The French regulator, the Autorité des Marchés Financiers (the AMF) has recently published a report (the AMF Report) following its inspection, involving a sample group of credit institutions, of certain simple, transparent and standardised (STS) securitisation transactions covering the period between 1 January 2019 and 30 September 2021. The AMF Report noted significant shortcomings in the due diligence process of these institutions, particularly the arrangements relating to the granting, monitoring, and withdrawal of the STS label.
The EU Securitisation Regulation (Regulation (EU) 2017/2402, as amended) includes a framework for securitisations to be designated as STS if they meet certain specified requirements. From the outset, this has applied to so-called “traditional” asset-backed commercial paper (ABCP) transactions and programmes and non-ABCP transactions, but not to synthetic securitisations, which were to be considered at a later date.
As part of the EU Capital Markets Recovery Package, various amendments to the EU Securitisation Regulation came into force in April 2021 (the EU Securitisation Regulation Amendments). The EU Securitisation Regulation Amendments (among other things) added an STS framework for on–balance sheet synthetic securitisations.
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.
The parties may engage an authorised third-party verification agent (TPVA) to ascertain whether a particular securitisation meets the relevant STS criteria, but the use of a TPVA will not affect the liability of the relevant originator, sponsor, or securitisation special purpose entity (SSPE), or the obligations of institutional investors, under the EU Securitisation Regulation.
The originator and sponsor jointly (in the case of a non-ABCP transaction) or the sponsor only (in the case of an ABCP transaction or programme) must notify the European Securities and Markets Authority (ESMA) by way of a specified template indicating that the transaction complies with each of the STS criteria (an STS Notification), and provide a copy of the STS Notification to the relevant national competent authority and to investors. ESMA maintains a register of traditional securitisations and a list of synthetic securitisations in relation to which it has received an STS Notification.
There are currently 244 non-ABCP transactions and 287 ABCP transactions on the ESMA STS register (but no ABCP programmes), and 40 synthetic securitisations on the EMSA STS list.
Following the end of the Brexit transition period on 31 December 2020, the EU Securitisation Regulation, in the form that applied at that time, was adopted as part of UK law, 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), including in relation to the STS regime.
Consequently, there is now a separate securitisation regime in the United Kingdom under the UK Securitisation Regulation and related regulations, which is similar but not identical to the EU regime. Certain STS transactions with UK entities had to be removed from the ESMA lists of STS transactions as they became non-compliant under the EU STS regime as a result of Brexit.
Between November 2021 and February 2022, the AMF investigated a sample group of five credit institutions authorised to provide investment services (referred to as investment service providers (ISPs)) comprising three sponsors of ABCP transactions, an arranger of non-ABCP transactions and an originator of both ABCP and non-ABCP transactions. The relevant transactions were notified as STS during the period between 1 January 2019 and 30 September 2021 and the number of STS transactions for the individual ISPs ranged from two to 101. Synthetic securitisations were excluded from the scope of the inspections. The AMF considered the applicable requirements of the EU Securitisation Regulation, together with other relevant EU and French rules.
The main focus of the inspections was on:
The AMF published the AMF Report on 30 August 2022. The AMF stated that the AMF Report does not constitute a position or a recommendation, but that it may facilitate, or complicate, compliance with the EU Securitisation Regulation.
As a result of its inspections, the AMF identified significant shortcomings in the required due diligence performed by the ISPs in relation to the relevant STS securitisations, and in particular, the arrangements in relation to the granting, monitoring, and withdrawal of the STS label.
The AMF Report provides reminders of the regulatory obligations in respect of securitisations seeking to rely on the STS label and identifies “good” and “poor” practices. The main findings of the AMF Report are summarised below.
Arrangements for determining the STS nature of a transaction and its notification
Following its review of the arrangements for determining the STS nature of a transaction and its notification, the AMF found that some firms lacked specific procedures for designating a transaction as STS, and in other firms, the robustness of the procedures varied. Only one firm had a committee for STS certification and in the other firms the decision on STS designation was taken by the personnel responsible for arranging and structuring the transaction.
The AMF noted that the use of a TPVA is common practice but that a TPVA was not always engaged in private transactions, where a law firm might be engaged to perform a gap analysis, or a comparison might be made with a previous public transaction where a TPVA had been used.
The AMF found that the timing of submission of the STS Notification to ESMA varied between one day and 15 months. Under the EU Securitisation Regulation, the STS Notification must be made available to investors and competent authorities before pricing, with the final documentation being made available to investors at the latest 15 days after closing. According to the Q&As published by the Joint Committee of the European Supervisory Authorities in December 2021, only minor changes should be made after pricing.
Furthermore, although Article 27 of the EU Securitisation Regulation requires originators and sponsors to inform their competent authorities of the STS Notification, the AMF had not always been notified or the notification had been delayed, in some cases significantly. These disparities may have resulted from the lack of procedures in relation to notification.
While the AMF did not confirm whether the transactions complied with all the STS requirements, it did consider whether all the STS criteria had been taken into consideration, and reviewed whether information in relation to certain criteria in the STS Notification was consistent with that in the prospectus (for public transactions) or the legal documentation (for private transactions), and with any TPVA report or any gap analysis. The AMF concluded that the information was consistent but that certain transactions had been designated as STS where they did not have an SSPE.
The AMF Report provides the following examples of good practice, and regulatory reminders, in relation to these issues:
Good practice
Regulatory reminders
Control systems
On the review of the control systems, the AMF made a distinction between the controls implemented before and after an STS Notification. It noted that the implementation of controls before the STS Notification was not systematic. In terms of controls following the STS Notification, it found that they were only partially satisfactory. In both cases, there was no “level two control.”
The AMF Report provides the following examples of good and poor practice, and regulatory reminders, in relation to these issues:
Good practice
Poor practice
Regulatory reminders
Arrangements for monitoring the STS transaction and the withdrawal of the STS label if the transaction no longer meets the requirements
Under Article 27 of the EU Securitisation Regulation, the originator and the sponsor must immediately notify ESMA and their competent authority where a securitisation no longer meets the relevant STS requirements. The AMF found that two of the five ISPs determined that some of their transactions no longer met the STS requirements as a result of Brexit, the absence of an SSPE, or the end of the transaction. Disparities were noted among the ISPs which had arrangements for monitoring and withdrawal of the STS label, and two of the ISPs had no such arrangements.
The AMF Report provides the following examples of good and poor practice, and regulatory reminders, in relation to these issues:
Good practice
Poor practice
Regulatory reminders
The AMF Report identified significant shortcomings in relation to compliance with certain procedural aspects of the EU STS regime. It is difficult to know the extent to which similar issues would be found in other transactions and with respect to other entities. It is also unclear whether a review by other EU or UK regulators would lead to similar observations. However, it is apparent that regulators are taking an increased interest in the compliance of securitisations with the regulatory regime. Market participants may wish to consider the findings of the AMF as they continue to develop their understanding of the STS requirements and their procedures in relation thereto.
At Morgan Lewis, we have experience of advising on STS transactions in a range of asset classes. If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers: