Regulation (EU) 2017/2402 establishes a framework for securitization, allowing lenders to refinance loans by transforming them into tradable securities. It aims to create a market for simple, transparent, and standardized securitizations while strengthening legislation to avoid the risks associated with complex securitizations. This legislative framework contributes to financial stability and economic growth by…
Regulation (EU) 2017/2402 of the European Parliament and of the Council, adopted on December 12, 2017, establishes a general framework for securitization as well as a specific framework for simple, transparent, and standardized (STS) securitizations. This regulation amends several European directives and regulations, notably Directives 2009/65/EC, 2009/138/EC, 2011/61/EU and Regulations (EC) No 1060/2009 and (EU) No 648/2012. The scope covers securitization operations within the European Union, including institutional investors, originators, sponsors, original lenders, and securitization special purpose entities (SSPE). The document comprises 46 pages, about 19 pages provided here, and applies to securities issued from January 1, 2019 (p. 1-12).
The regulation aims to create a harmonized framework for securitization within the European Union, clearly distinguishing simple, transparent, and standardized (STS) securitizations from complex operations, to strengthen investor confidence and financial stability. Securitization allows lenders to refinance loan portfolios by transforming them into tradable securities, thus diversifying funding sources and distributing risks within the financial system. The regulation responds to the desire to revive a quality securitization market, avoiding the mistakes of the 2008 financial crisis, by imposing strict requirements of appropriate due diligence, risk retention (at least 5% net economic interest retained by the originator, sponsor, or original lender), and transparency for all parties involved (p. 1-16). It prohibits resecuritization except for limited exceptions, excludes synthetic securitizations from the STS framework, and imposes criteria for homogeneity of underlying exposures. Institutional investors must carefully assess risks and cannot rely solely on the STS notification. The regulation also provides for the creation of centralized repositories approved by ESMA for the collection and dissemination of securitization information, facilitating investors’ appropriate due diligence. National competent authorities are responsible for supervision and sanctioning in case of non-compliance, with a European coordination mechanism to ensure harmonization. Finally, the regulation includes specific provisions for the sale of securitization positions to retail clients, limiting their exposure (p. 1-14, 27-37). Key recommendations include rigorous application of STS criteria, increased transparency, significant risk retention, and enhanced cooperation among authorities to ensure an effective and secure single market.
This regulation was developed in the context of the desire to revive a securitization market in Europe, following the 2008 financial crisis which highlighted the risks related to complex, opaque, and risky securitizations. The European Commission, in its November 2014 communication, emphasized the importance of a quality, simple, transparent, and standardized securitization market to support economic growth and job creation. The regulation aims to strengthen the post-crisis legislative framework by clearly differentiating STS products from others, imposing a more risk-sensitive prudential framework, and ensuring transparency and accountability of actors. It also seeks to avoid regulatory arbitrage between Member States and facilitate cross-border operations within a single market. The document covers definitions, due diligence requirements, risk retention, transparency, prohibition of resecuritization, conditions for SSPEs, and supervision and sanction modalities. However, it excludes securities issued before 2019 and does not address aspects beyond the first 19 pages provided (p. 1-5).
Definition and general framework of securitization:
- Securitization is defined as an operation subdividing credit risk of exposures into tranches, with payments dependent on underlying performance and subordination of tranches (p. 10).
- Securitization entities (SSPE) are structures isolating the originator’s obligations, limited to carrying out the securitization (p. 10).
- The regulation distinguishes traditional securitizations (transfer of asset ownership) and synthetic securitizations (transfer of risk via derivatives), excluding the latter from the STS framework (p. 11, 24).
STS criteria and requirements:
- STS securitizations must be simple, transparent, and standardized, with precise criteria harmonized at the European level to avoid divergences (p. 2, 19-21).
- Only securitizations with perfect transfer of underlying exposures to an SSPE can be STS (p. 22-23).
- Underlying exposures must be homogeneous, exclude defaulted assets, and comply with strict credit granting standards (p. 26-28).
- CMBS are excluded from the STS framework due to their complexity and proven risks (p. 29).
Risk retention:
- The originator, sponsor, or original lender must retain a significant net economic interest of at least 5% in the securitization (p. 14-16).
- Retention can take several forms, including retaining the first loss tranche or random exposures (p. 15).
- Exemptions exist for exposures guaranteed by public entities or certain institutions (p. 16).
