Response to consultation on the draft RTS on homogeneity of underlying exposures in securitisation

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Question 1: Do you agree with the focus of the RTS, general approach and underlying assumptions on which the RTS are based? Does the proposed approach provide sufficient clarity and certainty on the interpretation and application of the criterion of homogeneity?

Yes, the French Banking Federation agrees with the general approach and rationale, which provides sufficient clarity. However it should be clarified that the criteria supporting the homogeneity analysis are not risk criteria, as by definition securitisation can combine a diversity of risks (for the same asset class).

Question 2: Do you agree with the assessment of the homogeneity of underlying exposures based on criteria specified under (a) to (d)? Should other criteria be added or should any of the criteria be disregarded?

We agree in general with the criteria specified under (a) to (d). Regarding the requirement for similar underwriting standards" in criterion (a), we believe that it should refer to underwriting standards designed to measure similar types of risks rather than the same underwriting criteria precisely. As an illustration, it could be the case that different rating/scoring models are used (depending on the size of the client in the underwriting process for example in SME transactions). The same would apply to servicing in criterion (b): for instance the servicing measures applied to a borrower of an auto loan who is an individual would differ from the servicing measures applied to a corporate borrower, although the process would remain controlled by the originator (and ultimately be subject to common governance rules)."

Question 3: Are there any impediments or practical implications of the criteria as defined? Are there any important and severe unintended consequences of the application of the criteria?

It is important to have some flexibility in the application of the criteria. Especially it would be important to get clarity on mixed pools falling under the same process in terms of underwriting, recoveries, cash flows and servicing procedures and where underlying risks can be so assessed on the basis of common methodologies and parameters (e.g., pools combining auto loans and consumer loans can be viewed as homogeneous).

Question 4: Do you agree that when considering the relevance of the risk factors, the asset category, type of securitisation (non-ABPC or ABCP), and specific characteristics of the pool of exposures, should be taken into account? Should other elements be considered as important determinants of the relevance of the individual risk factors?

We agree.

Question 5: Do you agree that the same set of criteria should be applied to non-ABCP and ABCP securitisation? Or do you instead consider that additional differentiation should be made between criteria applicable to non-ABCP and ABCP securitisation, and if so, which criteria?

ABCP securitisations are used as a very flexible tool to provide funding to sellers where a market placement via ABS issuance is often not possible: whether assets are too short-term (receivables), do not, or have not yet reached critical mass, exhibit specific features etc.
The ABCP sponsor is generally in a different position from a typical ABS investor as it is able to structure the risk and overcollateralization of the securitised portfolio based on an in-depth analysis and applying his own methodology. For these reasons the sponsor is usually more flexible in incorporating a variety of assets going beyond traditional selection criteria in ABS securitisations.
Should an ABCP transaction not be seen as homogeneous under the proposed EBA rules, there could be a simple - although very expensive - way to comply with this criterion, consisting in separating further the assets of the seller into several sub-portfolios.
For this reason, and to avoid this uneconomic approach for ABCP transactions which are usually of a small size, we advocate a more flexible approach to the definition of homogeneity in ABCP transactions. We propose that in order that ABCP transactions comply with homogeneity requirements, it should be sufficient that underlying exposures fall under a single asset category in accordance with article 1.c and as a result article 1.d would not apply.

Question 6: Do you agree with providing a list of asset categories in the RTS? Do you agree with the asset categories listed? Should other asset categories be included or some categories be merged? For example, should separate asset categories of project finance, object finance, commodities finance, leasing receivables, dealer floor plan finance, corporate trade receivables, retail trade receivables, credit facilities to SMEs and credit facilities to corporates, be included? Please substantiate your reasoning.

Our understanding of the draft RTS is that residential loans secured by mortgages and guaranteed residential loans fall into the same asset category. The FBF supports this rule, as French banks currently include both in their residential loans securitisations and consider that this is not inconvenient for investors. Indeed, both guaranteed loans and mortgage loans are very common practice in France and are underwritten and serviced under common procedures.
Some French banks currently securitise portfolios that comprise credit facilities to natural persons and credit card receivables. Furthermore, in France some exposures can be considered both as credit facilities to natural persons and credit card receivables as well. Hence we suggest merging these two asset categories.
We believe that dealer floorplan finance should be added to the list as a separate asset category.

Question 7: Do you agree with the definitions of the asset categories provided? For example, do you consider that the asset category of credit facilities to SMEs and corporates should be further specified and for the SMEs should refer to the definition provided in the Commission Recommendation 2003/361/EC, or should other reference be used (for example to Art. 501 of the CRR)? Please substantiate your reasoning.

We believe that the description of auto loans and leases as being secured by automobile vehicles" is not correct. In auto finance securitisations, security will generally only be taken over payment streams related to the vehicles rather than the vehicles themselves. In addition, auto loan securitisations can include loans financing different types of vehicles such as motorcycles, light trucks and vans (all being granted by the seller under common procedures).
As regards SME, we believe that a specific definition is not necessary. The asset category is broad enough to include loans to all enterprises and corporates, including micro, small and medium sized enterprises and corporates."

Question 8: Do you agree with the approach to determination of the homogeneity based on the risk factors, and the distinction between the concept of risk factors to be considered for each asset category, and relevant risk factors to be applied for a particular pool of underlying exposures, as proposed? Are there any impediments or practical implications of the risk factors as defined? Are there any important and severe unintended consequences of the application of the risk factors?

