Response to draft Guidelines on the STS criteria for non-ABCP securitisation
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It would be useful to have the possibility to sell defaulted loans as part of the recovery process and to precise that this is not regarded as active portfolio management.
Paragraph 19 (a) is problematic because we cannot be absolutely certain that the sale of underlying exposures for reasons other than those described in paragraph 18 should always be considered as active portfolio management.
It is common practice to return defaulted trade receivables to the seller to allow him to claim the reimbursement of the value added tax.
• the presence/absence of a penalty fee in case of a prepayment of the loan, or
• the option to differ an instalment, or
• The periodicity of payments (monthly, quarterly, etc.)
• Etc. (non-exhaustive list)
Otherwise it would be difficult to constitute homogeneous portfolio.
Furthermore, it would be useful to specify that exposures in Certificates of Deposits for cash management purposes, or other cash equivalent investments, are not to be taken into account for the homogeneity criteria.
Regarding paragraph 28 (b), We recommend removing the requirement to disclose, after the issuance of the securitisation, all material changes to underwriting standards pursuant to which exposures have been originated in the context of “(i) substitution or repurchase of underlying exposures due to the breach of representation and warranties, (ii) replenishment of underlying exposures”, as it would be cumbersome for the originators to monitor the evolution of underwriting standards during the lifetime of the securitisation.
We would like to point out that all securitisations do not have a prospectus or initial offering document. Also, we propose following amendment: “For the purposes of this paragraph, changes should be deemed material where they SUBSTANTIALLY modify the information on the underwriting standards originally disclosed in the prospectus or made available in the initial offering document”.
We believe the intent of Article 20 (11) (c) of the STS Regulation is to exclude loans that are credit impaired, but not loans that are individually more risky than the average loan. We would suggest to exclude impaired, provisioned, doubtful, non-performing and defaulted loans, based on the bank’s accounting data or internal rating. It is indeed common market practice to include all performing loans in the securitisation, some being riskier than others.
Another possibility would be to require that the average risk assessment of the securitised portfolio is not significantly higher than the average risk of the seller’s global portfolio before securitisation, for the considered asset category.
There is also an important operational aspect: the rule must be simple enough for banks to be able to implement it with the data available in the bank’s systems on a large number of loans.
In paragraph 47, regarding debtors that are flagged in a credit registry as having an adverse credit status at the time of the origination, we would recommend a tolerance of 3 months, for practical reasons, to take into account the time it takes to structure and originate a securitisation.
We believe the intent of Article 20 (11) (c) of the STS Regulation is to exclude loans that are credit impaired, but not loans that are individually more risky than the average loan. We would suggest to exclude impaired, provisioned, doubtful, non-performing and defaulted loans, based on the bank’s accounting data or internal rating. It is indeed common market practice to include all performing loans in the securitisation, some being riskier than others.
Another possibility would be to require that the average risk assessment of the securitised portfolio is not significantly higher than the average risk of the seller’s global portfolio before securitisation, for the considered asset category.
There is also an important operational aspect: the rule must be simple enough for banks to be able to implement it with the data available in the bank’s systems on a large number of loans.
In paragraph 47, regarding debtors that are flagged in a credit registry as having an adverse credit status at the time of the origination, we would recommend a tolerance of 3 months, for practical reasons, to take into account the time it takes to structure and originate a securitisation.
The condition described in paragraph 53 (c) is an additional requirement in comparison to level 1 text. Therefore, if EBA guidelines add requirements on this subject, we recommend aligning the minimum granularity at 50 exposures, rather than 500 in order to be consistent to CRR additional criterion on granularity (article 243). This would better reflect the current practice for securitisations of company car fleets, trucks or professional equipment.
In our opinion, the conditions described in paragraphs 53 (b) and (c) should apply only if the residual value of the underlying assets to be sold is > 5% of the initial value.
Paragraph 55 should be modified, because the requirement that the provider of the guarantee or repurchase obligation have a credit rating step 2 or better is too stringent. Indeed in our experience it is frequently the case that the protection provider has a credit rating below this level. Car dealers and car manufacturers, for example, can have a credit rating below the proposed level of step 2.
