Verband der Automobilindustrie e.V.; Banken der Automobiliwirtschaft; CCFA
We do not agree with the focus of the draft regulatory technical standards (draft RTS") and its general approach. In fact, we believe that the proposed approach does not provide sufficient clarity and certainty as to the interpretation and application of the criterion of homogeneity.
In particular, the relationship between the different homogeneity criteria set out in Article 1 of the draft RTS and the risk factors set out in Article 3 remain unclear.
The application of the proposed risk factors will not lead to a sufficient level of clarity as to what homogeneity means. It is in particular unclear what the considering of risk factors as required in Article 1 (d) entails. If this is meant to require an assessment of whether certain risk factors would have to be excluded from a given portfolio for it to be homogeneous, this would be problematic since the concept does not give enough guidance so that different market participants and, in fact, national competent authorities, will not always come to the same conclusion if a securitisation transaction is homogeneous or not. This is highly worrying against the background of the material sanctions introduced by Article 32 of the STS-Regulation ((EU) 2017/2402).
If, in contrast, considering the risk factors is meant to require originators to merely disclose the fractions of the risk factors set out as being considered pursuant to Article 3 in a given portfolio, we do not oppose the disclosure of relevant data with regard to risk factors. In fact, auto-ABS transactions already provide a high level of information for investors. Problematic would be, however, if the RTS do not only require disclosure of data but a lengthy and burdensome process of proving which risk factors are relevant and that they indeed mean that a pool is homogeneous. What degree of divergence within the pool would be acceptable? To what extend would a mixture be allowed? The conclusion of a self-assessment can easily be challenged by the authorities.
Accordingly, we believe that the meaning of the risk factors having to be considered pursuant to Article 1(d) would have to be further clarified, so that it becomes clear that they are not meant to determine the homogeneity of a portfolio.
We therefore disagree with the concept of “risk factors” in order to determine homogeneity. In our opinion, a "risk factor" is a term defined in Regulation (EC) 809/2004 as a list of risks which are specific to the situation of the issuer and/or the securities and which are material for taking investment decisions. In our understanding, the purpose of a risk factor is to point out risks for investors. Therefore, we do not think that "risk factor" is an accurate term.
Besides, we believe that homogeneity as such does not lead to fewer risks, but granularity does. As explained in our answer to Q17, a pool consisting of only one type of debtor is not necessarily less risky than a pool consisting of various types of debtors. In general, the granularity of the portfolio reduces the impact of a single risk component on the overall performance of the transaction.
Moreover, we would like to point out that the introduction of the highly complicated concept of risk factors is not anticipated in the STS-Regulation ((EU) 2017/2402) with respect to homogeneity. Recital 27 of the STS-Regulation ((EU) 2017/2402) only refers to homogeneity in asset types.
Also, the reasoning given for the evaluation of individual risk factors is not convincing. For example, Rationale 31a suggests that the risk factor of jurisdiction is generally more relevant for credit facilities addressed to natural persons due to consumer protection legislation. However, such reasoning seems to ignore that in particular consumer credit legislation throughout Europe is primarily based on EU legislation whilst there are differences in borrower protection standards for legal entities. We have outlined our most crucial concerns with regard to specific “risk factors” under Q8 below."
We strongly disagree with the assessment of the homogeneity of underlying exposures based on the criteria in Article 1.
a) Criteria specified under Article 1 a)
European Banking Authority
the underlying exposures have been underwritten according to similar underwriting standards, methods and criteria;
the underlying exposures have been underwritten according to equivalent underwriting standards, methods and criteria;
It is believed that the term similar is misleading in this context as it seems to imply that underwriting standards would have to be identical which, in practice is not the case. In particular auto ABS portfolios frequently comprise both retail and commercial debtors. Whilst retail customers are usually subject to a credit scoring system based on income statements and information provided by a single credit agency, such as SCHUFA in Germany, commercial customers and entrepreneurs are regularly rated on the basis of tax statements and information obtained from various credit bureaus. Accordingly, the procedures are not identical but provide equivalent results and solid assessments of the credit quality of an individual debtor be it a retail customer or commercial customer or entrepreneur.
b) Criteria specified under Article 1 d)
European Banking Authority
the underlying exposures take into account the relevant risk factors from among those that need to be considered for each asset category in accordance with Article 3, and at least one.
