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EBA Summary: Implementation of the New EU Securitisation Framework

Core Content

The European Banking Authority (EBA) presented an introductory statement at the ECON meeting in Brussels on 29 August 2018, outlining the key aspects of the implementation of the new EU securitisation framework, known as the "STS" (Simple, Transparent, and Sustainable) framework, which fully entered into application in January 2019.

The EBA emphasized its role in the development and implementation of this framework, which aims to restore confidence in the securitisation market and promote a sound and resilient financial system in the EU. The framework is part of the broader Capital Market Union (CMU) initiative, which seeks to enhance the integration and efficiency of capital markets across the EU.

Main Points

1. Purpose of the STS Framework

• To address the stigma associated with securitisation, particularly from the pre-crisis period.
• To promote a better understanding and confidence in securitisation products.
• To support cross-border and cross-sector lending and investment.

2. EBA's Role in the Reform

• The EBA has been actively involved in the development of securitisation regulations at both European and international levels since 2014.
• It has played a central role in shaping the regulatory initiatives that led to the current framework, including the introduction of the concept of qualifying securitisation and more risk-sensitive capital treatment.

3. Key Regulatory Mandates

• The EBA has 28 regulatory mandates to deliver as part of the implementation of the new framework.
• In 2018, it focused on six key mandates to ensure the smooth functioning of the STS market.

4. Published Technical Standards

• The EBA published two technical standards (RTS) in July 2018:
  • RTS on Homogeneity in Securitisation: Designed to ensure that securitisation assets are homogeneous, facilitating investors' risk assessments and due diligence.
  • RTS on Risk Retention: Replacing previous standards, these provide more legal certainty and aim to prevent regulatory arbitrage.

5. Homogeneity Conditions

• The RTS on homogeneity include four conditions that ensure the legal mandate is fully reflected:
  • Underwriting and homogeneity factors.
  • Contractual, credit risk, and prepayment characteristics.
  • Servicing and cash flow characteristics.
  • Asset category and type characteristics.

6. Risk Retention Provisions

• The new RTS on risk retention include:
  • The 'sole purpose test' to prevent originators from being created solely for securitisation.
  • Clarification of the requirement to disallow securitisation of 'adversely selected' assets.
  • Exceptional circumstances under which the risk retention requirement can be modified.

7. Upcoming Regulatory Products

• RTS on Calculation of KIRB: Currently under consultation, to be delivered by spring 2019.
• Guidelines on Weighted Average Life Maturity: Aimed for delivery before the end of 2019, to support the calculation of maturity for securitisation tranches.

8. Collaboration with Other Regulators

• The EBA is working closely with ESMA and EIOPA to ensure consistent and operable implementation of the rules across the EU.
• This collaboration is essential for achieving a harmonized regulatory approach.

Key Information

• STS Framework Effective Date: 1 January 2019.
• Legal Deadline for RTS on Homogeneity: Six months, leading to their publication in July 2018.
• Focus Areas for EBA: Homogeneity, risk retention, and other critical mandates to support the STS market.
• Capital Market Union (CMU): The STS framework is aligned with the objectives of CMU to improve the efficiency and integration of capital markets in the EU.

The EBA is committed to ensuring the effective and consistent implementation of the new framework, which is expected to enhance the transparency, sustainability, and resilience of the securitisation market in Europe.