Response to consultation on draft RTS amending Delegated Regulation (EU) 2016 2251 on risk-mitigation techniques for OTC-derivative contracts not cleared by a CCP
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Within European Auto-ABS securitisation fixed-interest customer receivables are sold to the SPV and refinanced by the SPV through the issuance of floating-rate ABS bonds. This creates an interest rate mismatch/risk at the SPV level which is eliminated by the SPV by entering into an interest rate swap (i.e. the derivative).
Within this structure it is common practice that the counterparty of the SPV does not post collateral as long as it has a certain minimum rating of at least “A” which corresponds to credit quality step 2. However, the proposed art. 30a does not link the posting of collateral to such rating, but provides for the counterparty to post collateral without any further preconditions and hence immediately if the swap has a negative market value. This would increase the costs of refinancing as the counterparty would ask the SPV and hence the originator for compensating the costs of the posted collateral.
Against this background we propose to amend art 30a par. 1 lit. (a) as follows:
(a) that variation margin is not posted by the securitisation special purpose entity but that it is collected from its counterparty and returned to its counterparty when due where the rating of its counterparty is or falls below the credit quality step 2 and where the variation margin is not covered by a guarantee of a counterparty of a credit quality step of at least 2 pursuant to Annex III of the commission implementing regulation (EU) 2018/634.”
The current condition mentioned here might not be met in case interpretation is not clarified
1- In some transactions (notably PSA captive ones), the payment (termination payment) to the counterparty in case it is considered as defaulted is junior to noteholders (the mechanism of ‘flip clause’)
2- In some transactions, we have a derivative to cover senior notes and a derivative to cover mezzanine notes. For this last derivative, we either choose to pay the counterparty with a senior position or to pay it after all amounts due on senior swap and senior noteholders have been paid. This will not be a major point to “loose” this last option for future transactions, but this has a small cost. As mezzanine swap counterparty will then be paid senior or pari passu to senior noteholders, then this amount will reduce amounts dedicated currently to senior noteholders, and might request an additional credit enhancement on senior notes to compensate (rather low but no null).
1. With respect to OTC derivatives contracts that are concluded by a securitization special purpose entity in connection with a securitization within the meaning of Regulation (EU) 2017/2402 and meeting the conditions of Article 4(5) of this Regulation (EU) 648/2012, by way of derogation from Article 2(2), where the conditions set out in paragraph 2 of this Article are met, counterparties may provide in their risk management procedures the following:
(a) that variation margin is not posted by the securitisation special purpose entity but that it is collected from its counterparty in cash and returned to its counterparty when due;
(b) that initial margin is not posted or collected.
2. Paragraph 1 applies where all of the following conditions are met:
(a) the counterparty to the OTC derivative concluded with the securitisation special purpose entity in connection with the securitisation ranks at least pari passu with the holders of the most senior securitisation note. This condition applies only where the counterparty to the OTC derivative concluded with the securitisation special purpose entity in connection to the securitisation is neither the defaulting nor the affected party;
(b) the securitisation special purpose entity in connection with the securitisation to which the OTC derivatives contract is associated is subject to a level of credit enhancement of the most senior securitisation note of at least 2 % of the outstanding notes on an ongoing basis;
Question 1: Do stakeholders agree with the amendments for Delegated Regulation (EU) No 2251/2016 suggested in this CP?
„The proposed new art. 30a does not correspond to current market practices and would entail an increase of refinancing costs for STS-securitisations.Within European Auto-ABS securitisation fixed-interest customer receivables are sold to the SPV and refinanced by the SPV through the issuance of floating-rate ABS bonds. This creates an interest rate mismatch/risk at the SPV level which is eliminated by the SPV by entering into an interest rate swap (i.e. the derivative).
Within this structure it is common practice that the counterparty of the SPV does not post collateral as long as it has a certain minimum rating of at least “A” which corresponds to credit quality step 2. However, the proposed art. 30a does not link the posting of collateral to such rating, but provides for the counterparty to post collateral without any further preconditions and hence immediately if the swap has a negative market value. This would increase the costs of refinancing as the counterparty would ask the SPV and hence the originator for compensating the costs of the posted collateral.
Against this background we propose to amend art 30a par. 1 lit. (a) as follows:
(a) that variation margin is not posted by the securitisation special purpose entity but that it is collected from its counterparty and returned to its counterparty when due where the rating of its counterparty is or falls below the credit quality step 2 and where the variation margin is not covered by a guarantee of a counterparty of a credit quality step of at least 2 pursuant to Annex III of the commission implementing regulation (EU) 2018/634.”
The current condition mentioned here might not be met in case interpretation is not clarified
1- In some transactions (notably PSA captive ones), the payment (termination payment) to the counterparty in case it is considered as defaulted is junior to noteholders (the mechanism of ‘flip clause’)
2- In some transactions, we have a derivative to cover senior notes and a derivative to cover mezzanine notes. For this last derivative, we either choose to pay the counterparty with a senior position or to pay it after all amounts due on senior swap and senior noteholders have been paid. This will not be a major point to “loose” this last option for future transactions, but this has a small cost. As mezzanine swap counterparty will then be paid senior or pari passu to senior noteholders, then this amount will reduce amounts dedicated currently to senior noteholders, and might request an additional credit enhancement on senior notes to compensate (rather low but no null).
1. With respect to OTC derivatives contracts that are concluded by a securitization special purpose entity in connection with a securitization within the meaning of Regulation (EU) 2017/2402 and meeting the conditions of Article 4(5) of this Regulation (EU) 648/2012, by way of derogation from Article 2(2), where the conditions set out in paragraph 2 of this Article are met, counterparties may provide in their risk management procedures the following:
(a) that variation margin is not posted by the securitisation special purpose entity but that it is collected from its counterparty in cash and returned to its counterparty when due;
(b) that initial margin is not posted or collected.
2. Paragraph 1 applies where all of the following conditions are met:
(a) the counterparty to the OTC derivative concluded with the securitisation special purpose entity in connection with the securitisation ranks at least pari passu with the holders of the most senior securitisation note. This condition applies only where the counterparty to the OTC derivative concluded with the securitisation special purpose entity in connection to the securitisation is neither the defaulting nor the affected party;
(b) the securitisation special purpose entity in connection with the securitisation to which the OTC derivatives contract is associated is subject to a level of credit enhancement of the most senior securitisation note of at least 2 % of the outstanding notes on an ongoing basis;