The IDSA welcomes the opportunity to comment on these draft Regulatory Technical Standards (“RTS”). As an amendment to the existing risk retention regulation (Commission Delegated Regulation (EU) No 625/2014), we are of the opinion that the RTS is broadly acceptable. We believe that it is important for the IDSA to contribute its views to the revised regulatory framework for the securitisation market in Europe to help ensure that there are no unintended consequences that could hamper the operation of this market.
However, there are some areas where the IDSA has some concerns; the main areas of concern relate to guidance around Article 12(3) of the draft RTS and the possibility of adverse selection and some of the definitions in relation to performance and intent in Article 16 of the draft RTS. The IDSA welcomes the opportunity to comment on these points, in the sections below.
We would like to make a comment in relation to Article 2 of the draft RTS in relation to when an entity shall be “exposed” to the credit risk of a securitisation. This terminology is broadly unchanged from the existing RTS and sets out guidance on when an entity shall be deemed to be exposed to a securitisation. While there are still some references to a party being exposed to a securitisation the STS Regulation has generally moved away from this “exposed to” test and places requirements on “holders of a securitisation position”'. Due to the use of different terminology between the draft RTS and the STS Regulation we would welcome guidance on when an entity could be deemed to be a “holder of a securitisation position.”
An additional comment we would like to make is in relation to Article 3(6) of the draft RTS which specifies when “an entity shall be deemed not to have been established or to operate for the sole purpose of securitising exposures and, therefore, may constitute an originator”. The Article sets out the relevant conditions that need to apply at the closing of the securitisation, including that the entity has a business strategy consistent with a broader business enterprise. We would welcome more clarification on what is the intended meaning of “business strategy” and how an originator can demonstrate a “broader business enterprise”. There is a concern that the vagueness of these terms, in the absence of further clarification, will make it very difficult to determine with any level of certainty that the conditions have been met.
The IDSA believes that the technical standards, covering the disclosure-related provisions relevant to risk retention, as proposed by the ESMA Consultation on Disclosure Requirements, Operational Standards, and Access Conditions (ESMA33-128-107) is sufficient to satisfy the obligations set out in Article 7(3) of the STS Regulation.
The IDSA would welcome further clarification and guidance on some of the provisions in relation to the operation of Article 12(3) of the draft RTS especially in relation to the issue of a default by the retainer and the operation of Article 17.
Article 12(3) of the draft RTS states that the retainer may use any retained exposures or securitisation positions as collateral for secured funding purposes, as long as such use does not transfer the credit risk of these retained exposures or securitisation positions to a third party.
Typically, when a retainer uses these exposures or positions as collateral in a repo/stock lending or secured funding, the transaction is based on the concept of dual recourse. In the event of a default the repo counterparty/lender has recourse, in the first instance, to the retainer and in the event that the retainer has insufficient funds to repay the outstanding debt, which is likely in the event of a retainer insolvency, then the repo counterparty/lender (typically through an enforcement event) sells the collateral at market value to discharge the financial obligation. Effectively the lender is ultimately dependent on the credit risk of the collateral. There is a concern that the wording of Article 12(3) of the draft RTS, by stating that the credit risk of the collateral may not be transferred to a third party, effectively prevents a retainer from entering into precisely the type of repo/stock lending or secured funding transaction the RTS intends to permit.
Article 17 of the technical standard states that if the retainer “is unable to continue acting as retainer, the remaining retained material net economic interest shall, instead, be retained by another entity which, had the securitisation been closed as of the date when such entity becomes the retainer, would have satisfied all relevant conditions for constituting the retainer (except, where relevant, for any requirement for the relevant entity to have established the ABCP programme or other securitisation).”
There is a concern that this wording implies that the retainer can only enter a secured funding transaction, using retained exposures or securitisation positions as collateral, with an entity that could assume the role of the retainer, under Article 17, in the circumstances of an enforcement event.
We would welcome further guidance and clarification on this issue. In particular, whether it is intended to be possible for a retainer to enter into a secured funding transaction in compliance with both Article 12(3) and Article 17, where it uses retained exposures or securitisation positions as collateral. If so, is it the case that a retainer can only enter into a secured funding transaction, using retained exposures or securitisation positions as collateral, with an entity that could assume the role of retainer? Or can it be deemed sufficient for the retainer, entering such a funding transaction, to be deemed to be in compliance with the RTS up until the point of any enforcement of collateral, at which point the retained exposures or securitisation positions would need to be transferred to an entity that could assume the role of retainer in order for the securitisation to remain compliant with the STS Regulation?
The IDSA would welcome further clarification and guidance on some of provisions and definitions in relation to the operation of Article 16 of the draft RTS and the possibility of adverse selection.
Article 16 allows for the possibility of adverse selection in the transfer of assets to the SSPE, “provided that the higher credit risk profile of the assets transferred to the SSPE is clearly and conspicuously communicated in writing to the competent authorities, investors and potential investors prior to the investment being made.” This is a positive inclusion as it allows flexibility in selecting assets to be transferred to the SSPE, as long as it is accompanied by the prescribed full disclosure to investors.
However, we have a concern that the helpful wording contained in Article 16 of the draft RTS could, in practice, be rendered ineffective by a strict interpretation of Article 6(2) of the STS Regulation which states that “Where the competent authority finds evidence suggesting contravention of that prohibition, the competent authority shall investigate the performance of assets transferred to the SSPE and comparable assets held on the balance sheet of the originator. If the performance of the transferred assets is significantly lower than that of the comparable assets held on the balance sheet of the originator as a consequence of the intent of the originator, the competent authority shall impose a sanction pursuant to Articles 32 and 33.”
The concern arises as there is no precise definition of what constitutes a significantly lower performance or how to determine the intent of the originator. Depending on the granularity of the portfolio, the poor performance of a significant obligor, a single unique event, could result in the difference in performance of the assets on the balance sheet compared to the assets transferred to the SSPE and would in no way be a consequence of adverse selection.
Transparency is a prerequisite for all STS transactions and the disclosure of a transparent underlying structure, granular details of the collateral pool along with a clear and “conspicuously communicated in writing to the competent authorities, investors and potential investors prior to the investment being made” regarding “the higher credit risk profile of the assets transferred to the SSPE” are all mitigants and should protect against any adverse selection performance issues.
Another mitigant to be considered is when the originator can show that it has established and applied credit management policies and procedures to ensure that the securitised assets are managed in a similar manner to assets held on the balance sheet of the originator.
The IDSA would welcome clarification on the meaning of “significantly lower performance” to avoid any possible issues when performing an adverse assessment. It is our view that the determination of a poor performance of assets should be considered within the context of the originator's full disclosure of the adverse selection and its consistency in the application of credit management policies and procedures between securitised assets and held on the balance sheet of the originator. The IDSA believes that an originator that applies both of these mitigants is demonstrating a positive intent to ensure a similar performance between securitised assets and assets held on the balance sheet and should therefore not be subject to any sanctions.