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Verband der Automobilindustrie e.V. (VDA)

In general, we agree with the overall interpretation of the criteria. They provide a sufficient level of clarification.

Nevertheless, we would like to express our concern regarding the disclosure of the legal opinion. According to paragraph 13 of the draft guidelines, the legal opinion should be accessible and made available to third parties. This is particularly problematic for law firms issuing such legal opinions since they would be obliged to distribute the opinion to any third party independent of the fact whether the party has a legitimate interest in the legal opinion or not. As such an obligation may result in unforeseeable liability risks for which no insurance cover would be available law firms could be forced to abstain from supporting the securitisation processes.

However, legal counsel is of vital importance for a smooth and successful handling of securitisation transactions. A shortage of legal counsel because of the proposed distribution requirement would be an additional burden for the market participants of the European securitisation market.

That is why we propose to restrict the scope of legitimate recipients and to limit the access to the legal opinion on a non-reliance basis to third party certification agents and competent authorities supervising STS certifications.
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From the Captives’ perspective, the interpretation which techniques of portfolio management are allowed should be further extended in order to maintain current practices. Paragraph 18.c. of the draft guidelines only allows investing the proceeds from the underlying exposures into additional exposures during a “ramp-up” period.

However, almost all Captives have warehouse programs in which exposures are sold several times per year. The volume of such warehouse programs can be increased or decreased on an ongoing basis. Additionally the collection proceeds of such underlying exposures are used to refinance the purchase of further exposures during the revolving period in order to keep the transaction volume stable (“top-ups”) or increasing (“tap-ups”). It is furthermore market standard to transfer such exposures into public term transactions. Such market practice which has proven to be stable and successful in the past would not be covered by paragraph 18.c. This is however of utmost importance, especially for German Captives and leasing companies, given the legal interpretation of the German insolvency regulation (Insolvenzverordnung), which only allows the sale on a without-recourse basis of leasing exposures in a very limited period of time after origination of such exposures.

Against this background we propose to amend lit. c. as follows:

c. use of “ramp up” periods in SSPE built as a warehouse program
- following the initial transfer of the underlying assets to the SSPE during which the proceeds from the underlying asstes are reinvested into additional assets,
- or to replace underlying assets of which the SSPE has sold or terminated in accordance with the terms and conditions of ther governing contractual framework by additional assets that meets the same predefined eligibility criteria,
to line up the value of the underlying exposures with the value of the securitization obligations, that may be increased or decreasd, depending the funding intended to be raised through such SSPE;

Additionally, for consistency with criteria 20(13) where repurchase of residual values is contemplated to protect the SPV against any residual value risk, there is a need to complete the definition by an additional lit. e.:

e. repurchase of residual value, in a view to mitigate residual value risk, as contemplated in Article 20(13);

Additionally, for enabling the servicer to carry over its regular business activities , it will be necessary to let him treat its clients on an equivalent basis – shoul the related receivables be securitized or not – notably letting him renegotiate some terms of the contracts in line with its usual credit and collection policy. In some ABS transactions, these renegotiations are permitted as long as they do not have a material impact for the SSPE when in other ABS transactions, this leads to a repurchase obligation by the seller. Against this background we propose to insert an additional lit. f into paragraph 18. as follows:

f. renegotiating of the Terms and conditions of underlying receivables by the servicer in line with its credit and Collection policies should not be ssen as active Management Portfolio, with or without the repurchase of such receivables from the SSPE, as Long as this does not have a material negative impact on the credit Profile of the securitized Portfolio of the SSPE;

Additionally, any prohibition of the current practice would also be problematic at the individual transaction level since this would make a clean-up call impossible. To clarify that a sale of exposures in exercise of a clean-up call option is not portfolio management, although such sale is not described in paragraph 18 we propose to supplement paragraph 19 as follows:

a. sale of underlying exposure(s) for reason other than those described in the paragraph 18 or in exercise of a clean-up call option as contemplated in Article 244 (3) (g) of Regulation (EU) No 575/2013;

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Exposures with higher final instalments (so-called balloon loans) as well as residual values both have defined payment streams and should therefore be included in paragraph 24 for clarification purposes as follows:

For the purposes of Article 20(8) of Regulation (EU) 2017/2402, exposures payable in a single instalment in the case of revolving securitisation, as referred to in Article 20(12) of Regulation (EU) 2017/2402, exposures related to credit cards facilities, exposures with higher final instalments (“balloon-payments”), residual values and exposures with instalments consisting of interests only (including interest only mortgages) should also be considered to have defined payment streams relating to rental, principal, interest, or related to any other right to receive income from assets warranting such payments.

