed by the European Commission, the EU Parliament and the Council of the EU will have between one and six months (depending on whether any amendments have been made to the Commission adopted RTS) to object. Once it is clear that the EU Parliament and Council of the EU do not object to the RTS, they will be published in the Official Journal and enter into force after 20 days after being published in the Official Journal. Therefore, it is not expected that the Draft RTS will be in force until the first quarter 2023 at the earliest.
This note is for guidance only and should not be relied on as legal advice in relation to a particular transaction or situation. If you have any questions on this topic please speak to your usual Structured Finance contact at Hogan Lovells.
Authored by Jane Griffiths and Sebastian Oebels.
