Response to draft Guidelines on the STS criteria for ABCP securitisation
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It would be useful to have the possibility to sell defaulted loans as part of the recovery process and to precise that this is not regarded as active portfolio management.
Paragraph 19 (a) is problematic because we cannot be absolutely certain that the sale of underlying exposures for reasons other than those described in paragraph 18 should always be considered as active portfolio management.
It is common practice to return defaulted trade receivables to the seller to allow him to claim the reimbursement of the value added tax.
The non-financial corporates that originate trade receivables are subject to accounting rules (IFRS or local GAAP) defining which are doubtful or defaulted receivables, and that are verified by external auditors. Such underlying portfolio should not be subject to further guidance from bank regulators.
Also, as pointed out in our general comments, in ABCP securitisation of trade receivables it is normal market practice that the securitisation entity buys the whole portfolio of trade receivables, including the receivables that are ineligible, because they are either in default or in breach of the representations. But the receivables that are not eligible are not refinanced with the conduit, so they generate no risk to the investor. In practice this is much simpler then to sort between the receivables that are eligible and ineligible. This process is also applied in factoring.
Furthermore, paragraph 35 is problematic, especially the words “significantly higher than the average credit score or assessment”, because this could be interpreted as an obligation to exclude from the underlying portfolio the loans that individually have a higher than average probability of default. A securitisation’s underlying loan portfolio is usually composed of a variety of loans, some being riskier than others.
We believe the intent of Article 24 (9) (c) of the STS Regulation is to exclude loans that are credit impaired, but not loans that are individually more risky than the average loan. We would suggest to exclude impaired, provisioned, doubtful, non-performing and defaulted loans, based on the bank’s accounting data or internal rating. It is indeed common market practice to include all performing loans in the securitisation, some being riskier than others.
Another possibility would be to require that the average risk assessment of the securitised portfolio is not significantly higher than the average risk of the seller’s global portfolio before securitisation, for the considered asset category.
There is also an important operational aspect: the rule must be simple enough for banks to be able to implement it with the data available in the bank’s systems on a large number of loans.
In paragraph 32, regarding debtors that are flagged in a credit registry as having an adverse credit status at the time of the origination, we would recommend a tolerance of 3 months, for practical reasons, to take into account the time it takes to structure and originate a securitisation.
The condition described in paragraph 39 (c) is an additional requirement that is not required by level 1 regulation. As for ABCP transactions, granularity requirements are at ABCP programme’s level (see article 243 of the CRR), and as the low granularity will already penalise banking investors due to high risk weights as consequence of low granularity (in particular under SEC-IRBA, IAA and SEC-ERBA approaches), we recommend to delete this additional requirement.
In our opinion, the conditions described in paragraphs 39 (b) and (c) (if maintained) should apply only if the residual value of the underlying assets to be sold is > 5% of the initial value.
Paragraph 41 should be modified, because the requirement that the provider of the guarantee or repurchase obligation have a credit rating step 2 or better is too stringent. Indeed in our experience it is frequently the case that the protection provider has a credit rating below this level. Car dealers and car manufacturers, for example, can have a credit rating below the proposed level of step 2. In addition, this requirement goes beyond the requirements of level 1 regulation
Furthermore, this would lead to a heterogeneous assessment of STS securitisations (and therefore to uncertainty on STS qualification), because the STS qualification would depend on the bank’s credit assessment of the protection provider and of the External Credit Agencies it has designated, and will impose banking requirements to non-bank investors willing to qualify a transaction as STS.
Paragraph 44 corresponds to risk mitigation through reserves of cash and credit claims. For avoidance of doubt, we suggest specifying that credit claims are permitted.
The terms “should only be permitted where either of the following conditions is met” are too restrictive because they would prevent originators from developing new hedging techniques.
The level 1 text gives great latitude regarding the methods used to cover interest rate and currency risk and requires to disclose these methods. The hedging with other assets than cash, such as overcollateralization, or the mutualisation of reserves among several transactions should not be proscribed.
We recommend to remove the requirement of paragraph 45 to disclose the measures of the mitigation of interest and currency risk on a continuous basis, which would be hard to do in practice.