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We would like to comment on paragraphs 28. and 29. of the draft guidelines which require the disclosure of changes in the underwriting standards. From our perspective, such a disclosure is not compatible with competition and anti-trust laws as the required information are confidential. Furthermore, it also breaches the provisions of the General Data Protection Regulation (GDPR) (EU) 2016/679 since it requires disclosing personal data. Also, the benefit for investors is questionable.

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In general, we agree with the interpretation of this criterion. Nonetheless, we would like to point out that paragraph 39. leads to conflicts with the General Data Protection Regulation (GDPR) (EU) 2016/679 since it requires the disclosure of personal data. Also, the benefit for investors is questionable.

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For reasons of legal certainty it might be useful to further define the term “similar exposures”. However, we do not consider it helpful to provide an alternative interpretation by referencing the eligibility criteria. Such interpretation would unnecessarily restrict the scope and go beyond the intent and purpose of Article 20 (10).

The purpose of Article 20 (10) is to ensure that the underwriting standards for the securitised portfolio at the time of origination are no less stringent than those for similar exposures which will not be securitised. On the other hand, the eligibility criteria are tailored for selecting the portfolio to be securitised and are not applied at the time of origination, though. Hence, both standards could differ. Taking into account that the similar exposures will not at all be securitised there is simply no need to extend the benchmark for assessing them to the eligibility criteria.

We rather propose to interpret the “similar exposures” in a way that the assets have been originated due to comparable, but not identical criteria. This could for instance be fulfilled if the assets fall under the same classification of the “risk factors” for homogeneity as proposed and discussed under EBA´s respective consultation paper.

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We strongly oppose the interpretation of dependence in paragraph 53.a. During the legislative process, there has been a comprehensive discussion on this issue. Eventually, the previously envisaged term “substantially” was replaced by the term “predominantly” in order to clearly indicate that a majority is meant. Normally, a majority is more than 50 %, but not 30 %.

We would also like to comment on paragraph 55: In automotive finance it is most common that the customer pays affordable monthly instalments but does not repay the full credit amount, thus leaving a balance due at maturity. At the end of the term the customer has a choice between refinancing, paying the outstanding amount or returning the car to the lender. A third option would be to return the vehicle to the lender and being released from the final payment, provided they have paid at least half the total price. If the actual value of the returned vehicle is lower than the final payment there is a shortfall. The risk of this shortfall is the so called “residual value risk”.

Residual values can be backed by repurchase obligations by either the originator, the car dealer or the car manufacturer. In such cases the risk that the sales price of the asset is less than the calculated value of the asset, the so-called residual value risk, will be fully borne by the party that has assumed the repurchase obligation or residual guarantee. The repurchase obligation can either be on the cars securing the underlying exposures or the receivables. In order to clarify this point, we propose to begin paragraph 55 by an additional sentence such as:

The exemption referred to in the second subparagraph of Article 20(13) of Regulation (EU) 2017/2402 is provided in case of a repurchase Obligation of either the assets securing the underlying exposure or the underlying exposures themselves.

It was the explicit political consensus that such Auto-ABS with residual values and repurchase agreements should be STS-eligible. Therefore, a second paragraph was introduced in Art. 20 (13), clearly stipulating that such repurchase obligations are not dependent on the sale of assets securing the underlying exposures.

However, paragraph 55 of the draft guidelines stipulates that the exemption of a repurchase obligation is only valid if the third party repurchasing the cars or the receivables or guaranteeing the residual values has a credit quality equivalent to A-level at inception of the transaction, and to BBB-level during the life of the transaction, threatening the STS status in case of a downgrade of such transaction. This would have the consequence that a securitisation could cease to be STS if the guarantor is downgraded. If this happened, it would have to be de-notified as STS, and investors who had relied upon STS for capital benefits would lose them prospectively. This is also be noted that some dealers, some car manufacturers or Captives have not such required credit quality at inception and the transaction, and such criteria will restrict them to securitize residual values when their proper securitisation have correctly performed during the crisis.

We therefore strongly argue that paragraph 55 should be deleted. There is no need to further clarify – or indeed restrict – the exemption of provided in the second subparagraph of Article 20 (13).

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We propose to supplement paragraph 62 in a way that takes into account that LIBOR and EURIBOR are expiring benchmarks and that the reference interests, which will replace them in future, are not to be considered as complex formulae.

