15 May 2017
SECURITISATION
PRESIDENCY NON-PAPER
Re-Securitisation (Article 5r of STS)
In preparation for the final negotiations with the European Parliament (“EP”) and the
European Commission on the STS Package (“STS Regulation and the Amending CRR”), the
Presidency has prepared a non-paper on Article 5r of the proposal for the STS Regulation.
The two issues considered by this Non-Paper relate to the definition of ‘re-securitisation’
and the ban thereon, each of which is discussed in turn below.
A.
Definition of re-securitisation
The alternative definitions of ‘re-securitisation’ being considered under Line 65 are as
follows:
The definition of proposed by Council: securitisation where the risk associated with
an underlying pool of exposures is tranched and at least one of the underlying
exposures is a securitisation position
The definition proposed by the Commission and the EP: securitisation where at least
one of the underlying exposures is a securitisation position
Council text clarifies the situation for ABCP, which should not be considered as re-
securitisation as further explained further below in this Non-Paper. Council text also aims at
aligning the definition with Article 4(1)(63) of the CRR. This definition (amended further as
necessary) would be useful if the EP were to insist on a total ban on re-securitisation as per
Option 1 in Section B below.
The definition of re-securitisation is considered further in section C below, which takes into
account the position reached at technical level to the effect that the proposed Commission
and EP is acceptable provided that, if a ban on re-securitisation is agreed to by Council,
appropriate carve-outs (including the aforementioned ABCP clarification) are included in
Article 5(r) proposed by the EP.
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B.
Ban on re-securitisation
The discussion on the introduction of a ban on re-securitisation was initiated by the EP,
when it proposed the introduction of Article 5r which effectively imposes such a ban, total
and unconditional. In introducing this Article, the EP noted the importance of ensuring that
rules are adopted to better differentiate simple, transparent and standardised products from
complex, opaque and risky instruments. In the explanatory statement of the draft report on
the STS Regulation dated 6 June 2016, it was observed by the EP that re-securitisation
should be banned in order to improve transparency, reduce complexity, promote alignment
of interests and deter threats to financial stability.
The options considered during the course of discussions on this EP proposal are
predominantly three:
1.
Total ban on re-securitisations
A complete ban on re-securitisations, as proposed by the EP. This has been challenged by
Council principally on the basis that it would not be proportionate to the risks presented by
re-securitisations, and that indeed it would disregard the positive uses for re-securitisation
in particular contexts.
2.
No ban on re-securitisations
The revised Basel securitisation framework is considered to have already addressed the
risks associated with re-securitisation by requiring significantly increased risk weights (see
Basel Committee on Banking Supervision, ‘Revisions to the securitisation framework’ (11
December 2014) section F). Indeed, re-securitisations are already subject to a significantly
higher risk floor of 100% and the deterrent effect of such higher regulatory capital charges
is a more appropriate manner to address any concerns in respect of these arrangements
for entities subject to the relevant prudential standards. Given that re-securitisation
transactions currently represent only a minimal portion of the securitisation market and
given also the significantly higher risk-weights to which re-securitisation transactions will be
subject, it is highly unlikely – if not impossible in practice - that the ‘re-securitisation market’
would ever develop to an extent that could potentially be harmful to the securitisation
market as a whole and to its participants or would create any form of systemic risk.
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Further, the broad definition of re-securitisation is likely to create unintended consequences
by including within the ban certain positive uses of re-securitisation. A total ban may also
lead to regulatory arbitrage opportunities that move these products into unregulated space.
A variation to this Option 2 could be to provide for no ban to be put in place at the date of
entry into force of the Regulation, but allowing for the possibility of a ban being introduced
by the Commission, in consultation with the relevant ECAs, which would be mandated to
undertake a review of the European re-securitisation market with the aim of restricting or
prohibiting re-securitisation activity where this is deemed necessary by the results of the
review.
3.
Possibility of banning re-securitisation subject to certain important carve-outs
Since re-securitisations display an inherent opacity which introduces a multi-layer structure
and therefore run contrary to the simplicity and transparency objectives, the banning of
certain re-securitisations would appear plausible, at least superficially. All parties have in
fact already agreed to a ban on re-securitisation within the STS context (following the logic
that re-securitisations should not be afforded the lower risk-weights applicable to STS
transactions). The question is whether re-securitisation in the non-STS context should also
be prohibited.