Regarding paragraph 44, when the interest rate and currency risk are managed with reserves, it is important to have the possibility to have one reserve for multiple transactions. It should also be possible to have a guaranty mutualizing interest-rate and currency risk for multiple transactions. These structures are common market practice.
Furthermore, the sponsors carry out liquidity stress scenarios to ensure that the liquidity line will efficiently guarantee the repayment of the ABCPs.
We therefore recommend a more flexible approach, which is to define “comparable exposures” as exposures of the same asset category, as defined in article 2 of the draft RTS on homogeneity of the underlying exposures in STS securitisations, and that are not credit impaired.
In paragraph 69, we recommend suppressing the words “a seller’s default” in the following sentence: “The objective of the requirement in Article 24(17) of Regulation (EU) 2017/2402 is to prohibit non-sequential payments of principal in a situation of a seller’s default or an acceleration event.” The reason being that in the case of a seller’s default, usually a securitisation will not be accelerated but will start amortising. Pro-rata amortization is permitted and used in practice.
Regarding paragraph 70 (b), We recommend removing the requirement to disclose, after the issuance of the securitisation, all material changes to underwriting standards pursuant to which exposures have been originated in the context of “(i) substitution or repurchase of underlying exposures due to the breach of representation and warranties, (ii) replenishment of underlying exposures”, as it would be cumbersome for the originators to monitor the evolution of underwriting standards during the lifetime of the securitisation.
We propose following amendment: “For the purposes of this paragraph, changes should be deemed material where they SUBSTANTIALLY modify the information on the underwriting standards originally disclosed in the prospectus or made available in the initial offering document”.
A large part of ABCP programmes concern trade receivables. In the context of trade receivables, the concept of “underwriting standards” does not apply.
Originators should not be required to disclose side letters with the detail of the fees paid to the paying agent, the custodian, the rating agencies and the servicer when they pertain to small amounts, because that would be of limited interest for the investor.
We do not agree with the phrase “should be disclosed to all parties” of paragraph 76 and with paragraph 77, for two reasons. Firstly, the transmission of the transaction documentation should only occur upon request of the investors as specified in article 7 of the Securitisation Regulation, and secondly, if should remain at transaction level and not ABCP programme level.
Paragraph 76 and 77 go beyond the level 1 requirements and we recommend removing them from the guidelines.
Some ABCP have a call option that the sponsor can exercise only if the investor has exercised his put option first. In our opinion, this complies with Article 26(5). If EBA shares this interpretation, then it would be useful to add this specification in the STS guidelines.
Paragraph 44 corresponds to risk mitigation through reserves of cash and credit claims. For avoidance of doubt, we suggest specifying that credit claims are permitted.
The terms “should only be permitted where either of the following conditions is met” are too restrictive because they would prevent originators from developing new hedging techniques.
The level 1 text gives great latitude regarding the methods used to cover interest rate and currency risk and requires to disclose these methods. The hedging with other assets than cash, such as overcollateralization, or the mutualisation of reserves among several transactions should not be proscribed.
We recommend to remove the requirement of paragraph 45 to disclose the measures of the mitigation of interest and currency risk on a continuous basis, which would be hard to do in practice.
Regarding paragraph 44, when the interest rate and currency risk are managed with reserves, it is important to have the possibility to have one reserve for multiple transactions. It should also be possible to have a guaranty mutualizing interest-rate and currency risk for multiple transactions. These structures are common market practice.
Q5. Do you agree with the interpretation of this criterion, and the aspects that the interpretation is focused on? Should interpretation be amended, further clarified or additional aspects be covered? Please substantiate your reasoning.
Since Article 24(6) of the Securitisation Regulation contains the phrase “to the best of its knowledge”, the same words “to the best of its knowledge” should be included in paragraph 16 of the STS guidelines, to avoid making the guidelines more stringent than Article 24(6) of the Securitisation Regulation.Q6. Do you agree with the interpretation of this criterion, and the aspects that the interpretation is focused on? Should interpretation be amended, further clarified or additional aspects be covered? Please substantiate your reasoning.
