EU simple, transparent, and standardised (STS) securitisations may be recognised as STS for the purposes of the UK Securitisation Regulation if they are designated as STS under the EU Securitisation Regulation regime before the end of 2022. A draft UK statutory instrument proposes to extend that recognition for an additional two years.
The EU Securitisation Regulation (Regulation (EU) 2017/2402, as amended) introduced a framework for STS securitisations. This is broadly aligned with the Basel/IOSCO simple, transparent and comparable (STC) criteria. A securitisation which meets the relevant STS criteria (and in some cases, other criteria) can benefit from preferential regulatory treatment, including lower regulatory capital charges with respect to the related exposures for bank investors under the Capital Requirements Regulation and for insurance and reinsurance undertakings under Solvency II, and eligibility for certain exposures in specified asset classes as Level 2B high quality liquid assets under the liquidity coverage ratio (LCR) for banks.
Following the end of the Brexit transition period on 31 December 2020, the EU Securitisation Regulation was adopted as part of UK law, in the form that applied at that time, and was then amended by way of UK regulations to ensure that it would operate effectively in the United Kingdom (as so amended, the UK Securitisation Regulation).
Some of those amendments related to the STS regime as it would apply in the United Kingdom. Under the EU Securitisation Regulation, the originator, sponsor and securitisation special purpose entity (SSPE) must be established in the European Union. However, under the UK regime, in the case of a securitisation which is not an asset-backed commercial paper (ABCP) programme or transaction, only the originator and sponsor need to be established in the United Kingdom for such securitisation to be capable of being STS. In the case of an ABCP programme or transaction, only the programme sponsor needs to be established in the United Kingdom in order for such ABCP programme or transaction to be capable of being STS.
In addition to this flexibility, some further changes were made in order to allow securitisations which were designated as STS under the EU Securitisation Regulation before the end of the Brexit transition period, or before the end of the two-year period ending on 31 December 2022, to be recognised as STS under the UK Securitisation Regulation. This allows securitisations with EU-based originators or sponsors, or in the case of ABCP securitisations, EU-based sponsors, that are designated as STS under the EU Securitisation Regulation before the end of 2022 to be recognised as STS for UK purposes for the lifetime of those securitisations.
There are currently no reciprocal arrangements under the EU Securitisation Regulation regime for recognition of UK STS securitisations.
The draft Financial Services (Miscellaneous Amendments) (EU Exit) Regulations 2022, published on 5 July 2022, includes (among other things) a proposal to extend this temporary recognition of EU STS securitisations by two years, to the end of 2024.
It is expected that this will help bridge the gap until an STS equivalence regime can be put in place under the UK Securitisation Regulation. The intention to develop an STS equivalence regime was indicated in the report and response by HM Treasury (the HM Treasury Report), which was published in December 2021 following the call for evidence with respect to the review of the UK Securitisation Regulation published in June 2021.
The plan is to develop a framework for recognising overseas STS securitisations (which may have non-UK-based originators and/or sponsors) to allow UK investors to obtain the same regulatory capital treatment. The HM Treasury Report stated that “introducing an STS equivalence regime could help promote the development of robust securitisation frameworks internationally, thereby encouraging STS securitisations as an important element of open, well-regulated, and well-functioning markets globally.” It expressed the view that this “could help provide UK investors with more choice and, if it leads to overseas recognition of UK STS securitisations, it may provide UK securitisation manufacturers with greater demand and greater liquidity for their securitisations.”
The Financial Services and Markets Bill, which is currently making its way through the UK Houses of Parliament, includes provisions to amend the UK Securitisation Regulation to allow HM Treasury to make regulations to designate a country or territory as equivalent in its law and practice with respect to STS securitisations. It is expected that an equivalence assessment would be made in relation to the EU STS regime. HM Treasury may specify due diligence requirements with respect to STS equivalent non-UK securitisations. The Bill also includes amendments to the UK versions of the Capital Requirements Regulation, Solvency II and the Money Market Funds Regulation with respect to STS equivalent non-UK securitisations.
While the EU and UK STS regimes are currently very similar, the EU Securitisation Regulation was amended in April 2021 and now includes an STS framework for on balance sheet synthetic securitisations. While the HM Treasury Report states that HM Treasury and the regulators would welcome further evidence as to how this could be beneficial, they are not currently intending to expand the UK STS framework to include synthetic transactions. They also do not intend to amend the requirements of the UK STS framework that currently exclude CMBS (commercial mortgage-backed securitisations) and managed CLOs (collateralised loan obligations) from STS treatment.
The extension of the temporary recognition of EU STS for UK purposes will no doubt be welcomed by market participants. Given the ongoing review of the EU Securitisation Regulation and the UK Securitisation Regulation, it will be important to monitor any further developments closely.
If you have any questions or would like more information on the issues discussed in this LawFlash, please contact the authors, Merryn Craske and Elif Eke, or any of the following Morgan Lewis lawyers:
Chicago
Patrick J. Lampe
Philip W. Russell
Jeffrey D. Weinstein
London
Julian Goodman
Theresa Kradjian
New York
Reed D. Auerbach
Steven H. Becker
Harlyn Bohensky
Matthew P. Joseph
Keith L. Krasney
Steve Levitan
Edmond Seferi
Washington, DC
Asa J. Herald
Cory E. Barry
Jeffrey R. Johnson
Mark R. Riccardi
Paul R. St. Lawrence
Charles A. Sweet
Alex Velinsky