It has now been just over a year since the United Kingdom (the “UK”) left the European Union (the “EU”), at 11:00 pm on 31 January 2020. However, during the period from such time until 11:00 pm on 31 December 2020 (the “Brexit Transition Period”), the UK was treated as if it were an EU member state. At the end of the Brexit Transition Period, EU legislation that was directly applicable in the UK up to that date was adopted as part of “retained EU law” by virtue of the European Union (Withdrawal) Act 2018, as amended by the European Union (Withdrawal Agreement) Act 2020 (as so amended, the “EUWA”). In a process known as “onshoring”, this body of retained EU law was then amended by hundreds of pieces of secondary legislation, with the aim of ensuring that such retained EU law operates effectively and of remedying any deficiency in such law.
The Securitisation Regulation1 (the “EU Securitisation Regulation”) has been applicable from 1 January 2019 to new securitisations and to existing securitisations entered into before that date where a new securitisation position is created on or after that date. The EU Securitisation Regulation contains a number of requirements relating to investor due diligence, risk retention, disclosure, credit granting and various other matters and a ban on resecuritisation. In addition it established a new regime for “simple, transparent and standardised”, or “STS”, securitisations, allowing certain investors in such securitisations to benefit from lower regulatory capital requirements and other favourable regulatory treatment. A number of technical standards have also been published in order to set out certain aspects of the EU Securitisation Regulation in more detail. As a result of the end of the Brexit Transition Period and the onshoring process with respect to the EU Securitisation Regulation and the relevant technical standards, there is now a parallel regime for securitisation in the UK, which is very similar but not identical to the EU Securitisation Regulation regime.
The UK Securitisation Regulation regime
The EU Securitisation Regulation has been amended by the Securitisation (Amendment) (EU Exit) Regulations 2019 (the “Securitisation EU Exit Regulations”) (as so amended, the “UK Securitisation Regulation”, and together with the EU Securitisation Regulation, the “Securitisation Regulations”). Many of the changes made by the Securitisation EU Exit Regulations were minor changes, for example, the replacement of references to “Member States” or “the Union” with references to “the United Kingdom”, and the removal of references to ESMA,2 the EBA3 and EIOPA,4 with responsibility generally being assumed instead by the FCA5 and/or the PRA6.
However, the Securitisation EU Exit Regulations also made a number of other significant changes as discussed in more detail below.
Definition of sponsor
Under the EU Securitisation Regulation, it is possible for credit institutions and investment firms to be a “sponsor” for the purposes of risk retention provided that they meet the other requirements of the definition of “sponsor”.7 While the definition makes it clear that a credit institution can be a sponsor whether it is located in the EU or not, it is not clear from the wording whether an investment firm needs to be established in the EU in order to be a sponsor, since the definition of “sponsor” indicates that it must be an investment firm as defined in the applicable EU legislation but it is unclear whether that means it must be regulated thereunder (in line with the interpretation under the previous regime) and therefore would need to be established in the EU. It had been expected that this would be clarified but this has not yet been done.
However, under the UK Securitisation Regulation, an investment firm is in principle capable of being a sponsor whether it is located in the UK or in a third country.
In addition, under the EU Securitisation Regulation, if the sponsor delegates day-to-day active portfolio management of a securitisation to another entity, this entity needs to be authorised to perform such activity in accordance with the applicable EU Directive, and therefore it appears that such entity would need to be established in the EU. However, under the revised definition of “sponsor” in the UK Securitisation Regulation, active portfolio management can be delegated to an asset manager which is authorised in the jurisdiction in which it is established, thus broadening the jurisdictional scope.
Under the EU Securitisation Regulation, a securitisation can only be STS if the originator, sponsor and securitisation special purpose entity (“SSPE”) are established in the EU (subject to the applicable STS requirements also being satisfied). The UK Securitisation Regulation allows for some additional flexibility, since for a non-ABCP securitisation, the SSPE does not need to be in the UK for the transaction to be capable of being STS, and in the case of an ABCP programme or ABCP transaction only the sponsor has to be in the UK for that programme or transaction to be capable of being STS.
In addition, the UK Securitisation Regulation contains grandfathering provisions in relation to STS with the effect that any securitisations which have met the EU STS requirements, which have been notified to ESMA prior to the end of the Brexit Transaction Period or within two years thereafter and which have been included in ESMA’s list of STS securitisations can continue to be considered to be STS for UK purposes.
However, there is currently no reciprocal provision under the EU regime (although this may be considered in the future) and so transactions where the originator, sponsor and/or SSPE is not in the EU will no longer be capable of being EU STS.
Under Article 5 of the EU Securitisation Regulation, institutional investors8 must verify compliance with certain requirements before investing in a securitisation position. There are separate, but similar, requirements with respect to risk retention and credit granting, depending on whether the originator or other relevant entity is established in the EU or a third country. However, the requirements in relation to verifying compliance with the transparency requirements have been amended in the UK Securitisation Regulation.
