Response to draft Guidelines on the STS criteria for ABCP securitisation
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There are transactions where Seller and Original lender are different entities and the Seller wants to take responsibility of the representations as part of the commercial agreement between them. The most important thing is that an entity with enough credit quality takes responsibility of the representations and warranties. ESBG supports this if the Seller is a solvent and strong entity.
Existing European securitization transactions such as mixed amortising/bullet or collateralized/uncollateralized consumer or SME pools as well as retail/commercial auto leases have shown very strong performance even during the financial crisis years. Investors have been used to and able to analyse and perform robust due diligence of these pools for many years. In light of this, ESBG believes that further unnecessary differentiation based on risk factors will lead to concentration in smaller portfolios and prevent especially medium and smaller banks to compile an appropriate portfolio size and exclude them from securitization.
In addition, Article 20(8), sub paragraph 2 indicates that “The underlying exposures shall not include transferable securities, as defined in point (44) of Article 4(1) of Directive 2014/65/EU, other than corporate bonds that are not listed on a trading venue.” EBA should into consideration that under some national legislations, in particular the Spanish regulation, mortgage loans are transferred through securities by law (law 2/1981 and Royal Decree 716/2009).
It is worth mentioning that there needs to be a bit more of flexibility on the interpretation of homogeneity. For instance, in SME’s securitization it should be always possible to mix mortgage loans and loans.
With regards to paragraphs 37, 38.b) and 39, there should be a waiver for financial entities which are supervised by EBA. It should also be specified that this requirement should be done only at issuance and it is not necessary to update it during the life of the transaction.
With regards to paragraphs paragraph 38 a), b) and paragraph 39 it should be specified in which document the compliance of those requirements should be published.
For Art. 20(11) (c), ESBG would appreciate a definition of “significantly higher” in terms of credit assessment or credit score. Allowed deviation to homogenize transactions should be set. It should be specified where this information should be provided to the investor, in the Prospectus or in other document.
In addition, with regards to paragraph 53(a.), the analysis of the solvency capacity of the debtor indicated in the origination policy risk detailed in the Prospectus should be enough.
When a loan has collateral, the risk profile is always taken into consideration but it does not mean that the payment capacity of the debtor has not been taken into account. Article 20(11) mitigates this risk because the PD takes into consideration the payment capacity of a debtor.
On the other hand, there can be contradictions between LTV policy and the residual value for predominant dependence on the sale of the asset.
With regards to paragraph 62(a), official interest rate index or benchmarks used in every jurisdiction should be allowed, such as VPO, ICO, etc.
Regarding point a), the entity which provides the internal rating should calculate the EL. These triggers are based on internal models from the originator entity. SSPE should just monitor the breaching of the trigger according to the EL provided by the seller.
Regarding point b), ESBG understands that this point refers to triggers based on a percentage of loans in arrears more than 90 days (not written off) upon the outstanding principal balance of Notes.
Also, ESBG would appreciate a proposed level for the “certain percentage” terms given in 71 a and b.
- a): Please, specify if credit quality means internal PD.
- c): The term value of the underlying exposure is very uncertain. Please specify how this value should be calculated.
- d): There should be more flexibility regarding the number of replenishment dates without full replenishment (at least two consecutive).
- It should mention static or dynamic. Depending on the product type, some information might be more useful than other, as the Rating Agencies indicate in their methodology. For example, Rating Agency prefers dynamic for Credit Cards.
- It may be possible that some kind of assets have less than five years of historical information. However, this kind of assets have been approved for the Supervisor, particularly when the assets have been granted by a Financial Entity.
Q5. Do you agree with the interpretation of this criterion, and the aspects that the interpretation is focused on? Should interpretation be amended, further clarified or additional aspects be covered? Please substantiate your reasoning.
ESBG generally agrees. However, in ESBG’s opinion, the Original Lender should not be obliged to take responsibility of the representations and warranties, the Seller should have this possibility as well.There are transactions where Seller and Original lender are different entities and the Seller wants to take responsibility of the representations as part of the commercial agreement between them. The most important thing is that an entity with enough credit quality takes responsibility of the representations and warranties. ESBG supports this if the Seller is a solvent and strong entity.
Q6. Do you agree with the interpretation of this criterion, and the aspects that the interpretation is focused on? Should interpretation be amended, further clarified or additional aspects be covered? Please substantiate your reasoning.
ESBG agrees.Q7. Do you agree with the techniques of portfolio management that are allowed and disallowed, under the criterion of the active portfolio management? Should other techniques be included or excluded?
ESBG agrees.Q8. Do you agree with the interpretation of this criterion, and the aspects that the interpretation is focused on? Should interpretation be amended, further clarified or additional aspects be covered? Please substantiate your reasoning.
