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Para 13 states that the contents of the legal opinion should be accessible to third parties. The term “third parties” should be specified in more detail. Where ABCP transactions are concerned, we believe third parties should refer only to competent authorities and parties which are directly exposed to the risk associated with the pool of underlying exposures. By contrast, commercial paper investors and potential investors are protected by the “fully supported” liquidity facilities and do not, therefore, require any additional information about the true sale.
The legal opinion should cover only the legally effective transfer of assets. It should only address risks
which could impair the transfer. These are essentially clawback risks and re-characterisation risks.
Commingling risks and set-off risks, on the other hand, are risks which have no direct link with the
transfer of the assets, but which may exist independently of the transfer. These risks are not normally the
subject of a true sale opinion, nor are they addressed by Article 20(1) or 24(1) of the STS Regulation
(“…transfer of the title…”). The phrase “commingling risks and set-off risks” should therefore be dropped
from para 10b.
Our view is similar to that expressed in our reply to Q1. Here, too, we believe the representations and
warranties should be provided only to parties directly exposed to the underlying portfolio. In para 16, the
term “investors” should therefore be replaced with “parties directly holding a securitisation position at the
level of the respective ABCP transaction”.
The “best knowledge” requirement should only cover publicly available information if it was known to, and
processed by, the originator. In our view, the broad wording at the end of para 29 (“including publicly
available information”) runs counter to the view in para 26 that application of the guidance should not be
“unduly burdensome” and the statement in para 30 that compliance “should not require the originator […]
to take other steps in order to collect further information […] beyond the information referred to in
Recital 26”. The phrase “including publicly available information” at the end of para 29 should therefore
be deleted or reworded much more narrowly.
Please see our reply to Q8.
Para 28 proposes that, if a portfolio or asset is guaranteed, “neither the debtor, nor the guarantor” should
be credit-impaired. This is inappropriate and does not reflect common practice, in our view. If a debtor is
credit-impaired, it is advantageous to have a guarantor in place to assume credit risk. It is then the credit
status of the latter which is relevant. A portfolio or a single asset should only be deemed credit-impaired
within the meaning of Article 24(9) of the STS Regulation if both the debtor and the guarantor are creditimpaired
(i.e. the requirement should be cumulative). Take, for instance, widespread practice of
securitising trade exposures which are fully covered by trade credit insurance. It should be of no
importance whether or not the debtor has an impaired credit history since everything is covered by the
trade credit insurance. There should be no need to investigate the credit history or current credit status of
the originator. Para 28 should be amended accordingly.
Para 41 proposes that the exemption in the event that there is a guarantor for the residual value should
apply only if this guarantor is an eligible protection provider in accordance with Article 201(1) of the CRR
and Article 24 of the revised CRR. For companies, this means there has to be an external or (for banks
using the IRB approach) an internal rating.
This requirement raises the question of who needs to have an internal rating. The end of para 41 merely
requires “such third party” to be “an eligible provider of unfunded credit protection in accordance with [the IRB approach]”. In our view, however, it is not clear which party has to comply with this IRB
approach. Both level 1 and the beginning of para 41 refer to “holders of securitisation positions”. These
holders could be the sponsoring bank, one or more parties to a swap or banks investing in the ABCP. It
would be logical for the sponsoring bank only to be meant, since it is the provider of full support. But if
the term refers to other parties as well, differing conclusions would be arrived at. It would be equally
impracticable to require guarantor companies always to have an external rating in the event of such
differing conclusions. This would have severely adverse effects on the securitisation of car and equipment
leasing exposures with a residual value. We would suggest either deleting para 41 altogether or clarifying
that the requirements only have to be met by the sponsoring bank and adding as a further criterion (in
addition to an external or internal rating) that it is possible to include the guarantor in the IAA rating of
the sponsor.
To explain: under Article 265(2)(m) of the new CRR, the internal assessment approach may only be
applied if all potential risks are taken into account. In consequence, a guarantor of the residual value may
also be included in the risk assessment under the IAA. If this is the case, the guarantor should not need
to have an external or internal rating as well.
[No resecuritisation at ABCP transaction level (Article 24(8))
Q12 on page 37 of consultation paper:
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.
We agree with the interpretation and welcome the illustrative diagrams. It would be helpful for
clarification purposes if the “additional CE” shown in Figure 1 in para 23 was granted not only by the
sponsor, but also by a third party. This frequently occurs when trade exposures are securitised and the
portfolio sold is insured by trade credit insurance in the form of a CE policy. This could perhaps be
mentioned in the diagram as an additional example alongside the letter of credit (please see also our
reply to Q31).]
We basically welcome the proposed reporting obligation in the event of changes in the waterfall of
payment priorities. We nevertheless see room for improvement in the wording of para 49. As a rule, ABCP
transactions and programmes have two “waterfalls”: one at transaction and another at programme level.
In consequence, there are also two different securitisation positions. While a change in the waterfall at
transaction level, for example, may materially affect the parties directly involved (and thus trigger a
reporting obligation), this may, by contrast, have no material effect on the repayment at programme
level (owing to the full support, among other things). We would therefore recommend clarifying in
para 49 parties holding a direct securitisation position, on the one hand, and investors, on the other,
should be informed only if there will be a material effect on the repayment of their position. The current
wording suggests both parties always need to be informed.
We warmly welcome the clarification in para 51 that disclosure should only be mandatory to investors
which are directly exposed to the transaction portfolio and that, in other cases, confidentiality issues may
be taken into account. It should nevertheless be borne in mind that, where certain asset classes are
concerned (especially trade exposures), only dynamic loss and default data are available. Owing to the
short-term nature of these exposures, it is neither feasible nor helpful to compile static data. Para 51
should therefore not be understood as meaning that it is always mandatory to provide both static and
dynamic data but should mean that at least one of these types of data should be provided, depending on
availability.