Article 5(1)(e) of the EU Securitisation Regulation provides that institutional investors must verify that “the originator, sponsor or SSPE has, where applicable, made available the information required by Article 7 in accordance with the frequency and modalities provided for in that Article”.
Article 7 sets out detailed disclosure requirements, requiring originators, sponsors and SSPEs to make available certain information to holders of a securitisation position, competent authorities and, upon request, potential investors. This includes any prospectus, all transaction documents which are essential in order to understand the transaction, a transaction summary in the event that there is no prospectus, any STS notification, reports on the underlying exposures and investor reports and notification of any inside information and significant events. Regulatory technical standards setting out the information to be provided9 (the “EU Disclosure RTS”), and implementing technical standards setting out the format and the required forms of reporting templates for making available such information10 (the “EU Disclosure ITS”), came into force in September 2020. For further information please see our previous Legal Update “Disclosure Technical Standards and Templates Published in Relation to the EU Securitisation Regulation“.
In the case of non-EU entities, it is generally understood that they should not be directly subject to Article 7. However, the jurisdictional scope of the investor due diligence requirement in Article 5(1)(e) has not been specified. One interpretation of the wording of Article 5(1)(e) is that because of the words “where applicable”, EU investors should not be required to comply with Article 5(1)(e) in the case of securitisations where the originator, sponsor and SSPE are not established in the EU, because Article 7 does not apply to such non-EU entities. However, another interpretation is that an EU investor would be required to obtain such disclosure. Investors have had to take their own view of how to interpret these requirements, and given that non-EU originators have often not been inclined to complete detailed reporting templates containing asset level data when they are not required to do so under their own laws, investors have in some cases been prepared to invest without obtaining this information, although in some instances they have taken this view on the basis of a “substantive compliance” approach, taking into consideration the information that is being provided in the transaction.
In June 2020 a report was published by the High Level Forum on Capital Markets Union, which was established by the European Commission (the “Commission”), setting out a number of recommendations with a view to scaling up the EU securitisation market, and recognising the key role that securitisation has in funding the real economy.11 The report recommended that it should be clarified that Article 5(1)(e) does not apply with respect to securitisations where the originator, sponsor or SSPE are not established in the EU. Instead, an EU investor would need to receive sufficient information to meet the due diligence requirements proportionate to the risk profile of the securitisation exposure. This wording has generally been seen as helpful, but if implemented in this form there is still some uncertainty as to exactly what this would mean in practice, and in addition it does not resolve the issue for transactions where asset-level data is not required or provided for a particular type of transaction or asset class in that third country. At this stage the wording is simply a recommendation and market participants are awaiting further clarification.
In the case of the UK Securitisation Regulation, the wording of Article 5(1)(e) has been amended so that it applies in the case of originators, sponsors and SSPEs which are established in the UK. In addition, a new Article 5(1)(f) has been added, which states that the investor must verify that an originator, sponsor or SSPE which is established in a third country “has, where applicable, (i) made available information which is substantially the same as that which it would have made available in accordance with point (e) if it had been established in the United Kingdom; and (ii) has done so with such frequency and modalities as are substantially the same as those with which it would have made information available in accordance with point (e) if it had been so established”.
It is unclear precisely what the words “substantially the same” are intended to mean. It is possible that the UK regulators will be minded to interpret this to mean that UK investors do not have to obtain the specified reporting templates when investing in third country securitisations. However, it is likely that UK investors will interpret this wording to the effect that they will want to receive detailed reporting. The extent to which information will need to be in line with the UK requirements, and whether this needs to be asset level data, remains to be seen, and as for EU investors, this could be particularly challenging for UK investors where asset level reporting is not required or is not provided in that third country.
As a result of the uncertainty as to how both Article 5(1)(e) of the EU Securitisation Regulation and Article 5(1)(f) of the UK Securitisation Regulation should be interpreted, it is not yet clear to what extent the two will be aligned and whether the standard will be different for EU investors and UK investors.
In the case of EU technical standards which were finalised before the end of the Brexit Transaction Period, those technical standards now form part of UK domestic law pursuant to the EUWA, with some amendments pursuant to the relevant UK regulations. These include the technical standards relating to disclosure (discussed in more detail below) and those relating to STS notifications. However, in cases where the EU technical standards have not yet been put in place with respect to the EU Securitisation Regulation (and also with respect to certain related aspects of the Capital Requirements Regulation12 (the “CRR”)), the onshoring process will no longer apply and new UK technical standards will need to be developed.