Even if a ban on re-securitisation in the non-STS context were to be agreed to by Council,
this should not be a complete ban of all re-securitisations, and article 5(r) should include
clear carve-outs from the applicability of any such ban. It should be noted, however, that
this would nonetheless not represent an ideal solution given the risk of such carve-out not
adequately addressing the unintended or unforeseen consequences of an outright ban:
Council cannot guarantee that it has provided carve-outs that will cover all instances where
re-securitisation transactions may be necessary in the future.
Accordingly, a form of review
clause could be provided for, pursuant to which the Commission could, in consultation with
the relevant ECAs, be mandated to undertake a review of the European re-securitisation
market within a specified period from the date of entry into force of the Regulation and
thereafter as may be considered necessary by the Commission from time to time, with the
aim of considering whether the list in article 5(r) merits amendment.
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As already indicated above, in certain circumstances, the use of re-securitisations may be
perfectly legitimate. Indeed, in certain cases, re-securitisations may prove necessary to
ensure the preservation of the interests of the investors, such as where a restructuring is
deemed necessary in cases where the underlying exposures are non-performing. The
European Central Bank, in its report “Guidance to banks on non-performing loans” of March
20171 noted that “it is acknowledged that NPL risk transfer and securitisation transactions
can be beneficial for banks in terms of funding, liquidity management, specialisation and
efficiency.” It may not be excluded that some securitisations of non-performing loans (NPLs)
will have to be restructured, and in such cases, re-securitisation could clearly be a way
forward. One important qualification in this respect is that a securitisation that is being
repackaged (into a securitisation) should not itself include (re-) securitisations in its
underlying exposures. Naturally, defining what constitutes a ‘re-structuring’, and
determining exactly what types of re-structuring should or should not be permissible, could
prove to be problematic.
In light of the impossibility of streamlining, across all member states, the situations in which
re-securitisations ought to be considered legitimate (and should therefore not be captured
by the proposed ban), the competent authority of each Member State (in consultation with
other authorities such as resolution authorities where appropriate) should be entrusted with
the discretion necessary for it to decide whether a re-securitisation should be permitted or
otherwise, particularly (or only) where this does not fall squarely within any proposed carve-
out to be inserted in article 5(r). The competent authority should therefore be enabled to
permit a supervised entity to make use of re-securitisations if these are economically
reasonable, such as in: situations of institutions experiencing, or threatened by, severe
problems, or facing winding up; ABCP transactions; and other transactions that may
inadvertently be affected by the application of a ban, such as restructuring, rebalancing or
winding down of old deals for risk management purposes. In such cases, the competent
authority should notify ESMA of a permission granted.
From a grandfathering perspective, it is considered that any bans on re-securitisation should
only be applicable in relation to future transactions (which in any case are not expected to
be issued owing to rating issues and the lack of investor interest), such that existing
securitisation transactions would be exempt (to be provided for under the grandfathering
1
https://www.bankingsupervision.europa.eu/ecb/pub/pdf/guidance_on_npl.en.pdf)
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provisions in Article 28). Existing transactions are difficult to unwind, particularly as they
typically involve external investors whose consent may not be forthcoming. Existing
transactions are also difficult to sell – a total ban on re-securitisations would effectively
preclude the existence of a secondary market. It is also important to note that almost all of
the previous poor quality structures have already defaulted, and been removed from the
investment universe. In light of the aforesaid there is significantly reduced merit for a ban
on re-securitisations.
A variation to this Option 3 could be to include a ban in the level 1 text but that would only
come into effect following appropriate level 2 measures being issued that would determine
the extent of the ban and, therefore, a list of appropriate carve-outs that would still be
permissible. As indicated above, the contents of this list remain subject to review by the
Commission, in consultation with the relevant ECAs, with the aim of considering whether
the list in article 5(r) merits amendment from time to time.
C.