Furthermore, this would lead to a heterogeneous assessment of STS securitisations, because the STS qualification would depend of the bank’s credit assessment of the protection provider.
Paragraph 58 corresponds to risk mitigation through reserves of cash and credit claims. For avoidance of doubt, we suggest specifying that credit claims are permitted.
The terms “should only be permitted where either of the following conditions is met” are too restrictive because they would prevent originators from developing new hedging techniques.
The level 1 text gives great latitude regarding the methods used to cover interest rate and currency risk and requires to disclose these methods. The hedging with other assets than cash, such as overcollateralization, or the mutualisation of reserves among several transactions should not be proscribed.
We recommend to remove the requirement of paragraph 59 to disclose the measures of the mitigation of interest and currency risk on a continuous basis, which would be hard to do in practice.
In paragraph 69, we recommend suppressing the words “a seller’s default” in the following sentence: “The objective of the requirement in Article 21(4) of Regulation (EU) 2017/2402 is to prohibit non-sequential payments of principal in a situation of a seller’s default or an acceleration event.” The reason being that in the case of a seller’s default, usually a securitisation will not be accelerated but will start amortising. Pro-rata amortization is permitted and used in practice.
Originators should not be required to disclose side letters with the detail of the fees paid to the paying agent, the custodian, the rating agencies and the servicer when they pertain to small amounts, because that would be of limited interest for the investor.
Regarding paragraph 80 (e), the documentation should provide for a maximum time for the organization of a meeting rather than the maximum time for the resolution of the conflict, as it is difficult to guarantee in advance how much time it will take to resolve a conflict.
We therefore recommend a more flexible approach, which is to define “comparable exposures” as exposures of the same asset category, as defined in article 2 of the draft RTS on homogeneity of the underlying exposures in STS securitisations, and that are not credit impaired.
Furthermore, the requirement of paragraph 85 (a) goes beyond the requirement of Article 22(2) of the STS Securitisation Regulation. Our understanding of Article 22(2) is that the sample verifications aims at testing data quality only and not compliance with eligibility criteria.
Currently, originators undergo two levels of audit:
1. An audit of a sample of the underlying portfolio, to check the data quality, and
2. An audit of the stratification tables which allows to verify the compliance with the eligibility criteria.
In practice, because of incompressible delays, the sample verification is not carried out on exactly the same data as the data of the final portfolio that will be disclosed to the investors. In other words: the portfolio inevitably evolves slightly between the date when the sample audit is carried out and the closing date.
For these reasons, we recommend to remove 85(a) and remove the reference to any formal offering document. We suggest to rewrite paragraph 85 as follows: “For the purposes of Article 22(2) of Regulation (EU) 2017/2402 the verification, based on a representative sample, that the data disclosed to investors in respect of the underlying exposures is accurate should apply a confidence level of at least 95%.”
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.
It can happen that the underlying portfolio is composed of loans that have been purchased several years before the securitisation origination. In such a situation, it could be problematic to obtain from the original lender the representation that the loans are not encumbered. For example, the relationship between the original lender and the seller may have evolved and the original lender may not have a clear incentive to provide the representation.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.
It would be useful to precise that the exercise of the clean-up call or a regulatory call is not active portfolio management.It would be useful to have the possibility to sell defaulted loans as part of the recovery process and to precise that this is not regarded as active portfolio management.
Q7. Do you agree with the techniques of portfolio management that are allowed and disallowed, under the requirement of the active portfolio management? Should other techniques be included or excluded?
For revolving securitisations, it can happen that the criteria slightly evolve during the life of the securitisation. For example, a subsidiary can be added to the list of entities of a group from which the securitisation can purchase assets, or the purchase limit for one entity of the group can be modified. We would welcome additional comfort from the EBA guidelines in this respect.Paragraph 19 (a) is problematic because we cannot be absolutely certain that the sale of underlying exposures for reasons other than those described in paragraph 18 should always be considered as active portfolio management.
It is common practice to return defaulted trade receivables to the seller to allow him to claim the reimbursement of the value added tax.
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.