Both of the Securitisation Regulations impose a direct obligation on the originator, sponsor or original lender of a securitisation to retain a material net economic interest in the securitisation of not less than 5 per cent. This is understood to apply directly to originators, sponsors and original lenders established in the EU, or the UK, as applicable. However, as a result of the investor due diligence requirements under Article 5 of each of the Securitisation Regulations, EU and UK investors will not be able to invest in securitisations with originators, sponsors and original lenders which are not established in the EU, or the UK, as applicable, unless the risk retention requirements have been complied with.
Under the Securitisation Regulations, technical standards are required to be put in place in order to set out the more detailed aspects of the risk retention requirements. The EBA published a final draft of these regulatory technical standards on 31 July 2018 (the “EBA Draft RTS”) but implementation of these technical standards has been delayed and they have not yet been adopted by the Commission. Pursuant to the transitional requirements set out in the Securitisation Regulations, certain aspects of the previous technical standards relating to risk retention and developed in relation to the CRR13 continue to apply in relation to the risk retention requirements until the new regulatory technical standards come into force.
Because the new risk retention regulatory technical standards did not come into force before the end of the Brexit Transaction Period, new UK technical standards will be required to be developed. While the UK regulators had previously been considering and consulting with market participants on the EBA Draft RTS, it is possible that there will be some differences between the final EU and UK regulatory technical standards in relation to risk retention.
Given that the EU Disclosure RTS and the EU Disclosure ITS came into force before the end of the Brexit Transition Period, they form part of UK domestic law, and have been amended by certain technical standards published by the FCA.14
The amendments are not extensive and this will be welcomed by UK reporting entities. In the case of UK investors in transactions with EU originators, sponsors and/or SSPEs, the fact that the UK requirements will be similar also means that it seems likely that UK investors will be able to accept reporting in the form of the required EU templates as being “substantially the same” for the purposes of Article 5(1)(f) of the UK Securitisation Regulation.
Transitional provisions and UK approach to non-legislative materials
In order to smooth the transition from the EU Securitisation Regulation regime to that under the UK Securitisation Regulation, the UK regulators have put various transitional provisions in place under temporary transitional powers granted to them by the UK Treasury for a limited period until 31 March 2022 (the “TTP Period”). This means that in many cases, but not all, UK regulated entities can continue to comply with the previous requirements under the EU Securitisation Regulation instead of the UK Securitisation Regulation while they prepare to comply with the new UK regime. In particular, UK originators, sponsors and SSPEs may use the EU disclosure templates rather than the UK disclosure templates during the TTP Period.
The regulators have also confirmed that they expect to continue to apply EU non-legislative guidelines and other materials. This could be relevant, for example, with respect to the Questions and Answers published by ESMA, which includes their interpretation of how to comply with the disclosure requirements and the reporting templates,15 and with respect to the Guidelines published by the EBA in relation to the STS criteria for non-ABCP and ABCP securitisations.16
Amendments to the EU Securitisation Regulation and the CRR are close to being finalised in order to introduce an STS regime for on balance sheet synthetic securitisations and to make certain adjustments with respect to non-performing exposures. These form part of the Capital Markets Recovery Package which is aimed at providing support for the economic recovery in the EU following the effects of the COVID-19 pandemic. The inclusion of an STS framework for on balance sheet synthetic securitisation was also required to be considered under the EU Securitisation Regulation and has been the subject of reports by the EBA and the Commission, and this development has been broadly welcomed by the securitisation industry.
However, is not yet clear whether any similar amendments will be considered in the context of the UK Securitisation Regulation.
Under the EU Securitisation Regulation, the Joint Committee of the European Supervisory Authorities (i.e., the EBA, ESMA and EIOPA) (the “Joint Committee of the ESAs”) are required to prepare a report on certain matters with respect to the EU Securitisation Regulation. This was due by 1 January 2021. In addition, the Commission is required by 1 January 2022 to prepare a report considering the findings of the Joint Committee of the ESAs and assessing certain aspects of the EU Securitisation Regulation, and to present such report to the European Parliament and the Council of the European Union. The report may also be accompanied by a legislative proposal.
Under the UK Securitisation Regulation, the UK Treasury must review the functioning of the UK Securitisation Regulation and lay a report before Parliament by 1 January 2022.
It is possible that the two regimes will diverge further following those reports and any resulting legislative changes.
Any amendments to the EU Securitisation Regulation or any related EU technical standards, or any new EU technical standards, will not now form part of UK law, and as time goes on, the two regimes may start to look more different.
There are a number of points to consider in terms of the practical impact of the separate EU and UK securitisation regimes.
Firstly, in each transaction it is important to consider to what extent there will need to be compliance with each regime by entities which are directly subject to it. Where, for example, one of the parties is located in the EU and another party is located in the UK, there will need compliance with the relevant aspects of the two regimes, and this will need to be considered carefully.
