This final report presents guidelines on the STS criteria for on-balance-sheet securitisation, in accordance with European regulation. The main objective is to ensure a consistent interpretation of the criteria for simplicity, standardisation, and transparency, to facilitate the adoption of these criteria by market participants. The guidelines aim to strengthen the EU securitisation framework and support economic…
This document is the final report of the guidelines on STS (simple, transparent and standardised) criteria applicable to on-balance-sheet securitisation, published by the European Banking Authority (EBA) in May 2024. It covers the harmonized interpretation of the criteria of simplicity, standardization, transparency, as well as specific requirements related to credit protection agreements, third-party verification agents, and synthetic excess, in accordance with Articles 26b to 26e of Regulation (EU) 2017/2402 amended by the 2021 Capital Markets Recovery Package. The scope also includes targeted amendments to existing guidelines on ABCP and non-ABCP securitisations (EBA/GL/2018/08 and EBA/GL/2018/09). The document is addressed to originators, initial lenders, special purpose securitisation entities (SSPE), investors, competent authorities, and third-party verification agents in the European Union. The covered period is contemporary to the publication, with application from 9 December 2024 (pp. 1-6, 34-37).
This final report presents the EBA guidelines on STS criteria for on-balance-sheet securitisation, in response to the mandate of Article 26a(2) of Regulation (EU) 2017/2402. The main objective is to ensure a harmonized and consistent interpretation of the STS criteria related to simplicity, standardization, transparency, and specific requirements (credit protection, third-party agent, synthetic excess) for on-balance-sheet securitisations, to facilitate their adoption and enable more risk-sensitive prudential treatment for originating institutions. These guidelines complement and amend previous guidelines on ABCP and non-ABCP securitisations, ensuring consistency across the three frameworks. They apply transversally to all sectors and actors concerned within the EU. Their implementation aims to support the revival of a safe and sound securitisation market, notably in the post-COVID-19 context. After a three-month public consultation in 2023, these guidelines will be published in all official EU languages and enter into force on 9 December 2024. They impose compliance and reporting obligations on competent authorities and financial institutions. Detailed criteria notably cover the exclusion of arbitrage securitisations, origination standards, risk management, data transparency, credit protection agreement modalities, and tranche amortisation mechanisms. These guidelines also clarify key notions such as no double coverage, prohibition of active portfolio management, homogeneity criteria of underlying assets, and external verification requirements. They strengthen legal certainty and transparency for investors and supervisory authorities, while aligning stakeholders’ interests. Finally, they specify application modalities, definitions, and responsibilities of the different involved actors (pp. 3-6, 34-37).
The document responds to the mandate granted to the EBA by Article 26a(2) of Regulation (EU) 2017/2402 amended in 2021, within the framework of the Capital Markets Recovery Package, which enables it to develop guidelines for the harmonized interpretation of STS criteria applicable to on-balance-sheet securitisation. This regulatory framework aims to promote simple, transparent, and standardised securitisation, a necessary condition to benefit from preferential prudential treatment of originating institutions’ exposures. The stakes are to avoid arbitrage practices, ensure the quality and transparency of securitised assets, and strengthen investor and supervisory authority confidence. The scope covers criteria of simplicity, standardisation, transparency, as well as specific requirements related to credit protection agreements, third-party verification, and synthetic excess. The guidelines complement and amend existing ones for ABCP and non-ABCP securitisations to ensure consistency of interpretation. They apply transversally to all concerned actors in the European Union, including originators, initial lenders, SSPEs, investors, competent authorities, and third-party verification agents. The document also specifies limits, notably excluding certain aspects deemed sufficiently clear or outside the current mandate, and foresees future recommendations depending on practical developments (pp. 4-6).
- Simplicity criteria:
- Exclusion of arbitrage securitisations (Articles 26b(1), 26b(2), 26b(3), 26b(4), 26b(5)) to prevent the protection buyer from purchasing exposures outside its core business solely to securitise and arbitrage yields. Prohibition of double credit risk coverage (double hedging). Criteria are deemed clear, with no need for further interpretation (pp. 7-8).