In paragraph 22, we recommend removing “i.e. that relate to any obligations to make payments or provide security by the debtor, and, where applicable, guarantor” which could be confusing, all payment obligations may not be relevant to investors.Q9. 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?
It is important that minor differences among the loans do not prevent the compliance with the homogeneity criteria. For example:• the presence/absence of a penalty fee in case of a prepayment of the loan, or
• the option to differ an instalment, or
• The periodicity of payments (monthly, quarterly, etc.)
• Etc. (non-exhaustive list)
Otherwise it would be difficult to constitute homogeneous portfolio.
Furthermore, it would be useful to specify that exposures in Certificates of Deposits for cash management purposes, or other cash equivalent investments, are not to be taken into account for the homogeneity criteria.
Q10. 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.
In paragraph 28 (a) the requirement to disclose material changes to the underwriting standards over a period of 5 years before the issuance of the securitisation is too long and would be cumbersome for the originators. In our experience, bank’s underwriting standards evolve very regularly. We recommend a period of three years. Furthermore, there is an overlap between this requirement and the requirements of the Delegated Regulation on homogeneity of underlying exposures.Regarding paragraph 28 (b), We recommend removing the requirement to disclose, after the issuance of the securitisation, all material changes to underwriting standards pursuant to which exposures have been originated in the context of “(i) substitution or repurchase of underlying exposures due to the breach of representation and warranties, (ii) replenishment of underlying exposures”, as it would be cumbersome for the originators to monitor the evolution of underwriting standards during the lifetime of the securitisation.
We would like to point out that all securitisations do not have a prospectus or initial offering document. Also, we propose following amendment: “For the purposes of this paragraph, changes should be deemed material where they SUBSTANTIALLY modify the information on the underwriting standards originally disclosed in the prospectus or made available in the initial offering document”.
Q11. Do you agree with this balanced approach to the determination of the expertise of the servicer? 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?
We agree with the balanced approach to the determination of the expertise of the servicer.Q12. Should alternative interpretation of the “similar exposures” be provided, such as, for example, referencing the eligibility criteria (per Article 20(7)) that are applied to select the underlying exposures? Similar exposure under Article 20(10) 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 20(10), and “substantially similar exposures” under Article 22(1). 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.
We do not support the suggestion to add additional constraints in the interpretation of “similar exposures”.Q13. 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.
Paragraph 50 is problematic, especially the words “significantly higher than the average credit score or assessment”, because this could be interpreted as an obligation to exclude from the underlying portfolio the loans that individually have a higher than average probability of default. A securitisation’s underlying loan portfolio is usually composed of a variety of loans, some being riskier than others.We believe the intent of Article 20 (11) (c) of the STS Regulation is to exclude loans that are credit impaired, but not loans that are individually more risky than the average loan. We would suggest to exclude impaired, provisioned, doubtful, non-performing and defaulted loans, based on the bank’s accounting data or internal rating. It is indeed common market practice to include all performing loans in the securitisation, some being riskier than others.
Another possibility would be to require that the average risk assessment of the securitised portfolio is not significantly higher than the average risk of the seller’s global portfolio before securitisation, for the considered asset category.
There is also an important operational aspect: the rule must be simple enough for banks to be able to implement it with the data available in the bank’s systems on a large number of loans.
In paragraph 47, regarding debtors that are flagged in a credit registry as having an adverse credit status at the time of the origination, we would recommend a tolerance of 3 months, for practical reasons, to take into account the time it takes to structure and originate a securitisation.
Q14. Do you agree with the interpretation of the criterion with respect to exposures to a credit impaired debtor or guarantor?
Paragraph 50 is problematic, especially the words “significantly higher than the average credit score or assessment”, because this could be interpreted as an obligation to exclude from the underlying portfolio the loans that individually have a higher than average probability of default. A securitisation’s underlying loan portfolio is usually composed of a variety of loans, some being riskier than others.We believe the intent of Article 20 (11) (c) of the STS Regulation is to exclude loans that are credit impaired, but not loans that are individually more risky than the average loan. We would suggest to exclude impaired, provisioned, doubtful, non-performing and defaulted loans, based on the bank’s accounting data or internal rating. It is indeed common market practice to include all performing loans in the securitisation, some being riskier than others.