A risk factor shall be deemed to be relevant where, taking into account the asset category, the type of securitisation and the specific characteristics of the particular pool of underlying exposures, it results in all of the underlying exposures exhibiting similar risk profiles and cash flow characteristics within the respective asset category, enabling the investor to assess the underlying risks on the basis of common methodologies and parameters.
the underlying exposure meets at least one of the homogeneity criteria that need to be considered for each asset category in accordance with Article 3.
For homogeneity criteria that need to be considered for each asset category in accordance with Article 3 and which are not met by the underlying exposure, the originator, sponsor or SSPE shall disclose, that and why, taking into account the asset category, the type of securitisation and the specific characteristics of the particular pool of underlying exposures, in its unfettered determination they are not required to assess the underlying risk profiles and cash flow characteristics within the respective asset category on the basis of common methodologies and parameters.
Whether or not certain homogeneity criteria are relevant for the homogeneity of a certain underlying exposure is highly dependent on the individual exposure and subject to an individual assessment. So, differences in cash flow characteristics may have a substantial impact on the determination of homogeneity if in a CMBS transaction the underlying exposures consist of two large real estate loans whilst they may not be as relevant in a highly granular auto ABS portfolio. Moreover, whether or not a certain homogeneity criterion is relevant or not for a specific transaction often will be a highly subjective determination. This is particularly difficult given that pursuant to Article 29 (5) of Regulation (EU) 2017/2402 designated authorities shall supervise the compliance of originators, sponsors and SSPEs with Articles 18 to 27 of Regulation (EU) 2017/2402. Thus, such authority in the course of its supervision may take a different view as to whether a certain homogeneity criterion would have been relevant than the originator or even investors. For originators, sponsors and SSPEs it would be entirely unforeseeable what view such authority retrospectively would take when making its initial assessment in the course of structuring a transaction. So, to avoid the risk that due to the view of the authority a respective transaction retroactively loses its STS-eligibility and the originator is being sanctioned for a breach of the homogeneity criteria pursuant to Article 32 (1) e) of Regulation (EU) 2017/2402, as a matter of precaution, any transaction would have to comply with all risk factors to be considered, even if not relevant. Given that it would hardly be possible to comply with all risk factors to be considered, it would be almost impossible to have a securitisation being simple, transparent and standardised, so that the objective of Regulation (EU) 2017/2402 would fail.
Consequentially, the Regulatory Technical Standard should precisely clarify, that the originator's, sponsor's or SSPE's determination of relevance is a discretionary determination that, if properly disclosed to investors, is not subject to a reassessment and cannot be neglected by the competent authority.
Yes, we see practical implications of the criteria as defined, specifically as regards the concept of determining homogeneity with risk factors in Article 1 (d). The decision which risk factors are relevant and how they should be applied will have a substantial subjective element due to the lack of clarity in the RTS, so that it will be almost impossible to objectively assess whether a portfolio is homogeneous and thus, the related transaction qualifies as simple pursuant to Article 20(8) of the STS-Regulation ((EU) 2017/2402).
In our view, an important and severe unintended consequence of the application of the risk factors is that it will lead to a high level of uncertainty in the European securitisation market. This contradicts the purpose of STS-Regulation ((EU) 2017/2402) which “requires that the Union clearly define what an STS securitisation is”.
The development of a simple, transparent and standardised securitisation market is one of the main priorities of the European Commission. We believe that the introduction of the concept of risk factors obstructs this aim.
We do not think that the type of securitisation (non-ABCP or ABCP) should be taken into account when considering the homogeneity of the underlying pool of exposures, because such factors as set out in Article 3 of the draft RTS can be found in any portfolio, regardless of whether it being refinanced by a non-ABCP or ABCP structure. The asset category and the specific characteristics of the pool of exposures should, however, be taken into account when determining the homogeneity of a pool of exposures. As already discussed in the response to Q1, we believe that the concept of risk factors is the wrong approach and should not be expanded by additional criteria.
