Securitization is the pooling of certain types of contractual debt assets, such as auto loans, residential and commercial mortgages, credit card debt, etc., and then repackaging them into interest-bearing securities. The European Union set out comprehensive guidelines for securitization. In Article 147(8), the EU defines securitization regulation as the following: “Securitization refers to transactions or schemes where the credit risk associated with an exposure or a pool of exposures is tranched, and all of the following characteristics are met:”
- payments in the transaction or scheme are dependent upon the performance of the exposure or of the pool of exposures;
- the subordination of tranches determines the distribution of losses during the ongoing life of the transaction or scheme;
- the transaction or scheme does not create specialized lending exposures (i.e. those possessing all of the characteristics
EU regulation, which took effect on January 1st 2019, establishes a general framework to achieve Simple, Transparent and Standardized securitization (STS) for parties in-scope. A party is in-scope if it is subject to supervision by a national regulator designated under Article 29 of the EU Securitization Regulation.
The regulation is relevant to the following entities:
- Institutional investors
- Original lenders
- Securitization special purpose entities (SSPEs)
The key requirements of the regulation are as follows:
Article 5, Due diligence – Institutional investors will need to verify:
- the processes and procedures of the originator/original lender, from both EU and third countries, to grant the credits underlying the securitization obligation;
- the originator/sponsor/original lender, from both EU and third countries, has retained at least a 5% material net economic interest in the obligation as per article 6;
- the originator/sponsor/original lender, from both EU and third countries, has provided the required information set forth in Article 7; they have written procedures in place that are proportionate to the risk profile of the position held on an ongoing basis.
Article 6, Risk retention – Aligning interests with those of investors:
- the originator/sponsor/original lender shall maintain a material net economic interest in the securitization of at least 5% (not subject to hedging, credit risk migration);
- the retention shall be held by either the originator, sponsor, or original lender, and cannot be shared;
- if the originator, sponsor, or original lender are unable to reach an agreement on who retains the risk, the risk retention shall be borne by the originator.
Article 7, Transparency – Obligations of originators, sponsors, and SSPEs:
- supply (potential) investors, competent authorities, information on underlying exposures on a regular basis (quarterly, monthly dependent on securitization type);
- provide all documentation essential to understanding the securitization transaction (prospectus, offering document, closing transaction document, asset sale agreements, novation or transfer agreement, etc.)
- all required documentation should be made available at the securitization repository (where applicable) to enable investors with a single venue to help perform their due diligence.
The key benefits of securitization regulation in the ESMA securitization annexure:
- Reduces Risks to Investors:
- The regulations ensure investor’s interests are protected by helping them evaluate the risks and exposures related to securitization both within and across products
- Transparency in critical information:
- It brings in transparency and regular availability of information (including the investor reports and information related to underlying exposures)
- Increasing Liquidity:
- The regulation will increase liquidity in the system, provide a steady income for investors and frees up unrequired capital from the originator, thus enhancing the balance in financial ecosystem
- New Regime of STS securities:
- The regulation will usher in a new regime of STS securitization which will provide a more risk-sensitive framework and boost investments with a regulatory preferential capital regime.
IVP’s Regulatory Reporting solution helps alternative investment managers to be compliant with the securitization regulation’s nuances and complexities. The solution provides a comprehensive view of security specific information, underlying exposures and all reportable information. The securitization regulation module facilitates extraction of data from internal/external sources and ensures holistic data integration which helps in efficiently handling cumbersome filing processes and in regulatory reporting. The final output generated complies with the reporting formats for all the reporting annexures. To ensure a clear understanding of ESMA securitization annexures, the solution also helps users understand all ESMA related requirements with a detailed glossary. With the help of IVP’s Regulatory Reporting, the final output can easily be uploaded to the regulators’ portals to ensure a smooth and quick filing process and thus helps achieve STS securitization status.
To know more how IVP’s Regulatory Reporting solution can help in meeting securitization regulation requirements, please visit Regulatory Reporting or reach us at firstname.lastname@example.org
Maximize regulatory reporting efficiency with automation. This solution handles regulatory filings, manages threshold breach disclosures, and integrates seamlessly with enterprise systems and fund admins.
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