It would be useful to precise that the exercise of the clean-up call or a regulatory call is not active portfolio management.It would be useful to have the possibility to sell defaulted loans as part of the recovery process and to precise that this is not regarded as active portfolio management.
Q7. Do you agree with the techniques of portfolio management that are allowed and disallowed, under the criterion of the active portfolio management? Should other techniques be included or excluded?
For revolving securitisations, it can happen that the criteria slightly evolve during the life of the securitisation. For example, a subsidiary can be added to the list of entities of a group from which the securitisation can purchase assets, or the purchase limit for one entity of the group can be modified. We would welcome additional comfort from the EBA guidelines in this respect.Paragraph 19 (a) is problematic because we cannot be absolutely certain that the sale of underlying exposures for reasons other than those described in paragraph 18 should always be considered as active portfolio management.
It is common practice to return defaulted trade receivables to the seller to allow him to claim the reimbursement of the value added tax.
Q8. Do you agree with the interpretation of this criterion, and the aspects that the interpretation is focused on? Should interpretation be amended, further clarified or additional aspects be covered? Please substantiate your reasoning.
Many ABCP securitisations have an underlying portfolio of trade receivables from non-financial corporates. For trade receivables of non-financial corporates, there is no credit score or credit assessment available, hence paragraph 35 is not applicable for such securitisations.The non-financial corporates that originate trade receivables are subject to accounting rules (IFRS or local GAAP) defining which are doubtful or defaulted receivables, and that are verified by external auditors. Such underlying portfolio should not be subject to further guidance from bank regulators.
Also, as pointed out in our general comments, in ABCP securitisation of trade receivables it is normal market practice that the securitisation entity buys the whole portfolio of trade receivables, including the receivables that are ineligible, because they are either in default or in breach of the representations. But the receivables that are not eligible are not refinanced with the conduit, so they generate no risk to the investor. In practice this is much simpler then to sort between the receivables that are eligible and ineligible. This process is also applied in factoring.
Furthermore, paragraph 35 is problematic, especially the words “significantly higher than the average credit score or assessment”, because this could be interpreted as an obligation to exclude from the underlying portfolio the loans that individually have a higher than average probability of default. A securitisation’s underlying loan portfolio is usually composed of a variety of loans, some being riskier than others.
We believe the intent of Article 24 (9) (c) of the STS Regulation is to exclude loans that are credit impaired, but not loans that are individually more risky than the average loan. We would suggest to exclude impaired, provisioned, doubtful, non-performing and defaulted loans, based on the bank’s accounting data or internal rating. It is indeed common market practice to include all performing loans in the securitisation, some being riskier than others.
Another possibility would be to require that the average risk assessment of the securitised portfolio is not significantly higher than the average risk of the seller’s global portfolio before securitisation, for the considered asset category.
There is also an important operational aspect: the rule must be simple enough for banks to be able to implement it with the data available in the bank’s systems on a large number of loans.
In paragraph 32, regarding debtors that are flagged in a credit registry as having an adverse credit status at the time of the origination, we would recommend a tolerance of 3 months, for practical reasons, to take into account the time it takes to structure and originate a securitisation.
Q9. Do you agree with the interpretation of the criterion with respect to exposures to a credit impaired debtor or guarantor?
Please refer to our answer to Q8.Q10. Do you agree with the interpretation of the criterion with respect to the exposures to credit-impaired debtors or guarantors that have undergone a debt-restructuring process?
We agree with the interpretation.Q11. Do you agree with the interpretation of this criterion, and the aspects that the interpretation is focused on? Should interpretation be amended, further clarified or additional aspects be covered? Please substantiate your reasoning.
Regarding revolving securitisations, it would be useful to specify that the exception mentioned in article 24(10) of the STS Regulation remains valid during the amortisation period.Q12. Do you agree with the interpretation of this criterion, and the aspects that the interpretation is focused on? Should interpretation be amended, further clarified or additional aspects be covered? Please substantiate your reasoning.