We believe that the criteria determining the homogeneity of a pool of exposures should not differ for non-ABCP or ABCP transactions as the structure of the refinancing of such pool of exposures does not have an impact on its homogeneity.
We agree with the asset categories provided in the draft RTS. However, we noted that the proposed list of asset categories deviates from Recital 27 of the STS-Regulation ((EU) 2017/2402). The list of asset categories in the Level-2 legislation should be congruent with the list of asset categories in the Level-1 legislation.
Any further specification would lead to an even greater deviation from the STS-Regulation ((EU) 2017/2402) and should therefore be avoided.
As outlined above, we do not support the introduction of risk factors for the determination of homogeneity.
There are indeed practical implications due to the following reasons and examples:
• The scope of application of the risk factors and the relationship between the homogeneity criteria set out in Article 1 of the draft RTS and the risk factors set out in Article 3 of the draft RTS is unclear.
• The risk factor specified in Article 3 (1) c) should not have to be considered for auto loans and leases pursuant to Article 2 e). For auto loans and leases there is no seniority on the liquidation of the collateral. The financed vehicle is either encumbered for the financier only or, in some jurisdictions, such as Italy or partly Spain, not encumbered at all. Where the vehicle is leased, it is owned by the lessor.
• It is unclear what the risk arising out of such risk factors would be. For example, considering Article 3(2)(j) of the draft RTS: We are of the opinion that based on the detailed European consumer credit legislation, such as Directive 2008/48 EC, it is believed that a level playing field already exists in consumer credit business throughout Europe.
• Other than intended by EBA, the proposed risk factors in particular do not address differences in cash flow characteristics as required by Article 20(8) of the STS-Regulation ((EU) 2017/2402) and Rationale 13 of the draft RTS as already discussed in our response to Q1.
• Article 3(2)(a) of the of the draft RTS sets out different types of obligors, i.e. natural persons and legal entities, but it remains unclear whether an asset class must consist of either debtor category only to be homogeneous. If so, such distinction appears to be rather artificial as e.g. the cash flow characteristics of natural persons generally do not differ from those of legal entities. Again, we argue that making the various types of obligors transparent to investors in a STS-ABS deal is not a problem. However, it should be avoided to use this information for determining if the transaction is homogeneous or not.
• Moreover, the composition of the risk factors is rather random in various instances. In particular the distinction in Article 3(2)(d) between loans, leases, purchase and hire seems to be artificial as in auto finance portfolios these contract types have similar cash-flow characteristics. Furthermore, according to Article 2 (e) of the draft RTS, auto loans and leases should be considered as one asset category. As stated above, we argue that this risk factor should only make it transparent to investors as to what the pool comprises.
• Any distinction between fully amortising exposures and exposures with balloon or bullet amortisation would preclude auto ABS from being STS eligible. It is in particular common for auto ABS to have exposures with linear amortisation mixed with balloon structures as such differences do not have a substantial impact on the overall pool given the granularity of these pools. Mixing these different structures is explicitly permissible for STS transactions pursuant to Article 20(8) 2nd paragraph of the STS-Regulation ((EU) 2017/2402).
• Finally, the enumeration in Article 3(1) of the draft RTS seems to be incorrect as it includes other paragraphs than Article 2 of the draft RTS.
As already stated in Q1 and Q8 above, we strongly disagree with the approach of risk factors as it is highly likely to prevent originators from certifying their transactions as STS. Therefore, it does not make sense to expand the catalog of risk factors.
Please refer to our example in Q8 regarding the jurisdiction risk factor. The same applies to the governing law risk factor. So, it would indeed be more appropriate to distinguish e.g. between collateral that qualifies as financial collateral under Directive 2002/47/EC and collateral that does not.
No, we do not consider prepayment characteristics as a relevant and adequate risk factor for determining the homogeneity. In fact, prepayment characteristics are difficult to predict as they relate to each individual exposure and could also be influenced by eventual changes in the political and economic environment that are most difficult to predict as well as by the originator’s business policy.