We agree in general with the approach. We believe that there should be more guidance on how to determine the relevance of risk factors. In addition we think that the term “risk factor” is not appropriate and that another term should be used such as “relevant homogeneity factor”.

Question 9: Do you agree with the distribution of the risk factors that need to be considered for each asset category, as proposed? What other risk factors should be included for consideration for which asset category?

There should be some flexibility in the analysis of applicable risk factors in order not to unduly limit the diversification of the pools (in particular for ABCP transactions or mixed pools, as mentioned above).
Besides, there is a typing error (“typo”) in the draft RTS under Article 3 (1) for points (e), (f) and (g). It should be:
e) for the asset category referred to in point (e) of Article 2, the risk factors referred to in points (a), (c), (d), (g), (i) and (j) of paragraph 2;
f) for the asset category referred to in point (f) of Article 2, the risk factors as defined in points (a), (i) and (j) of paragraph 2;
g) for the asset category referred to in point (g) of Article 2, the risk factors as referred to in point (h) of paragraph 2;

Question 10: Do you agree with the definition of the risk factor related to the governing law, which refers to the governing law for the contractual arrangements with respect to the origination and transfer to SSPE of the underlying exposures, and with respect to the realisation and enforcement of the credit claims? Do you consider the risk factor of the governing law should be further specified, or further limited (e.g. to the realisation and enforcement of the financial collateral arrangements securing the repayment of the credit claims)?

We do not believe that governing law is a relevant risk factor to be considered in addition to jurisdiction. As an example, French auto loan pools could be governed by consumer law or commercial law depending on the type of obligor. However, a pool of French auto loans should be seen as homogeneous on the basis that they have been originated in France.

Question 11: Do you consider prepayment characteristics as a relevant risk factor for determining the homogeneity? If yes, based on which concrete aspect of the prepayment characteristics of the underlying exposures should the distinction be made, and for which asset categories this risk factor should be considered and should be most relevant?

French banks consider that prepayment characteristics are not relevant and should be left out of the RTS.

Question 12: Do you consider seniority on the liquidation of the property or collateral a relevant risk factor for determining the homogeneity? If yes, do you consider the distinction between the credit claims with higher ranking liens on the property or collateral, and credit claims with no higher ranking liens on a different property or different collateral, as appropriate for the purpose of determination of homogeneity?

In our opinion, the seniority of collateral is not a relevant risk factor for securitisations of performing loans, because it has no impact on the cash flow characteristics of performing loans. We would recommend not including it in the RTS.

Question 13: Do you agree with the approach to determining the homogeneity for the underlying exposures that all do not fall under any of the asset categories specified in the Article 3?

No comment at this point.

Question 14: Do you believe that materiality thresholds should be introduced with respect to the risk factors i.e. that it should be possible to consider as homogeneous also those pools which, while fully compliant with requirements under Article 1 (a), (b) and (c), are composed to a significant percentage (e.g. min 95% of the nominal value of the underlying exposures at origination), by underlying exposures which share the relevant risk factors (e.g. by 95% of general residential mortgages with properties located in one jurisdiction and 5% of income producing residential mortgages located in that and other jurisdictions)? Please provide the reasoning for possible introduction of such materiality thresholds.

We strongly support the proposal of materiality thresholds because it would help avoiding the unwanted situation where a securitisation loses its STS label because a few loans that do not respect the homogeneity criteria have unintentionally been included in the securitised portfolio.

Question 15: Alternatively, do you see merit in introducing synergies with IRB modelling, enabling the IRB banks to rely on risk management factors validated for modelling purposes, when assessing the similarity of the underwriting standards, or assessing relevant risk factors? Please provide the reasoning and examples for possible introduction of such synergies.

We do not support the idea of introducing synergies with IRB modelling. We would be prefer that IRB modelling and securitisation structuring remain independent of each other. We are afraid the proposed synergies with IRB modelling could generate counterproductive constraints and risks of misinterpretation.

Question 16: Which option from the two (the existing proposal as described in this consultation paper, and the alternative option as described in this box) is considered more appropriate and provides more clarity and certainty on the determination of homogeneity? Please substantiate your reasoning.

We prefer the existing proposal as described in this consultation paper, because it is clearer and provides more certainty on the determination of homogeneity. We do not recommend implementing the alternative option.

Question 18: Alternatively, do you believe that a hybrid option, combining the existing proposal and the alternative proposal, would be most appropriate? The hybrid option could envisage that all the risk factors would need to be taken into account in the underwriting, and for those risk factors that are not taken into account in the underwriting, (i) either adequate justification would need to be provided that it is not required for the purpose of the homogeneity, (ii) or if the justification cannot be provided, the risk factor would still need to be taken into account when determining the exposures in the pool (on the top of the requirements related to underwriting, servicing, and asset category). Or, should other hybrid option be envisaged? Please substantiate your reasoning.

Cf. answer to question 16

Question 19: What are the advantages, disadvantages and unintended consequences of this alternative option, in particular compared to the existing proposal?

Cf. answer to question 16

Question 20: Are there any impediments or practical implications of this alternative option as defined? Are there any important and severe unintended consequences of the application of this option?

Cf. answer to question 16

Name of organisation

French Banking Federation