In paragraph 39, we recommend following amendment: “guaranteed or fully mitigated by a repurchase obligation by the seller of the assets securing the underlying exposures or by third parties”The condition described in paragraph 39 (c) is an additional requirement that is not required by level 1 regulation. As for ABCP transactions, granularity requirements are at ABCP programme’s level (see article 243 of the CRR), and as the low granularity will already penalise banking investors due to high risk weights as consequence of low granularity (in particular under SEC-IRBA, IAA and SEC-ERBA approaches), we recommend to delete this additional requirement.
In our opinion, the conditions described in paragraphs 39 (b) and (c) (if maintained) should apply only if the residual value of the underlying assets to be sold is > 5% of the initial value.
Paragraph 41 should be modified, because the requirement that the provider of the guarantee or repurchase obligation have a credit rating step 2 or better is too stringent. Indeed in our experience it is frequently the case that the protection provider has a credit rating below this level. Car dealers and car manufacturers, for example, can have a credit rating below the proposed level of step 2. In addition, this requirement goes beyond the requirements of level 1 regulation
Furthermore, this would lead to a heterogeneous assessment of STS securitisations (and therefore to uncertainty on STS qualification), because the STS qualification would depend on the bank’s credit assessment of the protection provider and of the External Credit Agencies it has designated, and will impose banking requirements to non-bank investors willing to qualify a transaction as STS.
Q13. Do you agree with the interpretation of the predominant dependence with reference to 30% of total initial exposure value of securitisation positions? Should different percentage be set dependent on different asset category securitised?
Regarding paragraph 39 (a), we recommend a residual value of 50% rather than the proposed 30%, because this reflects the reality of certain automobile loan securitisations. For example: securitisation of Car Personal Contract Purchase (PCP) transactions in the United Kingdom.Q14. Do you agree with the interpretation of this criterion, and the aspects that the interpretation is focused on? Should interpretation be amended, further clarified or additional aspects be covered? Please substantiate your reasoning.
In our opinion, the requirement described in paragraph 43 (e) to carry out a sensitivity analysis under extreme market scenarios goes beyond the requirement of Article 24(12) of the STS securitisation regulation and is overly complex and cumbersome, especially if it has to be carried out through the life of the transaction. It would be more realistic to ask for the sensitivity analysis to be carried out only at the origination date. This requirement would discourage the usage of derivatives which are currently the most appropriate hedging instrument. Furthermore, it would make it more difficult for institutional investors to carry out the due diligence with respect to STS compliance, as required in Article 5 (3) (c) of the STS regulation.Paragraph 44 corresponds to risk mitigation through reserves of cash and credit claims. For avoidance of doubt, we suggest specifying that credit claims are permitted.
The terms “should only be permitted where either of the following conditions is met” are too restrictive because they would prevent originators from developing new hedging techniques.
The level 1 text gives great latitude regarding the methods used to cover interest rate and currency risk and requires to disclose these methods. The hedging with other assets than cash, such as overcollateralization, or the mutualisation of reserves among several transactions should not be proscribed.
We recommend to remove the requirement of paragraph 45 to disclose the measures of the mitigation of interest and currency risk on a continuous basis, which would be hard to do in practice.
Regarding paragraph 44, when the interest rate and currency risk are managed with reserves, it is important to have the possibility to have one reserve for multiple transactions. It should also be possible to have a guaranty mutualizing interest-rate and currency risk for multiple transactions. These structures are common market practice.
Q15. Do you agree with the interpretation of this criterion, and the aspects that the interpretation is focused on? Should interpretation be amended, further clarified or additional aspects be covered? Please substantiate your reasoning.
In paragraph 49, we do not agree with the requirement to report all changes in the priorities of payment “to the investors in commercial paper holding a securitisation position at the level of the ABCP programme”. This is not necessary as the investors in ABCPs receive a liquidity line providing full support from the sponsor. The ABCP transaction waterfall has no impact on the repayment of the ABCPs and is a private documentation.Furthermore, the sponsors carry out liquidity stress scenarios to ensure that the liquidity line will efficiently guarantee the repayment of the ABCPs.