Possible Compromises
In pursuing Option 3 above, the Presidency has considered the following compromise
proposals if a ban on re-securitisation in the non-STS context were to be agreed to:
1. implement a grandfathering clause to expressly exclude from the applicability of the
ban all re-securitisation transactions issued prior to a specified date (date of entry into
force of the Regulation). This would effectively result in the banning of the purchase of
new re-securitisations (save for new transactions that are carved out as indicated in
section C(2) below), but allowing the holding of existing re-securitisation transactions
and also allowing the buy back of existing re-securitisation transactions to close them
down;
2. implement, in Article 5(r), a list of carve-outs for new re-securitisations that are
undertaken for legitimate purposes, including:
a. ABCP transactions;
b. winding up scenarios;
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c. subject to securitisations that are being repackaged not themselves including
securitisations as underlying exposures:
i. repackaging of securitisation transactions where underlying exposures
are non-performing;
ii. repackaging of securitisation transactions where necessary to preserve
the interests of the investors;
iii. repackaging of securitisation transactions where necessary for risk
management purposes;
d. other transactions that may inadvertently be affected by the ban, to be
considered carefully at technical level prior to implementation;
e. other transactions that, pursuant to a review of the European re-securitisation
market to be carried out by the Commission in consultation with the relevant
ECAs within a specified period from the date of entry into force of the Regulation
and thereafter as may be considered necessary by the Commission from time
to time, are considered as meriting inclusion in the list set out in article 5(r) (as
amended from time to time as aforesaid).
Approval by the relevant Competent Authority would be given by reference to such list.
Regulatory Technical Standards may be issued by ESMA by a specified date if the need
for expansion or clarification of the list were to be considered necessary. Guidance (in
the form of examples included in level 1 text) to Member State Competent Authorities
as to which transactions fall within the ‘legitimacy carve-out’ is to be defined in level 1;
3. taking into account the preceding point in respect of the need for carve-outs from a
total ban, and assuming that a compromise may be reached in that respect, given that
the definition of securitisation already provides that the risk is tranched, the EP text
would appear to be sufficient. If the EP definition were to be retained, the definition in
Article 4(1)(63) of the CRR could be amended to cross-refer to the definition under the
STS Regulation;
4. at technical trilogue level, in support of point 2 above, propose clarifications on the
issues of re-tranching and ABCPs. In so far as re-tranching is concerned, it is pertinent
to note that, in line with clarification provided by the Basel Committee in its Basel III
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Document2 entitled “Revisions to the securitisation framework” of July 2016, it was
submitted that the definition of re-securitisation should also include reference to the
fact that an exposure resulting from re-tranching of a securitisation position is not to be
considered as re-securitisation if the cash flows of this exposure could be replicated in
all circumstances and conditions by an exposure to the securitisation of a pool of
exposures that contains no securitisation position. Article 2(4) (Line 65 STS) may be
amended accordingly. With respect to ABCPs, article 12(1d) (Line 455 STS) merits
further clarification, to the effect that the exposures underlying the ABCP transaction
shall not include exposures which are securitisation positions of other securitisations;
5. amend recitals (in addition to level 1 text as indicated in section C(2) above) as
necessary to clarify that with respect to re-securitisation, it is necessary to acknowledge
the need, in exceptional circumstances, to allow securitisations to be repackaged into a
securitisation where, for example, the underlying exposures are non-performing or in
other circumstances to preserve the interests of the investors - however, to avoid re-
securitisations in chain and to ensure transparency, the use of re-securitisations should
be restricted to cases where securitisations that are being repackaged do not
themselves include securitisations as underlying exposures.
D.
Conclusions
The utility and need of re-securitisations should not be dismissed outright. There have been
instances where re-securitisations have been used to assist with struggling banks and with
the winding up of banks, and may also be helpful for the purpose of reduction of risks and
refinancing in connection with winding down other financial entities as well as for the
purpose of future resolution actions. Accordingly, Council is strongly opposed to a total ban
on re-securitisations as proposed by the EP. On the other hand, in the context of ongoing
discussions with the EP on the STS package as a whole, and taking into account the dearth
of interest in the market for new re-securitisations, conceding the banning of future re-
securitisations which do not qualify for the carve-out mechanism to be proposed by Council
(refer to section C(2) above) would appear to be a pragmatic compromise.
We hope that this non-paper will be helpful in your analysis of the position. We look forward
to hearing your views.
2 available at:
http://www.bis.org/bcbs/publ/d374.pdf