Appropriate due diligence by institutional investors:
- Before investing, investors must verify the rigor of credit granting criteria, risk retention, and have necessary information (p. 13-14).
- They must implement written procedures adapted to risk profile, conduct regular stress tests, and ensure internal reporting (p. 14).
- They may rely on the STS notification but must not rely exclusively on it (p. 14, 33).
Transparency and information:
- Originators, sponsors, and SSPEs must provide investors and authorities with detailed information on underlying exposures, legal documentation, cash flows, and events affecting the securitization (p. 16-17).
- A system of centralized repositories approved by ESMA is established to collect and disseminate this information (p. 3, 12).
- Private securitizations are exempt from notification to repositories to protect sensitive commercial information (p. 3).
Prohibition of resecuritization:
- Resecuritization is prohibited except for specific exceptions provided, notably to preserve transparency and limit complexity (p. 2-3).
Supervision and sanctions:
- Member States designate competent authorities responsible for supervision, investigation, and sanctioning, with close cooperation between national and European authorities (p. 6-7).
- Sanctions concern intentional or negligent infringements, with publication of administrative sanctions (p. 7).
Sale to retail clients:
- The sale of securitization positions to retail clients is regulated, with suitability tests, exposure limits (10% of portfolio, minimum EUR 10,000), and information obligations (p. 12).
Harmonization and implementation:
- The regulation provides delegation to the European Commission to adopt technical standards specifying retention, transparency, and repository operation modalities (p. 8-9).
- ESMA and other European supervisory authorities coordinate their actions to ensure consistent application (p. 20-21).
- A three-month grace period is provided to correct a good faith erroneous use of the STS designation (p. 7).
Exclusions and specificities:
- SSPEs cannot be established in third countries with high tax risk or non-cooperative according to FATF (p. 12).
- Fully supported ABCP transactions benefit from specific rules, notably regarding due diligence and liquidity support (p. 13-14).
- Environmental performance of underlying assets must be published when available for certain types of loans (p. 29-30).
Established facts:
- Securitization is a key mechanism to diversify financing and distribute risks within the European financial system (p. 1-2).
- The regulation establishes a harmonized framework applicable to all securitizations issued from January 1, 2019 (p. 9).
- The risk retention requirement is set at a minimum of 5% net economic interest retained by the originator, sponsor, or original lender (p. 14-15).
- Institutional investors must apply appropriate due diligence and cannot rely solely on the STS notification (p. 13-14, 33).
- SSPEs must be established in jurisdictions respecting international tax standards (p. 12).
Hypotheses:
- The implementation of a harmonized STS framework will encourage the revival of a quality securitization market in Europe (p. 2, 19-21).
- Increased transparency and risk retention will align parties’ interests and reduce systemic risks (p. 3, 10).
Interpretations:
- The clear distinction between STS and non-STS securitizations aims to avoid regulatory arbitrage and strengthen investor confidence (p. 2).
- The prohibition of resecuritization, except exceptions, is interpreted as a measure to limit complexity and improve transparency (p. 2-3).
- The exclusion of synthetic securitizations from the STS framework reflects their complexity and increased risks (p. 24).
Uncertainties:
- The practical effectiveness of centralized repositories and coordination between authorities remains to be observed (p. 3, 6-7).
- The real impact of STS requirements on reviving the European securitization market will depend on actors’ adherence and implementation of technical standards (p. 20-21).
- Management of cases where a securitization loses its STS qualification and consequences for investors require monitoring (p. 6-7).
The regulation establishes a robust and harmonized framework for securitization within the European Union, aiming to revive a safe and transparent market, avoiding past mistakes. It recommends strict application of STS criteria to ensure simplicity, transparency, and standardization of eligible securitizations. Originators, sponsors, and original lenders must retain a significant net economic interest of at least 5%, thus aligning interests with investors. Appropriate due diligence by institutional investors is essential, without relying exclusively on the STS notification. Transparency is enhanced by the obligation to provide detailed information and by the creation of centralized repositories approved by ESMA. Competent authorities must exercise close supervision, cooperate at the European level, and apply sanctions in cases of intentional or negligent breaches. The regulation also provides specific measures for sales to retail clients and for fully supported ABCP transactions. Finally, the European Commission is empowered to adopt technical standards to specify application modalities, with ongoing monitoring of market standardization efforts. These measures aim to ensure an effective, secure, and competitive single market for securitization in Europe (p. 7-9, 38-49).
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