Q16. Do you agree with the interpretation of this criterion, and the aspects that the interpretation is focused on? Should interpretation be amended, further clarified or additional aspects be covered? Please substantiate your reasoning.
For the definition of “substantially similar exposures”, paragraph 52 refers to paragraph 34 which itself refers to article 16(2) of the draft RTS on risk retention requirements. We fear that this could be too restrictive with respect to the operational constraints of securitisation originators, because this would entail the requirement to apply the exact same eligibility criteria for the historical performance data disclosure and the securitisation. This could be difficult to achieve in practice, because the historical data and the actual underlying portfolio are often not extracted from the same systems and databases.We therefore recommend a more flexible approach, which is to define “comparable exposures” as exposures of the same asset category, as defined in article 2 of the draft RTS on homogeneity of the underlying exposures in STS securitisations, and that are not credit impaired.
Q19. Do you agree with the interpretation of this criterion, and the aspects that the interpretation is focused on? Should interpretation be amended, further clarified or additional aspects be covered? Please substantiate your reasoning.
Banks would like to stress that is highly important that the successors of EONIA, EURIBOR and LIBOR will be compliant with the STS criteria and that EBA ensures that the guidelines allow STS securitisations to reference these future successor benchmarks.Q20. Do you agree with the interpretation of this criterion, and the aspects that the interpretation is focused on? Should interpretation be amended, further clarified or additional aspects be covered? Please substantiate your reasoning.
Regarding paragraph 61, French banks would like to point out that trustees play a role in securitisation structured under English Law. In other jurisdictions, such as France, securitisations do not have a trustee but a securitisation manager (“société de gestion”). Furthermore, in some cases, the securitisation legal documentation leaves no leeway to the trustee or securitisation manager in this respect.In paragraph 69, we recommend suppressing the words “a seller’s default” in the following sentence: “The objective of the requirement in Article 24(17) of Regulation (EU) 2017/2402 is to prohibit non-sequential payments of principal in a situation of a seller’s default or an acceleration event.” The reason being that in the case of a seller’s default, usually a securitisation will not be accelerated but will start amortising. Pro-rata amortization is permitted and used in practice.
Q21. Do you agree with the interpretation of this criterion, and the aspects that the interpretation is focused on? Should interpretation be amended, further clarified or additional aspects be covered? Please substantiate your reasoning.
In paragraph 70 (a) the requirement to disclose material changes to the underwriting standards over a period of 5 years before the issuance of the securitisation is too long and would be cumbersome for the originators. In our experience, bank’s underwriting standards evolve very regularly. We recommend a period of three years. Furthermore, there is an overlap between this requirement and the requirements of the Delegated Regulation on homogeneity of underlying exposures.Regarding paragraph 70 (b), We recommend removing the requirement to disclose, after the issuance of the securitisation, all material changes to underwriting standards pursuant to which exposures have been originated in the context of “(i) substitution or repurchase of underlying exposures due to the breach of representation and warranties, (ii) replenishment of underlying exposures”, as it would be cumbersome for the originators to monitor the evolution of underwriting standards during the lifetime of the securitisation.
We propose following amendment: “For the purposes of this paragraph, changes should be deemed material where they SUBSTANTIALLY modify the information on the underwriting standards originally disclosed in the prospectus or made available in the initial offering document”.
A large part of ABCP programmes concern trade receivables. In the context of trade receivables, the concept of “underwriting standards” does not apply.
Q24. Do you agree with the interpretation of this criterion, and the aspects that the interpretation is focused on? Should interpretation be amended, further clarified or additional aspects be covered? Please substantiate your reasoning.
Yes we agree.Q25. Do you agree with the interpretation of this criterion, and the aspects that the interpretation is focused on? Should interpretation be amended, further clarified or additional aspects be covered? Please substantiate your reasoning.
We question the added value of paragraph 76, because securitisation originators must already comply with Article 7 “Transparency requirements for originators, sponsors and SSPEs” of the STS regulation.Originators should not be required to disclose side letters with the detail of the fees paid to the paying agent, the custodian, the rating agencies and the servicer when they pertain to small amounts, because that would be of limited interest for the investor.