- Representations and warranties (Article 26b(6)): requirement for specific guarantees from the protection buyer on legal ownership and accuracy of information on underlying exposures. Clarifications on the "best knowledge" standard, comparability of origination standards, and the notion of consolidated group. Differs from non-ABCP guidelines (pp. 9-10).
- Active portfolio management prohibited (Article 26b(7)): to avoid complexity and agency risk, eligibility criteria for exposures added after closing must be as strict as initial ones. Clarification of techniques not considered active management (pp. 10-11).
- Homogeneity and obligations of exposures (Article 26b(8)): exposures must be homogeneous, contain valid contractual obligations with defined periodic payment flows, and exclude transferable securities. Specialized loans (project finance, etc.) are distinct and must not be mixed with other corporate exposures to respect homogeneity (pp. 11-12).
- Prohibition of re-securitisation (Article 26b(9)): to avoid complex and highly leveraged structures observed during the financial crisis (p. 12).
- Origination standards and originator expertise (Article 26b(10)): prevention of cherry-picking, ban on self-certified mortgage loans, requirement for robust creditworthiness assessment, and proven originator experience on similar exposures. Clarifications on scope, disclosure of changes, and expertise criteria (pp. 12-14).
- Exclusion of defaulted exposures or to downgraded debtors/guarantors (Article 26b(11)): to avoid assets affected by negative events, with details on default definition, knowledge standard, and consideration of credit registers (pp. 14-17).
- Requirement of at least one payment made (Article 26b(12)): to reduce fraud and operational risks, each exposure must have at least one ordinary payment made at selection, except for revolving securitisations (pp. 17-18).
- Standardisation criteria:
- Risk retention requirements (Article 26c(1)): alignment of interests between originators and investors, coordination among supervisory authorities (pp. 17-18).
- Mitigation of interest rate and currency risks (Article 26c(2)): protection of parties via appropriate measures or hedges, prohibition of derivatives unrelated to these risks in the pool (pp. 18-19).
- Referenced interest payments (Article 26c(3)): prohibition of non-observable or complex interest rates, to facilitate investor analysis (p. 19).
- Post-execution notification requirements (Article 26c(4)): clarifications on the amount blocked in the SSPE, adapted to on-balance-sheet specifics (pp. 19-20).
- Loss allocation and tranche amortisation (Article 26c(5)): limited use of non-sequential amortisation with clear contractual triggers, prohibition of reverting to non-sequential amortisation after switching to sequential (pp. 20-21).
- Early amortisation provisions (Article 26c(6)): criteria deemed clear, with no need for further interpretation (p. 21).
- Transaction documentation (Article 26c(7)): transparency for investors, high service standards, and designation of a fiduciary representative in case of multiple investors (pp. 21-22).
- Servicer expertise (Article 26c(8)): criteria aligned with those of the originator, crucial importance of servicing, possibility for new entities with experienced backup (pp. 22-23).
- Reference register (Article 26c(9)): maintenance of up-to-date reference obligations to avoid conflicts (pp. 23-24).
- Rapid resolution of investor conflicts (Article 26c(10)): requirements for clear clauses to facilitate resolution (p. 24).
- Transparency criteria:
- Historical default and loss data (Article 26d(1)): provision of sufficient information for appropriate risk analysis, including for new asset classes (pp. 24-25).
- Verification of a sample of underlying exposures (Article 26d(2)): assurance of data quality by an independent third party, with details on sample size and verifier independence (p. 25).
- Liability cash flow model (Article 26d(3)): provision of an accurate model to allow investors to model payments (pp. 25-26).
- Environmental and sustainability information (Article 26d(4)): disclosure of energy performance and negative sustainability impacts when available, without minimum requirement (pp. 26-27).
- Compliance with Article 7 disclosure requirements (Article 26d(5)): coordination among authorities to avoid redundancies, access to necessary data for investor analysis (p. 27).
- Specific criteria for on-balance-sheet securitisation:
- Covered credit events (Article 26e(1)): standardization of minimum events to include in the protection agreement, possibility to add additional or stricter events (p. 30).
