Sensible Approach on STS Securitisation and EU Risk Retention Likely to Help EU Securitisations and the Real Economy
At the 7th trilogue meeting held in Strasbourg on 30 May 2017 among representatives of the European Parliament, Council of Ministers and Commission, agreement was reached in principle on an EU regulatory framework for simple, transparent and standardised (STS) securitisation and EU risk retention.
It has been reported that:
- Percentage Requirements: The minimum risk retention threshold is set to remain at 5% irrespective of the method of retention used (whether horizontal, vertical, or otherwise).
- Transparency: The representatives also agreed on the creation of a data repository system for securitization transactions in order to increase market transparency. Private securitisations where no prospectus has to be drawn would be excluded from this reporting obligation.
- Capital Treatment: The representatives also agreed preferential capital treatment for simple, transparent and standardised (STS) securitisation.
- Monitoring: The European Systemic Risk Board (ESRB) will monitor build-ups of excessive risks on the market and be ready to step up with concrete warnings or recommendations for actions to the relevant competent authorities, including possibly changes to the risk retention level.
- Retail: Retail as well as institutional investors would also be permitted to invest in securitisations subject to satisfying certain tests.
It is further understood that the final text will omit proposals that only EU-regulated entities could hold risk retention interests and that investment in EU securitisations would be limited to EU-regulated institutional investors.
One troubling note in the EU Parliamentary press release was the suggestion that simple, transparent and standardized securitisations could only be issued by entities established in the European Union. For these and further details, we are awaiting the actual compromise language.
While the current EU risk retention rules generally require investors to ensure that an appropriate risk retention interest is being held by the sponsor or originator, the new EU risk retention requirements also place the onus on the sponsors and originators of securitisations. The new STS framework is also intended to bring UCITS funds and institutions for occupational retirement provision (IORPs) within the scope of EU risk retention requirements once it enters into force.
The technical drafting of the STS regulatory framework remains to be completed and is still subject to formal approval by the Council of Ministers (finance ministers of the EU Member States next meet on 16 June) and European Parliament in due course. Current market expectations are that the new framework will not come into force until late 2017 at the earliest.