A number of STS requirements in Level 1 for on-balance-sheet securitisations are the same as those for traditional (non-ABCP and ABCP) securitisation. Some amendments to applicable to both type of securitisations have been applied consistently across all three guidelines.
On April 21, the European Banking Authority (EBA) opened a consultation on draft guidelines for simple, transparent and standardised (STS) criteria for on-balance-sheet securitisations. The EBA guidelines detail the interpretation and application of STS criteria.
Compliance with these requirements is a prerequisite for a preferential risk-weight treatment for originator institutions retaining exposures to senior tranches on STS on-balance-sheet securitisations. The guidelines are linked with the ESMA RTS/ITS which specify the format of notification of compliance with STS criterion.
A number of STS requirements in Level 1 for on-balance-sheet securitisations are the same as those for traditional (non-ABCP and ABCP) securitisation. Some amendments to applicable to both type of securitisations have been applied consistently across all three guidelines.
Below is a summary detailing the key parts of the new guidelines.
Criteria related to simplicity
Requirements on the originator:
The guidelines exclude the originator from performing arbitrage securitisations. This covers transactions where a protection buyer purchases exposures outside their core lending activity for the purpose of writing tranched credit protection and arbitraging yields on the transaction.
No double hedging:
The guidance disallows double hedging in addition to the exclusion of arbitrage securitisations. Practically, this prevents a buyer from obtaining credit protection in addition to credit protection already provided by the securitisation. This is to ensure the legal certainty of payment obligations of the protection seller.
Credit risk mitigation rules:
These rules require securitisation documentation to contain warranties provided by the buyer with relation to the characteristics of underlying exposures.
Eligibility criteria, active portfolio management:
In order to enable investors to assess the credit risk of the asset pool, the guidelines apply the following restrictions to selection of underlying exposures:
- Active portfolio management of the exposures in the securitisation is prohibited to prevent risk to investors when assessing the performance of the underlying exposures.
- Eligibility criteria no less strict than at the initial securitisation pool are applied to any exposure selected after the closing.
- To ensure consistency underlying exposures must not include transferable securities. Specialised lending exposures are subject to specific rules set out in the Commission Delegated Regulation 2019.
Resecuritisation:
Resecuritisation is prohibited from classification as an STS on-balance-sheet securitisation. This is to prevent resecuritisations from being structured into leveraged structures which enable low credit quality to be re-packaged and enhanced.
Underwriting:
The guidelines apply rules on the types of exposure an originator can select in order to ensure exposures remain within the type of business performed by the originator.
Included in these rules is a prohibition on the securitisation of self-certified mortgages for STS securitisations due to associated moral hazards.
No-exposures in default:
The guidelines prohibit STS securitisations from including underlying exposures to debtors or guarantors with adverse credit history.
One payment borrower requirement:
In order to address fraud and operational risk, each underlying borrower should make at least one ordinary payment at the time of selection of exposure. This rule applies to every exposure of a borrower. An exception to this requirement is revolving securitisations where distribution of exposures is subject to frequent changes....
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