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The introduction of a mandatory sequential redemption in Article 21(4) of Regulation (EU) 2017/2402 has led to some uncertainty about what the requirements of such sequential redemption would be. In practice transactions often provide for different waterfalls for going concern scenarios compared to enforcement scenarios. The main difference usually is the ranking of interest coupons on junior notes as shown in the below picture. Whilst, as shown in option 1, in a going concern scenario a non-sequential payment waterfall applies with interest on junior notes ranks ahead of principal on senior notes, in enforcement scenario option 2 would apply in which there would be a sequential payment waterfall in which interest payments on junior notes are subordinated to principal on senior notes. This is mainly to comply with the requirement of Article 77 (2) of Guideline (EU) 2015/510 of the European Central Bank. Against such background market participants are uncertain whether a sequential redemption as required by Article 21(4) of Regulation (EU) 2017/2402 would also require a certain order of priority. Therefore, it would be helpful if EBA in its Guidelines could elaborate on its understanding of the requirements for a sequential redemption also.

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In general, we agree with the interpretation of this criterion. Nonetheless, we would like to point out that paragraph 76. leads to conflicts with the General Data Protection Regulation (GDPR) (EU) 2016/679 since it requires to disclose personal data. Also, the benefit for investors is questionable.

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We largely agree with the proposed approach. However, we fear that paragraph 78.b. would entail an additional requirement for specifically leasing companies which conduct the servicing within the transactions. Paragraph 78.b. defines that the proof of „well documented and adequate policies and risk management controls“ as well as the other requirements mentioned in this paragraph should be substantiated by a third-party review.

Such proof would require the third party to have an insight view into the leasing companies’ processes. This, however, is strictly confidential. Furthermore, such a disclosure is would breach the provisions of data protection within the European Union. Whilst we do not consider this approach to be unreasonably as such, we would, for the sake of legal certainty, ask EBA to precisely determine the circle of possible third parties as well as the format of substantiation for conducting the required proof. Otherwise the leasing companies would have no clarity on who and how their expertise is being checked.

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Yes, we largely agree with the interpretation of this criterion. However, in a number of European civil law jurisdictions there are already specific statutory concepts for creditor resolutions which should prevail and would be expected by investors to apply and which should not be confused with discretionary contractual arrangements investors may not expect.

Hence we would like to ask EBA for supplementing paragraph 80 as follows:

For the purposes of Article 21(10) of Regulation (EU) 2017/2402 provisions of the transaction documentation that “facilitate the timely resolution of conflicts between different classes of investors”, should include provisions with respect to all of the following:
a. the method for calling meetings or arranging conference calls;
b. the required quorum
c. the minimum threshold of votes to validate such a decision, with clear differentiation between the minimum thresholds for each type of decision,
d. where applicable, a location for the meetings which should be in the Union;
e. the maximum period from the time where conflicts between different classes of investors occur and the resolution of such conflicts by means of holding a meeting or conference call,
unless the statutory law governing the transaction documents already provides for rules and procedures for creditor resolutions.

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We do not oppose the verification as such. However, we are concerned about the present interpretation as included in paragraph 85 and 86.

According to paragraph 85b. the representative sample should include the verification, applying a confidence level of at least 95 %, that the data disclosed to investors in any formal offering document in respect of the underlying exposures is accurate. We fear that a confidence level of at least 95 % cannot be guaranteed in case of large volume securitization transactions. There is an incalculable risk of increase in time and costs.

In addition, we fear that the present interpretation as included in paragraph 86 would lead to severe difficulties with regard to the process of verification.

Paragraph 86 would extend the scope of Article 22 (2) by an obligation that the offering circular should include a confirmation of the external verification of the underlying exposures. This verification will be conducted by an auditor. Hence, the obligation would entail that the originator would have to disclose the Agreed-Upon-Procedures (AUP) of the auditor in the offering circular to third parties.

The AUP´s are the core of the relationship between originator and auditor, though. As such they are confidential and any disclosure is subject to data protection provisions. As a result we are of the view that it will become very difficult – if not impossible – to obtain the necessary consent for disclosure from the responsible auditor and suggest to delete the proposed interpretation from the Guidelines.

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Pursuant to paragraph 88. the originator should be deemed to bear the full responsibility for the submission of the information deriving from a cash flow model which is developed by third parties.

Indeed, it is common practice that the originator buys a cash flow model from the arranger or uses other service providers to develop and provide a cash flow model. However, the arranger/other service provider in its own responsibility and without any participation of the originator (other than providing required data/assumptions) develops, calculates and prepares the cash flow model. Whilst we do not oppose to bear responsibility for the transaction itself (including the provided data/assumptions) we are of the view that the responsibility for a service which is being conducted by a third party and which is clearly communicated to the investor should stay with the third party.

Additionally, we would like to express that we do not consider the wording of Article 22 (3) to cover the present interpretation as it only speaks of the obligation for the originator to “make available” the cash flow model, but does not touch upon any distribution of responsibilities.
As a result we propose to amend paragraph 88 in a way that the responsibility for the cash flow model stays with the arranger/other service provider who developed the same.

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Ricarda Leffler
+49 30 897 842 263