It is also unclear how frequently a comparison has to be made between exposures in revolving portfolios
(e.g. trade exposures) and substantially similar exposures. Article 24(14) of the STS Regulation says
“before pricing”. In ABCP programmes, the cost of funds is normally passed on to sellers once a month. It
would be unreasonably burdensome if this meant that a monthly comparison had to be made between the
exposures sold and substantially similar exposures. We would therefore recommend clarifying that, for
ABCP programmes, “before pricing” refers only to the initial pricing of a transaction, i.e. the initial sale of
the exposures.
We see no need for additional guidance.
Para 63 is not relevant to ABCP and can be deleted.
The definition of “material changes” in para 70b (“where they modify the information on the underwriting
standards originally disclosed in the prospectus or made available in the initial offering document”) cannot
normally be applied to ABCP transactions since the underwriting standards of transactions are not
contained in prospectuses or offering documents. It would be better to refer to “transaction
documentation” in this context.
The criteria for determining the expertise of the seller should basically mirror those for determining the
expertise of the servicer (Article 26(8) of the STS Regulation). Please also see our reply to Q34.
We would prefer “similarity” to refer to exposures with the same eligibility criteria. This would ensure that
exposures which are really similar were compared with one another. The proposed referencing of portfolio
level criteria would set too broad a standard for comparison, in our view. Receivables from equipment
leases to corporates, for instance, would, under Article 2(d) of the draft RTS on homogeneity, have to be
subject to the same underwriting standards regardless of whether they originated abroad or domestically.
If, by contrast, a securitised portfolio only permitted domestic lessees, the non-securitised (foreign)
portfolio would have to be originated on the same conditions. This is often not the case. Underwriting
standards can also differ according to the type of object leased. If only certain types of leased object are
allowed in a securitised portfolio, the possibility cannot be ruled out that there will be divergences
between the securitised and non-securitised portfolio or at portfolio level in general.
It is not clear how transaction documentation is supposed to be disclosed to commercial paper investors
(para 77). Anonymised, aggregated and summarised documentation will not provide commercial paper
investors with any benefit or additional insight. These investors can obtain sufficient information about
the securitised transaction portfolios from the monthly investor reports. In addition, they largely enjoy
the full support of the liquidity facility. In our view, this covers, from the perspective of commercial paper
investors, the requirement for “all underlying documentation that is essential for the understanding of the
transaction” in accordance with Article 7(1)(b) of the STS Regulation. In contrast, Article 24(20) of the
STS Regulation specifies only the content, not the addressees of transaction documentation. Para 77 can
therefore be deleted, as we see it.
Para 78 requires (for the purposes of Article 24(20)(d) of the STS Regulation) that the transaction
documentation include a reference to the fact that the sponsor has demonstrated its solvency and
liquidity to the satisfaction of the competent authority. While we agree with the qualification in sentence
two of para 78, we believe it would make better sense to include this reference to the demonstration of
solvency and liquidity in a document made available to investors. We therefore see a need to clarify that
this reference may also be included in a document which is not part of the transaction documentation
(such as the investors report) as long it is accessible by commercial paper investors.
We agree with the method of calculating the extent of temporary non-compliance set out in para 79. As
to the definition of “temporarily” in para 80, however, we believe the three-month period should begin on
the day of notification of the non-compliance, not “from the first occurrence of non-compliance”. A
corresponding period and mechanism is prescribed for remedial measures in the third paragraph of
Article 36(6) of the STS Regulation. We assume, moreover, that the three-month period applies
separately to each infringement and will start again in the event of non-compliance occurring again.
We understand Article 26(1) of the STS Regulation to mean that external verification should only be
carried out if there has been notification of temporary non-compliance with Article 24(9) to (11) of the
STS Regulation (“For the purpose of the second subparagraph…”). This external verification should then
cover only the relevant transactions. This means that, if all requirements have been fulfilled at transaction
level, there is no need for external verification at all (and the same applies if the programme has not
been notified as having STS status). We would ask that these points be clearly spelled out since they are
not made clear by the guidelines in their present form. We would also ask that para 83 be deleted. We
believe this is justified because investors in a fully supported ABCP programme will not experience any
material impairment of their securitisation positions as a result of temporary non-compliance with
Article 24(9) to (11) of the STS Regulation. If, however, all transactions had to be examined on a regular
basis, this would impose a large cost burden on sellers without delivering any appreciable added value to
commercial paper investors.
In the event of notification of temporary non-compliance, therefore, only the relevant transactions should
be subject to a one-off external verification, as described above (para 84).
Please see our reply to Q27.
We agree with the guidance on this criterion. We merely recommend clarifying that trade credit insurance
policies at transaction level (CE policies) are also not be understood as a second layer of tranching. Please
see also our reply to Q12 above.
Please see our reply to Q31.
As explained in our reply to Q22, the expertise of the seller and the servicer should be assessed on the
basis of the same criteria. This is the case.
As to the requirement in Article 26(8) of the STS Regulation for “well-documented policies, procedures
and risk-management controls”, we see no need for non-regulated entities to have this documentation
demonstrated by a third party. This would generate substantial costs for sellers without delivering any
appreciable added value to commercial paper investors, which already enjoy extensive protection owing
to the full support. Only the sponsor has a commercial interest in making sure that these mechanisms are
duly in place. We therefore believe it would be appropriate for the sponsor to verify this in its due
diligence report. It should be left to the sponsor to decide whether to carry out the review itself or
commission a third party to do so. Wording should therefore be added to the final sentence of para 102b
to the effect that the review can be undertaken by a third-party or by the sponsor.
Nicole Quade
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