- Credit protection payments (Article 26e(2)): alignment of payments with actual losses, clarifications on calculation methods and conditions (pp. 27-28).
- Debt settlement and protection premiums (Article 26e(3)): limited to contingent premiums, maximum duration of workout extension (p. 28).
- Third-party verification agent (Article 26e(4)): requirements to ensure reliability and accuracy of verifications, notably for mezzanine positions (pp. 28-29).
- Early termination events by originator (Article 26e(5)): exhaustive list of conditions, clarifications on weighted average life (WAL) calculation and eligibility criteria for guarantees (pp. 29-30).
- Early termination events by investor (Article 26e(6)): criteria deemed clear (p. 30).
- Synthetic excess (Article 26e(7)): requirements on calculation and availability of synthetic excess as credit enhancement, details on IRB approach application (p. 30).
- Types of credit protection agreements (Article 26e(8)): criteria deemed clear (p. 31).
- Specific requirements for certain agreements (Article 26e(9)): clarifications on legal opinions and qualification of legal counsel (p. 31).
- Use of high-quality guarantees (Article 26e(10)): details on acceptable guarantee types, payment frequency, and use of credit-linked notes (pp. 31-32).
- Implementation and obligations:
- Application from 9 December 2024 for agreements adopted after this date.
- Obligation for competent authorities to notify their compliance or non-compliance to the EBA before this date.
- Guidelines apply to financial institutions, competent authorities, and third-party verification agents in the EU (pp. 34-37).
- Targeted amendments to ABCP and non-ABCP guidelines:
- Harmonization of interpretations on common criteria such as origination standards, absence of defaulted exposures, risk retention, referenced interest payments, non-sequential payment priority, historical data, exposure verification, cash flow modelling, environmental disclosure, and disclosure compliance (p. 6).
This thematic synthesis reflects the clarifications, details, and adaptations provided by the EBA to ensure a consistent and harmonized application of STS criteria under the European securitisation regulation.
Findings:
- The guidelines clarify STS criteria for on-balance-sheet securitisation, consistent with existing criteria for ABCP and non-ABCP, with specific adaptations.
- The prohibition of arbitrage securitisation, no double coverage, exclusion of defaulted exposures, and active portfolio management are key principles to ensure simplicity and transparency.
- Disclosure, external verification, and transaction documentation requirements are strengthened to ensure investor confidence.
- Specific criteria for on-balance-sheet securitisation, notably on credit events, protection payments, and synthetic excess, are detailed to ensure legal and financial robustness.
Assumptions:
- Consistent application of STS criteria will favour more favourable prudential treatment and support the recovery of the securitisation market in Europe.
- Clarifications provided will reduce risks of divergent interpretations and abuses.
Author’s interpretations:
- The EBA considers clarity and harmonization of criteria essential for legal certainty and stakeholder confidence.
- Some requirements are deemed sufficiently clear and do not require further interpretation.
- Future recommendations may be developed based on feedback.
Uncertainties:
- The concrete market impact will depend on effective adoption by actors and coordination among authorities.
- Evolution of securitisation practices and financial markets may require subsequent adjustments.
(pp. 3-6, 34-37)
The EBA concludes that these guidelines provide a clear and harmonized framework for the application of STS criteria to on-balance-sheet securitisations, essential to ensure simplicity, transparency, and standardisation of transactions. They strengthen legal certainty, facilitate supervision, and support more risk-sensitive prudential treatment. The EBA recommends competent authorities and financial institutions comply with these guidelines from 9 December 2024, the effective date. It highlights the importance of coordination among authorities for supervision and compliance verification. Furthermore, the EBA plans to publish consolidated versions of the guidelines for ABCP and non-ABCP securitisations, integrating the proposed amendments. Finally, it indicates that complementary recommendations may be developed later based on identified practical needs. Authorities must notify their compliance to the EBA before the application date. These measures aim to support the revival of a safe and efficient securitisation market in the European Union (pp. 3-6, 34-37).
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