Another possibility would be to require that the average risk assessment of the securitised portfolio is not significantly higher than the average risk of the seller’s global portfolio before securitisation, for the considered asset category.
There is also an important operational aspect: the rule must be simple enough for banks to be able to implement it with the data available in the bank’s systems on a large number of loans.
In paragraph 47, regarding debtors that are flagged in a credit registry as having an adverse credit status at the time of the origination, we would recommend a tolerance of 3 months, for practical reasons, to take into account the time it takes to structure and originate a securitisation.
Q15. Do you agree with the interpretation of the requirement with respect to the exposures to credit-impaired debtors or guarantors that have undergone a debt-restructuring process?
We agree with the interpretation.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.
Regarding revolving securitisations, it would be useful to specify that the exception mentioned in article 20(12) of the STS Regulation remains valid during the amortisation period.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.
In paragraph 53, we recommend following amendment: “guaranteed or fully mitigated by a repurchase obligation by the seller of the assets securing the underlying exposures or by other third parties”The condition described in paragraph 53 (c) is an additional requirement in comparison to level 1 text. Therefore, if EBA guidelines add requirements on this subject, we recommend aligning the minimum granularity at 50 exposures, rather than 500 in order to be consistent to CRR additional criterion on granularity (article 243). This would better reflect the current practice for securitisations of company car fleets, trucks or professional equipment.
In our opinion, the conditions described in paragraphs 53 (b) and (c) should apply only if the residual value of the underlying assets to be sold is > 5% of the initial value.
Paragraph 55 should be modified, because the requirement that the provider of the guarantee or repurchase obligation have a credit rating step 2 or better is too stringent. Indeed in our experience it is frequently the case that the protection provider has a credit rating below this level. Car dealers and car manufacturers, for example, can have a credit rating below the proposed level of step 2.
Furthermore, this would lead to a heterogeneous assessment of STS securitisations, because the STS qualification would depend of the bank’s credit assessment of the protection provider.
Q18. 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?
Regarding paragraph 53 (a), we recommend a residual value of 50% rather than the proposed 30%, because this reflects the reality of certain automobile loan securitisations. For example: securitisation of Car Personal Contract Purchase (PCP) transactions in the United Kingdom.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.
In our opinion, the requirement described in paragraph 57 (e) to carry out a sensitivity analysis under extreme market scenarios goes beyond the requirement of Article 21(2) of the STS securitisation regulation and is overly complex and cumbersome, especially if it has to be carried out through the life of the transaction. It would be more realistic to ask for the sensitivity analysis to be carried out only at the origination date. This requirement would discourage the usage of derivatives which are currently the most appropriate hedging instrument. Furthermore, it would make it more difficult for institutional investors to carry out the due diligence with respect to STS compliance, as required in Article 5 (3) (c) of the STS regulation.Paragraph 58 corresponds to risk mitigation through reserves of cash and credit claims. For avoidance of doubt, we suggest specifying that credit claims are permitted.
The terms “should only be permitted where either of the following conditions is met” are too restrictive because they would prevent originators from developing new hedging techniques.
The level 1 text gives great latitude regarding the methods used to cover interest rate and currency risk and requires to disclose these methods. The hedging with other assets than cash, such as overcollateralization, or the mutualisation of reserves among several transactions should not be proscribed.
We recommend to remove the requirement of paragraph 59 to disclose the measures of the mitigation of interest and currency risk on a continuous basis, which would be hard to do in practice.
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.
Banks would like to stress that is highly important that the successors of EONIA, EURIBOR and LIBOR will be compliant with the STS criteria and that EBA ensures that the guidelines allow STS securitisations to reference these future successor benchmarks.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.
Regarding paragraph 66, French banks would like to point out that trustees play a role in securitisation structured under English Law. In other jurisdictions, such as France, securitisations do not have a trustee but a securitisation manager (“société de gestion”). Furthermore, in some cases, the securitisation legal documentation leaves no leeway to the trustee or securitisation manager in this respect.In paragraph 69, we recommend suppressing the words “a seller’s default” in the following sentence: “The objective of the requirement in Article 21(4) of Regulation (EU) 2017/2402 is to prohibit non-sequential payments of principal in a situation of a seller’s default or an acceleration event.” The reason being that in the case of a seller’s default, usually a securitisation will not be accelerated but will start amortising. Pro-rata amortization is permitted and used in practice.