ESBG strongly advocates that only (i) similar underwriting, (ii) uniform servicing and (iii) the same asset category are considered as criteria for homogeneous pools. If in addition the proposed risk factors are applied, available pools for securitization are significantly decreased. Due to the risk factors lower available volumes especially for medium and smaller banks will in combination with the newly proposed intensive disclosure and STS notification requirements, it would result in the STS label not being used by most originators and will not lead in the intended revival of the European securitization market.Existing European securitization transactions such as mixed amortising/bullet or collateralized/uncollateralized consumer or SME pools as well as retail/commercial auto leases have shown very strong performance even during the financial crisis years. Investors have been used to and able to analyse and perform robust due diligence of these pools for many years. In light of this, ESBG believes that further unnecessary differentiation based on risk factors will lead to concentration in smaller portfolios and prevent especially medium and smaller banks to compile an appropriate portfolio size and exclude them from securitization.
In addition, Article 20(8), sub paragraph 2 indicates that “The underlying exposures shall not include transferable securities, as defined in point (44) of Article 4(1) of Directive 2014/65/EU, other than corporate bonds that are not listed on a trading venue.” EBA should into consideration that under some national legislations, in particular the Spanish regulation, mortgage loans are transferred through securities by law (law 2/1981 and Royal Decree 716/2009).
Q9. Do you agree with the interpretation of the criterion with respect to exposures to a credit impaired debtor or guarantor?
No, there should be no further requirements in addition to the requirements specified in Consultation Paper about Homogeneity.It is worth mentioning that there needs to be a bit more of flexibility on the interpretation of homogeneity. For instance, in SME’s securitization it should be always possible to mix mortgage loans and loans.
Q10. Do you agree with the interpretation of the criterion with respect to the exposures to credit-impaired debtors or guarantors that have undergone a debt-restructuring process?
ESBG generally agrees. With regards to paragraph 29, it should not be necessary to explain the purpose of every change. Investor will request clarifications if necessary.Q11. Do you agree with the interpretation of this criterion, and the aspects that the interpretation is focused on? Should interpretation be amended, further clarified or additional aspects be covered? Please substantiate your reasoning.
ESBG generally agrees.With regards to paragraphs 37, 38.b) and 39, there should be a waiver for financial entities which are supervised by EBA. It should also be specified that this requirement should be done only at issuance and it is not necessary to update it during the life of the transaction.
With regards to paragraphs paragraph 38 a), b) and paragraph 39 it should be specified in which document the compliance of those requirements should be published.
Q12. Do you agree with the interpretation of this criterion, and the aspects that the interpretation is focused on? Should interpretation be amended, further clarified or additional aspects be covered? Please substantiate your reasoning.
ESBG generally agrees. However, exposures that were originated at the time of the securitized expo-sures should be used, but not selected because of prepayment. This might allow a wider concept of similar exposures.Q13. Do you agree with the interpretation of the predominant dependence with reference to 30% of total initial exposure value of securitisation positions? Should different percentage be set dependent on different asset category securitised?
In paragraph 49, the concept “comparable exposures” is still confusing. However, trying to detail the characteristics can make it so detailed that it will be difficult to find portions of exposures that are comparable. On the other hand, the regulator should interpret this concept in the widest possible sense.For Art. 20(11) (c), ESBG would appreciate a definition of “significantly higher” in terms of credit assessment or credit score. Allowed deviation to homogenize transactions should be set. It should be specified where this information should be provided to the investor, in the Prospectus or in other document.
Q14. Do you agree with the interpretation of this criterion, and the aspects that the interpretation is focused on? Should interpretation be amended, further clarified or additional aspects be covered? Please substantiate your reasoning.
ESBG agrees.Q15. Do you agree with the interpretation of this criterion, and the aspects that the interpretation is focused on? Should interpretation be amended, further clarified or additional aspects be covered? Please substantiate your reasoning.
The concepts of restructuring and refinancing are very wide. In the case of exposure originated by financial entities regulated by the EBA, the “restructuring” term should comply with the criteria of binding accounting circulars. Refinancing criteria between securitization and financial entity reporting should be consistent.Q16. Do you agree with the interpretation of this criterion, and the aspects that the interpretation is focused on? Should interpretation be amended, further clarified or additional aspects be covered? Please substantiate your reasoning.
ESBG agrees.Q17. Do you agree with the interpretation of this criterion, and the aspects that the interpretation is focused on? Should interpretation be amended, further clarified or additional aspects be covered? Please substantiate your reasoning.
With regards to paragraph 53(c.) it should be clear that granularity is not related to the capacity of payment of the debtor. Granularity makes reference to concentration risk more than origination policy risk.Q18. Do you believe that additional guidance should be provided in these guidelines with respect to the homogeneity requirement, in addition to the requirements specified in the Delegated Regulation (EU) 2018/.... further specifying which underlying exposures are deemed homogeneous?
ESBG strongly recommend to increase the 30% residual values hurdle in order to not exclude granular and in the past strongly performing European auto lease transactions with residual values from STS eligibility. A hurdle of 30% will ban most of these transactions.In addition, with regards to paragraph 53(a.), the analysis of the solvency capacity of the debtor indicated in the origination policy risk detailed in the Prospectus should be enough.
When a loan has collateral, the risk profile is always taken into consideration but it does not mean that the payment capacity of the debtor has not been taken into account. Article 20(11) mitigates this risk because the PD takes into consideration the payment capacity of a debtor.
On the other hand, there can be contradictions between LTV policy and the residual value for predominant dependence on the sale of the asset.
