Synthetic securitisations

Risk sharing (synthetic securitisation) transactions not only attracted new market entrants in 2021, but also saw an increase in deal volume as well as more innovative deal structures. This trend looks set to continue in 2022, as banks seek to alleviate ever higher capital requirements.

From a regulatory standpoint, a number of developments are in the pipeline for 2022, some of which began in 2021. In the UK, the end of 2021 saw the publication of HM Treasury’s report on the Review of the Securitisation Regulation. It remains to be seen what will follow in the way of concrete proposals and how far the EU and UK regulatory regimes will diverge (although HMT seems to be broadly happy with the current regime, which was inherited from the EU).

Simple Transparent and Standardised (STS) label

In the EU, we anticipate further uptake of the STS label, which was introduced to balance sheet synthetic securitisations from April 2021 as part of the COVID-19 recovery package and which allows the senior tranches retained by the originator of an STS-compliant synthetic securitisation to benefit from lower regulatory capital treatment.

The EBA is currently consulting on the additional “backward-looking” and “forward-looking” performance-related triggers to be included in the STS requirements for balance sheet synthetic securitisations which feature non-sequential amortisation. The triggers proposed by the EBA appear to be slightly different from any of the triggers it suggests for achieving “significant risk transfer” (SRT) and so these triggers would be additional requirements for achieving STS status. The consultation is due to conclude on 28 February 2022.

In the UK, the timing of the extension of the STS label to balance-sheet securitisations means that it was not automatically incorporated into the onshored Securitisation Regulation.

Although the implementation of an STS regime for UK balance synthetic securitisations was being considered as part of the review of the UK securitisation regime, HM Treasury’s report suggests that it has little appetite to do so. It appears that UK banks will be disadvantaged in this respect.

Notification, disclosure requirements and jurisdictional scope

The ECB consulted on its draft guide and template for the notification of securitisation transactions in November 2021. The consultation raised some new notification processes that could be burdensome if implemented.

Further, following the European Commission’s targeted consultation on the functioning of the EU securitisation framework in 2021, its report is expected to be published this year. This should include further consideration of the definition, scope and disclosure requirements for “private securitisations” (versus “public securitisations”) and the contentious issue of how the disclosure requirements should apply when an EU investor is investing in a third country securitisation.

In the UK, HMT has said that it will consider changing how public and private securitisations are categorised (they agree that the current distinction based purely on whether a prospectus is required is not always appropriate), and what kinds of disclosure are appropriate for private securitisations. This will need to be carefully developed with industry input and HMT and the regulators will consult on this in due course.

HMT have also indicated that the UK regulators will seek to clarify the due diligence requirements for UK investors in non-UK securitisations “as a priority” and also monitor the impact of any uncertainty arising from jurisdictional scope issues and consider further steps if any issues are impeding the functioning of the market in the future.

Sustainable securitisation framework

We expect to see further issuances of green securitisations (by reference to underlying assets and/or to use of proceeds), but we are also due the development of some regulatory parameters.

In the EU, we are expecting an EBA report on ‘developing a specific sustainable securitisation framework to integrate transparency requirements’ in Q1 2022.

In the UK, HMT has said that it will consult on extending the environmental disclosure requirements (currently only applicable where the underlying exposures are residential mortgages, auto-loans and leases) to a broader range of underlying assets, acknowledging that there needs to be flexibility where the relevant data isn’t standardised or available. On the broader question of establishing a green securitisation framework, HMT acknowledges that it makes sense to delay this until the general UK ESG framework (including the Sustainability Disclosure Requirements (SDR) regime) has been set up first. For similar reasons, it also doesn’t consider it appropriate to give green securitisations beneficial regulatory capital treatment at this stage.

Given the expected differences between the EU and UK taxonomies and SDRs, significant divergence is likely.

Prudential treatment of securitisations

In October 2021, the Commission published its ‘Banking Package’, including proposals for final implementation of Basel III (including the controversial output floor). It also launched a call for advice to the Joint Committee of the ESAs for the purposes of its review of the prudential treatment of securitisations. The ESAs have been given until September 2022 to respond, representing a further slip in the timing of the CMU action plan. Will we see the Commission’s review before the end of the year?

Risk retention

The EBA had proposed draft technical regulatory technical standards on risk retention, the most recent draft of which was published on 30 June 2021. The deadline for submission of the final draft regulatory technical standards by the EBA to the Commission was 10 October 2021. It remains to be seen if there will be further regulatory movement on this front this year. Until then, the existing technical standards for risk retention under Delegated Regulation (EU) No 625/2014 will apply to EU synthetic securitisations.

In the UK, HM Treasury has said that it is of the view that the risk retention framework broadly works as intended and does not intend to change the existing prescribed methods of risk retention for the time being. So the old EU rules, as onshored, still apply (although HMT says that it and the PRA will look at some of the proposals made by the industry and that the PRA intends to prioritise work on the UK’s risk retention technical standards in 2022).

This publication is intended merely to highlight issues and not to be comprehensive, nor to provide legal advice. Should you have any questions on issues reported here or on other areas of law, please contact one of your regular contacts, or contact the editors.