Q22. 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.
Regarding paragraph 71, banks would like to have the possibility, if the credit quality of the underlying exposures improves again after having deteriorated, to switch back from the sequential priority of payments to a pro-rata amortisation. It would be useful to indicate this possibility in the STS guidelines.Q23. 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.
In practice, an insolvency event of the servicer does not automatically entail the replacement of the servicer, and such replacement is not required by the Securitisation Regulation. We recommend following amendment of paragraph 72: “an insolvency-related event with respect to the servicer should trigger the termination of the revolving period.”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.
We question the added value of paragraph 76, because securitisation originators must already comply with Article 7 “Transparency requirements for originators, sponsors and SSPEs” of the STS regulation.Originators should not be required to disclose side letters with the detail of the fees paid to the paying agent, the custodian, the rating agencies and the servicer when they pertain to small amounts, because that would be of limited interest for the investor.
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.
In our opinion, paragraph 78 (a) could be simplified. The requirement “the existence of well documented and adequate policies, procedures and risk management controls in this regard has been assessed and confirmed by the competent authority;” is superfluous for banks in the EU. The fact that they comply with the prudential regulation and that they are supervised by competent authorities or the Single Supervisory Mechanism should suffice. If a bank does not comply with prudential regulatory regulation or does not have adequate risk management procedures, the national competent authorities (NCA) will pronounce sanctions or prevent the bank from pursuing its activity. The requirement should be that the bank complies with the EU prudential regulation and the NCA authorises the bank to pursue its activity.Q28. 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.
We believe the requirement in paragraph 80 (d), to include provisions for a location for meetings, could in some cases be problematic.Regarding paragraph 80 (e), the documentation should provide for a maximum time for the organization of a meeting rather than the maximum time for the resolution of the conflict, as it is difficult to guarantee in advance how much time it will take to resolve a conflict.
Q29. 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.
For the definition of “substantially similar exposures”, paragraph 82 refers to paragraph 49 which itself refers to article 16(2) of the draft RTS on risk retention requirements. We fear that this could be too restrictive with respect to the operational constraints of securitisation originators, because this would entail the requirement to apply the exact same eligibility criteria for the historical performance data disclosure and the securitisation. This could be difficult to achieve in practice, because the historical data and the actual underlying portfolio are often not extracted from the same systems and databases.We therefore recommend a more flexible approach, which is to define “comparable exposures” as exposures of the same asset category, as defined in article 2 of the draft RTS on homogeneity of the underlying exposures in STS securitisations, and that are not credit impaired.
Q30. 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.
It would be useful to specify that the sample verification mentioned in Article 22(2) of the Regulation should not be required in the case of a reissuance under the same securitisation. For example, some master trusts reissue securities every month. For such transactions, we recommend a yearly audit.Furthermore, the requirement of paragraph 85 (a) goes beyond the requirement of Article 22(2) of the STS Securitisation Regulation. Our understanding of Article 22(2) is that the sample verifications aims at testing data quality only and not compliance with eligibility criteria.
Currently, originators undergo two levels of audit:
1. An audit of a sample of the underlying portfolio, to check the data quality, and
2. An audit of the stratification tables which allows to verify the compliance with the eligibility criteria.
In practice, because of incompressible delays, the sample verification is not carried out on exactly the same data as the data of the final portfolio that will be disclosed to the investors. In other words: the portfolio inevitably evolves slightly between the date when the sample audit is carried out and the closing date.
For these reasons, we recommend to remove 85(a) and remove the reference to any formal offering document. We suggest to rewrite paragraph 85 as follows: “For the purposes of Article 22(2) of Regulation (EU) 2017/2402 the verification, based on a representative sample, that the data disclosed to investors in respect of the underlying exposures is accurate should apply a confidence level of at least 95%.”