Q19. Do you agree with the interpretation of this criterion, and the aspects that the interpretation is focused on? Should interpretation be amended, further clarified or additional aspects be covered? Please substantiate your reasoning.
ESBG generally agrees. However it should be specified in the paragraph 59 at what frequency the update should be done.Q20. Do you agree with the interpretation of this criterion, and the aspects that the interpretation is focused on? Should interpretation be amended, further clarified or additional aspects be covered? Please substantiate your reasoning.
ESBG generally agrees.With regards to paragraph 62(a), official interest rate index or benchmarks used in every jurisdiction should be allowed, such as VPO, ICO, etc.
Q21. Do you agree with the interpretation of this criterion, and the aspects that the interpretation is focused on? Should interpretation be amended, further clarified or additional aspects be covered? Please substantiate your reasoning.
ESBG agrees.Q22. Do you agree with this balanced approach to the determination of the expertise of the seller? Do you believe that more rule-based set of requirements should be specified, or, instead, more principles-based criteria should be provided? Is the requirement of minimum of 5 years of professional experience appropriate and exercisable in practice?
With regards to paragraph 71, using just one of the three proposed triggers should be enough to measure the deterioration of the quality of the portfolio.Regarding point a), the entity which provides the internal rating should calculate the EL. These triggers are based on internal models from the originator entity. SSPE should just monitor the breaching of the trigger according to the EL provided by the seller.
Regarding point b), ESBG understands that this point refers to triggers based on a percentage of loans in arrears more than 90 days (not written off) upon the outstanding principal balance of Notes.
Also, ESBG would appreciate a proposed level for the “certain percentage” terms given in 71 a and b.
Q23. Should alternative interpretation of the “similar exposures” be provided, such as, for example, referencing the eligibility criteria (per Article 24(7)) that are applied to select the underlying exposures? Similar exposure under Article 24(18) could thus be defined as an exposure that would qualify for the portfolio, based on the exposure level eligibility criteria (not portfolio level criteria) which has not been selected for the pool and which was originated at the time of the securitised exposure (e.g. an exposure that has repaid / prepaid by the time of securitisation). Similar interpretation could be used for the term “exposures of a similar nature” under Article 24(18), and “substantially similar exposures” under Article 24(14). The eligibility criteria considered should take into account the timing of the comparison. Please provide explanations which approach would be more appropriate in providing clear and objectively determined interpretation of the “similarity” of exposures.
With regards to Article 21(6), further clarification should be made:- a): Please, specify if credit quality means internal PD.
- c): The term value of the underlying exposure is very uncertain. Please specify how this value should be calculated.
- d): There should be more flexibility regarding the number of replenishment dates without full replenishment (at least two consecutive).
Q24. Do you agree with the interpretation of this criterion, and the aspects that the interpretation is focused on? Should interpretation be amended, further clarified or additional aspects be covered? Please substantiate your reasoning.
ESBG generally agrees. However, with regards to Article 21(7)(b), setting a backup servicer facilitator with a specific timeframe at the closing to look for a backup servicer if a trigger is breached should be enough to preserve the continuation of the servicer.Q25. Do you agree with the interpretation of this criterion, and the aspects that the interpretation is focused on? Should interpretation be amended, further clarified or additional aspects be covered? Please substantiate your reasoning.
ESBG generally agrees. However, the requirements indicated in the section 8.2.7 make only sense when the Servicer has not expertise in Securitization or it is not a Financial Entity regulated by EBA. Also, it is not clear where this requested information should be specified.Q26. Do you agree with the interpretation of this criterion, and the aspects that the interpretation is focused on? Should interpretation be amended, further clarified or additional aspects be covered? Please substantiate your reasoning.
ESBG agrees.Q27. Do you agree that the external verification should only cover the criteria referenced in paragraphs (9), (10) and (11) of Article 24, or should it cover all criteria mentioned in Article 24? Do you agree with the approach on determining the frequency of the external verification?
ESBG generally agrees. However usually securitised assets are serviced under the same procedures as if they were not securitised. Unless this criterion is different in any particular transaction, the Method of origination or creation of the Assets should be descriptive enough.Q28. Concerning the sample, should a minimum sample size be prescribed (in absolute or relative terms)? Should a statistical method for evaluating the outcome of the external verification of the sample be specified? Do you agree that it should be representative covering all underlying exposures of all transactions? Do you see merit in further specifying that the sample should be representative by properly representing the various asset categories of the transactions; or that representativeness may be assumed when the sample is gathered via a random selection?
ESBG agrees.Q29. Do you agree with the interpretation of this requirement, and the aspects that the interpretation is focused on? Should other aspects be covered? Please substantiate your reasoning.
ESBG generally agrees. However, further clarifications should be made, and specifically:- It should mention static or dynamic. Depending on the product type, some information might be more useful than other, as the Rating Agencies indicate in their methodology. For example, Rating Agency prefers dynamic for Credit Cards.
- It may be possible that some kind of assets have less than five years of historical information. However, this kind of assets have been approved for the Supervisor, particularly when the assets have been granted by a Financial Entity.