Transaction parties will also need to consider whether the transactions will be targeted at, or be funded (initially or in the future) by, EU and/or UK investors. The related wording in prospectuses and other offering documents, transaction documents and documents such as risk retention memos will need to be drafted accordingly, and we are currently seeing a range of different approaches in the market, depending on the degree of compliance required under the directly applicable requirements of the Securitisation Regulations, or contractually agreed to by non-EU or non-UK entities.
Provided that the transaction is risk retention compliant for the purposes of the EU regime, it is, at the moment, likely that it can also be risk retention compliant for the purposes of the UK regime, and vice versa. However, entities that are not directly subject to the risk retention requirements may want to consider limiting the extent of their compliance to the requirements as at the closing date of the transaction, given the possibility of future changes to the two regimes.
In addition, given the uncertainty around the interpretation of Article 5(1)(e) under the EU Securitisation Regulation, and the different wording with respect to verifying the disclosure of the relevant information as set out in Article 5(1)(f) of the UK Securitisation Regulation (which also still needs to be clarified), the information required by EU and UK investors may be different, depending on the information provided in the context of the relevant transaction.
While the UK Securitisation Regulation regime undoubtedly looks very similar to the one under the EU Securitisation Regulation, and so will be very familiar to parties who have been dealing with those requirements since 1 January 2019, there are some differences which need to be kept in mind and it will be important to monitor developments closely in order to consider the impact for market participants of any future changes with respect to the Securitisation Regulations and related legislation.
For further information on the matters discussed in this Legal Update, please contact any member of the Mayer Brown securitisation team.
1 Regulation (EU) 2017/2402 of the European Parliament and of the Council of 12 December 2017 laying down a general framework for securitisation and creating a specific framework for simple, transparent and standardised securitisation, and amending Directives 2009/65/EC, 2009/138/EC and 2011/61/EC and Regulations (EC) No 1060/2009 and (EU) No 648/2012.
7 Article 2(5) of the EU Securitisation Regulation defines “sponsor” to mean “a credit institution, whether located in the Union or not, as defined in point (1) of Article 4(1) of Regulation (EU) No 575/2013, or an investment firm as defined in point (1) of Article 4(1) of Directive 2014/65/EU other than an originator, that:
(a) establishes and manages an asset-backed commercial paper programme or other securitisation that purchases exposures from third-party entities, or
(b) establishes an asset-backed commercial paper programme or other securitisation that purchases exposures from third-party entities and delegates the day-to-day active portfolio management involved in that securitisation to an entity authorised to perform such activity in accordance with Directive 2009/65/EC, Directive 2011/61/EU or Directive 2014/65/EU”.
9 Commission Delegated Regulation (EU) 2020/1224 of 16 October 2019 supplementing Regulation (EU) 2017/2402 of the European Parliament and of the Council with regard to regulatory technical standards specifying the information and the details of a securitisation to be made available by the originator, sponsor and SSPE, available at https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=uriserv:OJ.L_.2020.289.01.0001.01.ENG&toc=OJ:L:2020:289:TOC.
10 Commission Implementing Regulation (EU) 2020/1225 of 29 October 2019 laying down implementing technical standards with regard to the format and standardised templates for making available the information and details of a securitisation by the originator, sponsor and SSPE, available at https://eur-lex.europa.eu/legal-content/EN/TXT/uri=uriserv:OJ.L_.2020.289.01.0217.01.ENG&toc=OJ:L:2020:289:TOC.
11 A new Vision for Europe’s capital markets – Final Report of the High Level Forum on the Capital Markets Union, published on 10 June 2020, available at https://ec.europa.eu/info/sites/info/files/business_economy_euro/growth_and_investment/documents/200610-cmu-high-level-forum-final-report_en.pdf. For a summary of the recommendations set out in this report, please see our previous Legal Update “Recommendations for developing the EU securitisation market – Report by the High Level Forum on Capital Markets Union“.
12 Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 648/2012, as amended.
14 Technical Standards (Specifying the Information and Details of a Securitisation to be Made Available by the Originator, Sponsor and SSPE) (EU Exit) Instrument 2020 (FCA 2020/80), available at https://www.handbook.fca.org.uk/instrument/2020/FCA_2020_80.pdf.
15 Questions and Answers On the Securitisation Regulation, Version 6, Last updated on 05/10/2020 published by ESMA and available at: https://www.esma.europa.eu/sites/default/files/library/esma33-128-563_questions_and_answers_on_securitisation.pdf.
16 Final Report on Guidelines on the STS criteria for non-ABCP securitisation and Final Report on Guidelines on the STS criteria for ABCP securitisation, each published by the EBA on 12 December 2018 and available at: https://www.eba.europa.eu/eba-publishes-final-guidelines-on-the-sts-criteria-in-securitisation.