European Commission: more time needed to assess Securitisation Regulation impact

The Commission's ‘article 46’ report on the Securitisation Regulation, mandated by the regulation itself, proposes no major changes to the European regulatory framework for securitisation transactions, judging it too early to fully assess its effects. It instead recommends some targeted improvements, particularly around the proportionality of certain requirements, that can be taken forward without changes to the regulation itself.

The EU Securitisation Regulation, which was adopted in 2017 and came into force in December 2019, represents supervisory attempts to both regulate and revive the European securitisation market in the wake of the global financial crisis. However, securitisation and structured finance experts at Pinsent Masons said that the broad scope and prescriptive nature of the framework appears to have hampered the intended revitalising effect, with issuance levels subdued and institutional investor appetite diminished.

After assessing the key rules within the Securitisation Regulation including risk retention, due diligence and disclosure, the Commission recommended little in the way of fundamental change. The Commission acknowledged that it has not yet endorsed the long-awaited final technical standards on risk retention and gives no clue as to timeframe, although these are expected imminently, according to securitisation regulatory expert Katie McCaw of Pinsent Masons.

She said: "The long-awaited final technical standards on risk retention represent one of the final pieces of the securitisation regulatory 'jigsaw', and their endorsement by the Commission will add welcome clarity to these important rules”.

The Commission recommends some fine-tuning of some of the requirements of the regime. Accepting that the securitisation industry does not regard the transparency requirements as proportionate, the report tasks ESMA with reviewing the existing disclosure templates and recommending improvements, in a move that will likely be welcomed by the securitisation industry. It also proposes creation of a dedicated template for "private" securitisations which, said McCaw, may bring welcome flexibility.

However, the distinction between public and private securitisations remains a key concern, McCaw said. “The Commission's report rejects calls for a change to the definition of private securitisation, apparently convinced that avoidance of the transparency requirements is behind the industry's push for a clearer delineation,” she said.

On the new regime for ‘simple, transparent and standardised’ (STS) securitisation created by the Securitisation Regulation, the Commission considers the possible establishment of an equivalence regime for non-EU STS securitisations but finds that it is premature to do so. The UK, which has included legislation to establish an equivalence regime for non-UK STS securitisation in its Financial Services and Markets Bill, is further ahead in this work, Katie McCaw said.

“However, the success of any STS equivalence regime depends on reciprocation and the Commission's report makes it clear that this will not be forthcoming in the near future,” she said.

With sustainability a hot topic across many types of finance, the report agrees with the European Banking Authority's earlier assessment of the possible adjustments that could be made to the EU Green Bond Standard to incorporate securitisation by recommending that no separate sustainability label for securitisation is needed at this stage. More required disclosures around sustainability within securitisation transactions are also expected as regulators work on the preparation of technical standards that would accommodate investors' demand for better information about ESG-linked products.

The report acknowledges the difficulties that arise from the lack of clarity about the jurisdictional scope of some of the Securitisation Regulation's requirements but stops short of agreeing that comprehensive amendments to the Securitisation Regulation are needed to address this. Attempting to provide interpretative guidance in its report, the Commission encourages a wider interpretation of the risk retention, transparency and credit-granting rules that, alongside the investor due diligence requirements, should operate to ensure that all relevant transaction parties meet their obligations under the legislation.

Some important aspects of the regulatory framework were not within the scope of the review. For example, capital requirements for so-called ‘institutional investors’ in securitisations – including banks and insurance companies – remain too high and the treatment of securitisation in banks' liquidity coverage ratios is overly harsh, according to structured finance expert Ed Sunderland of Pinsent Masons.

"The real work to be done in reviewing the Securitisation Regulation is to the prudential regime for securitisation,” he said. “Revitalising the market depends to a large extent on an overhaul of the capital framework to ensure securitisation is treated fairly and similarly to comparable products.”

A parallel report is now expected from UK regulators assessing the UK Securitisation Regulation.

“With the landscape of post-Brexit financial services legislation shifting significantly, more far-reaching changes may be expected that address some of the market's criticisms of the securitisation regulatory regime, even if only for UK transactions,” Sunderland said.