This question is not relevant for auto ABS as in auto finance no seniority of security interest and thus no seniority in the liquidation of collateral exists. Accordingly, we believe that also the reference to Article 3.2 (c) in Article 3.1(e) is not accurate.
Not relevant for auto ABS.
As already stated in Q1 and Q8, the scope of application of the risk factors and the relationship between the homogeneity criteria set out in Article 1 of the draft RTS and the risk factors set out in Article 3 of the draft RTS is unclear.
Furthermore, such materiality thresholds would be impractical as such distinction is irrelevant for a granular portfolio. In our opinion, the granularity of a portfolio is more important than the composition of the portfolio and such thresholds could prevent a portfolio from being granular. For example, the distinction in Article 3(2)(d) of the draft RTS is impractical as (for the reasons already discussed) it may not have an impact on cash-flow characteristics at all and, therefore, is meaningless. We believe that the granularity of a portfolio should be far more decisive on the assessment of its homogeneity than the suggested risk factors. A granular pool of retail exposures would have completely different requirements for its homogeneity than e.g. two shopping centers underlying a CMBS transaction.
Yes, we do see the merit of this approach. In our opinion, it is more appropriate to use an already existing, tried and tested model, rather than introducing a new model with the risk factors. As previously stated the distinctions between and within the risk factors are impractical. As the IRB modeling already works in practice, it is unnecessary, due to various reasons like costs, uncertainties in the introductory phase etc., to implement a new model.
Unfortunately, we consider both options not appropriate to establish a level of certainty as to the determination of homogeneity. Although option 2 seems to provide an easier approach as to the application of the risk factors, the main problem remains the same, namely the lack of clarity.
We advocate for a more practicable and easier to apply model that would allow all market participants to arrive at a common and clear understanding as to what homogeneity means. While we deem a thorough and sound due diligence a necessity, we think that assessing homogeneity should not bring the European securitisation market to a standstill because of a lack of clear and from our point of view legally not permissible rules.
Hence, we strongly recommend to only set-up similar underwriting standards, uniform servicing procedures and same asset categories as necessary conditions and abstain from introducing “risk factors” as measurements for homogeneity.
The consequence of the existing proposal regarding auto ABS would be that no transaction would explicitly qualify as STS. However, we believe it is not the aim of any regulation to create uncertainty in a market.
Quite often pools of securitized exposures comprise both loans and leases or hire purchase agreements given that these contract types have similar cash-flow characteristics.
Moreover, in any auto ABS transactions there are borrowers that are consumers, entrepreneurs, SMEs and larger corporates. However, it is the granularity of the portfolios that lowers the risk in general since it reduces the impact of a single debtor (irrespective of the type, business or private) on the performance of the overall portfolio. This risk for the investor is much higher with a portfolio that contains only one type of but very few borrowers. Clear homogeneity does not mean less risk.
In addition, pools often comprise exposures from different jurisdictions as there is often not a substantial difference in the various European jurisdictions when financing or leasing vehicles.
Finally, it is in particular common for auto ABS to have exposures with linear amortization mixed with balloon structures as such differences do not have a substantial impact on the overall pool given the granularity of these pools. Mixing these different structures is explicitly permissible for STS transactions pursuant to Article 20(8) 2nd paragraph of the STS-Regulation ((EU) 2017/2402).
All such transactions would most probably be excluded from being STS eligible - although auto ABS have the lowest spreads of all ABS segments and no investor in an European auto ABS transaction has ever suffered a loss. Auto ABS per se are of high quality and as such simple, transparent and standardised.
No, it is unclear to us how the risk factors should be taken into account in such hybrid option as the scope of application of the risk factors in the existing proposal is already unclear and in particular for auto ABS artificial.
Please refer to Q16 above.
A practical implication would be that the alternative option leads to legal uncertainties. In that case, an adequate justification is provided that taking into account that risk factor is unnecessary in order for the underlying exposures to have similar risk profiles and cash flow characteristics and to enable the investor to assess the underlying risks on the basis of common methodologies and parameters. This justification is rather vague and will require further specifications. Furthermore, it is still not set out in which way the risk factors should be taken into account, e.g. will it only be allowed to have an asset category with one kind of obligor or contract type.