We do not agree with the phrase “should be disclosed to all parties” of paragraph 76 and with paragraph 77, for two reasons. Firstly, the transmission of the transaction documentation should only occur upon request of the investors as specified in article 7 of the Securitisation Regulation, and secondly, if should remain at transaction level and not ABCP programme level.
Paragraph 76 and 77 go beyond the level 1 requirements and we recommend removing them from the guidelines.
Q26. Do you agree with the interpretation of this criterion, and the aspects that the interpretation is focused on? Should interpretation be amended, further clarified or additional aspects be covered? Please substantiate your reasoning.
Regarding the regular external verification of the underlying exposures described in paragraph 73, it is important to point out that, for trade receivables ABCP securitisation, the turnover of the underlying portfolio is very quick: 75% of the underlying portfolio is renewed every 3 months. Hence we recommend to add a rule that the external verification should not be done more than once every year.Q28. Concerning the sample, should a minimum sample size be prescribed (in absolute or relative terms)? Should a statistical method for evaluating the outcome of the external verification of the sample be specified? Do you agree that it should be representative covering all underlying exposures of all transactions? Do you see merit in further specifying that the sample should be representative by properly representing the various asset categories of the transactions; or that representativeness may be assumed when the sample is gathered via a random selection?
We see no merit in further specifying how to select a representative sample because the specialized auditors that carry out this task have sufficient expertise.Q29. Do you agree with the interpretation of this requirement, and the aspects that the interpretation is focused on? Should other aspects be covered? Please substantiate your reasoning.
Yes, we agree with the interpretation of this requirement.Q31. Do you agree with the interpretation of this criterion, and the aspects that the interpretation is focused on? Should interpretation be amended, further clarified or additional aspects be covered? Please substantiate your reasoning.
Yes, we agree with the interpretation of this criterion.Q33. Do you agree with the interpretation of this criterion, and the aspects that the interpretation is focused on? Should interpretation be amended, further clarified or additional aspects be covered? Please substantiate your reasoning.
In a given securitisation conduit, there can be several different types of ABCP. If there are structured ABCP with a call option and other ABCPs without any call option, then the ABCPs with call option will not be STS compliant, but the guidelines should specify that this should not prevent the other ABCPs that have no call option to be STS compliant.Some ABCP have a call option that the sponsor can exercise only if the investor has exercised his put option first. In our opinion, this complies with Article 26(5). If EBA shares this interpretation, then it would be useful to add this specification in the STS guidelines.
Q34. Do you agree with the interpretation of this criterion, and the aspects that the interpretation is focused on? Should interpretation be amended, further clarified or additional aspects be covered? Please substantiate your reasoning.
In our opinion, the requirement described in paragraph 43 (e) to carry out a sensitivity analysis under extreme market scenarios goes beyond the requirement of Article 24(12) of the STS securitisation regulation and is overly complex and cumbersome, especially if it has to be carried out through the life of the transaction. It would be more realistic to ask for the sensitivity analysis to be carried out only at the origination date. This requirement would discourage the usage of derivatives which are currently the most appropriate hedging instrument. Furthermore, it would make it more difficult for institutional investors to carry out the due diligence with respect to STS compliance, as required in Article 5 (3) (c) of the STS regulation.Paragraph 44 corresponds to risk mitigation through reserves of cash and credit claims. For avoidance of doubt, we suggest specifying that credit claims are permitted.
The terms “should only be permitted where either of the following conditions is met” are too restrictive because they would prevent originators from developing new hedging techniques.
The level 1 text gives great latitude regarding the methods used to cover interest rate and currency risk and requires to disclose these methods. The hedging with other assets than cash, such as overcollateralization, or the mutualisation of reserves among several transactions should not be proscribed.
We recommend to remove the requirement of paragraph 45 to disclose the measures of the mitigation of interest and currency risk on a continuous basis, which would be hard to do in practice.
Regarding paragraph 44, when the interest rate and currency risk are managed with reserves, it is important to have the possibility to have one reserve for multiple transactions. It should also be possible to have a guaranty mutualizing interest-rate and currency risk for multiple transactions. These structures are common market practice.