On April 6, 2021, the EU securitization regulation1 (RS) has been amended in accordance with Regulation (EU) 2021/557 of the European Parliament and of the Council2 (Regulation amending the RS) and Regulation (EU) 2021/558 of the European Parliament and of the Council3 (Regulation amending the CRR) (together, the SR amendments) with effect from April 9, 2021.
The recently introduced changes extend the scope of the simple, transparent and standardized framework (STS framework) of “true” securitizations4 synthetic balance sheet securitizations (see below) and remove existing regulatory barriers to the securitization of non-performing exposures (NPEs) (see below). Overall, the SR Amendments put in place amendments that aim to reduce regulatory costs when securitizing NPEs to help EU banks in their efforts to deal with increasing levels of NPEs on their balance sheets. caused by the pandemic.
It is important to note that the importance of a securitization to qualify under the STS is linked to the preferential regulatory capital treatment provided for the senior position held by the originator (eg EU bank).
An STS framework for synthetic securitizations
The STS framework for “real sell” securitizations formed the basis of the STS framework for synthetic securitizations to which certain adjustments were made.
In light of the above, the SR changes cover the areas below:
- In terms of scope, synthetic securitization can only be qualified as STS when carried out by EU banks. In addition, the STS framework does not apply to synthetic arbitrage securitization, where the objective is to profit from movements in the price of credit risk rather than to obtain protection against the credit risk associated with exposures. of the initiator.
- With regard to simplicity (article 26 ter of the RS), the STS framework introduces criteria according to which the underlying exposures must have been initiated within the framework of the originator’s main activity and must be recorded in the balance sheet of the initiator (or a member of his group). The originator must not hedge its exposure beyond the protection obtained by the credit protection contract which is part of the synthetic securitization concerned. Additional declarations and guarantees are required from the principal regarding compliance with the requirements of article 26b RS.
- With regard to standardization (article 26c RS), the STS framework introduces additional criteria relating to the disclosure of hedging and currency risks, sequential amortization applies (although, by derogation, non-sequential amortization can also apply) and the originator is now required to keep a master record of the underlying exposures.
- In terms of transparency (article 26d RS), the originator is required to disclose data on static and historical performance in terms of default and loss for at least five years. A verifier must confirm a sample of the underlying exposures, but investors may request verification with respect to individual underlying exposures when they consider the sample verification to be unsatisfactory.
- In terms of new requirements (article 26e RS), in particular:
Amendments to NPEs
The SR Amendments introduce changes to the rules governing NPEs in order to remove existing regulatory barriers and reduce regulatory costs. To begin with, the SR amendments apply to securitizations of NPEs which are defined as securitizations “backed by a pool of NPEs, the face value of which represents at least 90% of the face value of the entire pool at the time of the transaction. ‘origination, and at any subsequent time when assets are added or removed from the underlying pool ”(Article 2 (25) RS). In particular:
- The SR Amendments allow the manager of an NPE securitization to act as the risk agent, provided the manager demonstrates that it has the required expertise and adequate policies, procedures and controls in place to perform these tasks. (article 6 SR). This change is justified by the fact that the servicer should have a more substantial interest in the recovery value of the NPE portfolio.
- Prior to the recent changes, the RS required the originator to hold risk retention positions linked to the face value of NPE exposures. Since the face value of an NPE does not often reflect its market value, the SR Amendments allow the risk retention in an NPE securitization to be calculated on the basis of the net value of the NPEs, which is the result of their face value less any refundable purchase price discount agreed upon at the time of the securitization (Article 6 RS). The EBA should provide more clarity through the regulatory risk retention standards it should publish.
- With regard to the securitization of NPEs where an originator has purchased NPEs from a third party, the SR amendments modify the applicable pricing and selection standards by replacing the obligation to assess these standards at the time of creation of the exposure through the obligation to carry out this valuation at the time of their acquisition (Article 9, paragraph 1, RS). The rationale for this amendment is that in the event that NPEs are acquired from a third party, what matters most is the selection and pricing criteria at the time of purchase rather than at the time of purchase. of their creation. This amendment reduces the due diligence burden for an acquired NPE portfolio. This could mean that an originator holding an NPE portfolio from its origin (where there may be missing historical data at the time of origination) may even have more difficulty securitizing that latter portfolio than a recent NPE portfolio. acquired.
The SR Amendments introduce changes aimed at reducing the regulatory costs of securitizing NPEs. This question had already been pointed out in 2019 by the EBA in its opinion on the regulatory treatment of the securitization of NPEs.5, where he argued that the risks inherent in NPE securitizations are different from the securitization of productive assets. And, in its 2020 report, the EBA proposed a framework for STS synthetic securitization6. In light of the above, the EU has decided to act quickly on these changes, notwithstanding the fact that the RS is expected to undergo a full review by January 2022, in order to facilitate EU banks trying to ” clean up their balance sheets in the light of the new NPEs that are accumulating due to the pandemic.
Overall, the changes should satisfy market participants. The revised SR is expected to deliver on its promises by making it easier and more attractive for market participants to enter into synthetic balance sheet securitization transactions and securitize portfolios of NPEs. Nevertheless, there are some elements (such as the risk weight of the synthetic excess spread) that market participants should be aware of and should be further clarified once the EBA provides further guidance, especially during the period. post-pandemic where the need for an economic recovery will create a number of new securitization transactions across the EU.