Introduction and background

For STS on-balance-sheet securitisations as referred to in Article 26a (1) of the Securitisation Regulation, Article 26e (10) (b) of the Securitisation Regulation refers to "collateral in the form of cash held with a third-party credit institution with credit quality step 3 or above” ("qualifying third-party credit institution") [underline by SVI]. In practice, however, there is no such thing as „cash“ in the form of bills and coins (unless physically held in the bank’s vault or kept as segregated fiduciary cash account with another institution on behalf of the depositor as beneficial owner of such fiduciary account) and thus it is not possible to apply Article 26e (10) (b) of the Securitisation Regulation in its literal sense because it is legally impossible to create a security interest over the "cash" in a cash deposit. This is because any cash paid into a cash deposit is immediately commingled with all other funds of the deposit bank.

Therefore, in the term ‚cash on deposit‘, the reference to collateral in the form of "cash held with" a third-party credit institution in Article 26e (10) (b) of the Securitisation Regulation must in our view be read as collateral in the form of an undertaking to pay cash by a third-party credit institution. It should not make a difference if the undertaking of the third-party credit institution which meets the rating requirements to pay cash is established as a result of a cash deposit or otherwise (e.g. under a bank guarantee or letter of credit), provided that the terms of the undertaking and its treatment in an insolvency or resolution scenario are equivalent. This would also be in line with the wording of the provision, as the words "cash held with" do not apply as such and must be reinterpreted as described above for the provision to be operable. In addition, under the Capital Requirements Regulation (“CRR”), in order to be eligible as credit protection, collateral in the form of a pledge on "cash on deposit with a third-party institution" must be treated as collateral in the form of a guarantee of such institution, see Articles 232 (1), 212 (1) and 200 of the CRR and a related previous submission into the Single Rulebook Q&A (Question ID 2015-1917) where it is clarified by the European Banking Authority (“EBA”) that ‘an unconditionally drawable letter of credit held directly by an institution as beneficiary cannot be treated as cash assimilated instruments, to the extent that it is issued by a party different from the lending institution’, i.e. a letter of credit is considered to be similar to cash on deposit with an institution issuing the letter of credit. As any collateral under Article 26e (10) (b) of the Securitisation Regulation is therefore to be treated as a guarantee of a third-party credit institution, it would be inconsistent to interpret the provision as excluding collateral which actually is in the form of a guarantee of a third-party credit institution.

Due to the reasons mentioned above, in our opinion the feedback provided by EBA in its Final Report on the guidelines on the STS criteria for on-balance-sheet securitisation dated 27 May 2024 on this point (see Question 42: “The Level 1 test is clear. This is considered to be beyond the scope of these guidelines”) is not conclusive on this point and the question raised should, if not in the scope of the guidelines, be in the scope for the Single Rulebook Q&A.

Conclusion

From the perspective of the enforceability of the right to use the collateral for the purposes of Article 26e (9) (a) and (b) of the Securitisation Regulation, collateral in the form of a guarantee (including a letter of credit) of a qualifying third-party credit institution would have the following additional benefits for the originator and the investor, respectively:

• For the originator, a bank guarantee for the investor's obligation to make protection payments is equivalent or superior to a pledge on a cash deposit (claim) of the investor, as the guarantee provides a direct claim against the credit institution whereas a pledge needs to be enforced and requires proof that the secured obligation of the investor is due. In addition, guarantees, especially in the form of letters of credit, frequently grant the beneficiary the right to be paid on first demand and would thus provide a superior form of collateral to the originator compared to a pledge on a cash deposit.

• With regard to the credit risk incurred by the investor, a bank guarantee (including a letter of credit) of a qualifying third-party credit institution is superior to a pledged cash deposit as, in the case of a cash deposit, the investor bears the risk that the (remaining) cash deposit is not repaid upon the termination of the credit protection, i.e. the investor is exposed to the credit risk of the third-party credit institution. However, a bank guarantee does not create such credit risk and makes a recourse of the investor to the collateral unnecessary once the credit protection is terminated.

• For the market for STS on-balance-sheet securitisations in general, the eligibility of a bank guarantee (including a letter of credit) would also facilitate (re-) insurers to act as investors in funded transactions. 

The requirement, according to Article 26e (9) 3rd Subparagraph of the Securitisation Regulation, for the enforceability of the credit protection in all relevant jurisdictions to be confirmed through an opinion from a qualified legal counsel would also apply to collateral in the form of a guarantee (including a letter of credit).