08 May 2017
SECURITISATION
PRESIDENCY NON-PAPER
Re-Securitisation (STS Article 5r and CRR Article 269)
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 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’
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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.
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.
3.
Possibility of banning only certain re-securitisations
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.
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)
1
https://www.bankingsupervision.europa.eu/ecb/pub/pdf/guidance_on_npl.en.pdf)
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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 MemberStates, 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) could 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
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 sphere. Considering the aforesaid, there is significantly reduced merit for a ban
on re-securitisations.
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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 grandfathered transactions
from the applicability of the ban, effectively banning the purchase of new re-
securitisations but allowing banks to hold existing transactions and also to buy back
existing transactions to close them down;
2. implement, in Article 5(r), a carve-out for cases where re-securitisation is used in a
legitimate manner, as so determined and approved by the relevant Competent
Authority, and provide 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’. Winding up scenarios, ABCP transactions, and other transactions that may
inadvertently be affected by the ban, would form the subject of such carve-out
provision. The restructuring or re-hedging of an existing re-securitisation for risk
management purposes (such as a change in hedging contracts or tranche currency),
for example, shall not be considered to constitute a new transaction. Also, the
underlying exposures used in a securitisation may include securitisations where
exceptional circumstances require such securitisation to be structured in this manner,
including to preserve the interests of the investors or where a restructuring is deemed
necessary such as in cases where the underlying exposures are non-performing,
provided that in such cases any securitisation that is being repackaged shall not itself
include securitisations in its underlying exposures;
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
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to note that, in line with clarification provided by the Basel Committee in its Basel III
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 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