As of beginning of 2019, the new Securitization Regulation applies. It consists of 48 articles and brings forth several noteworthy rules, concerning mostly disclosure practices and Simple, Transparent and Standardized (STS) framework.
The STS Framework
The STS refers to a set of criteria that grant an STS label to a compliant ABS transaction. The requirements are described in articles 18 – 28 and can be broken down as follows:
Simplicity: Article 20 demands compliant transactions, among others, to undergo transfer with a legal effect of true sale, prohibit active management and any clawback provisions, meet certain homogeneity criteria and require underlying exposures not to include any securitization positions.
Standardization: Described in Article 21 which requires risk-retention as per Article 6, mitigation of interest and FX risk and deals in detail with waterfall related risk such as non-sequential amortization, triggers and revolving structures.
Transparency: As stated in Article 22, compliant transaction must disclose at least 5 years of historical defaults, losses and delinquencies. This data is subject to external verification and should be available for cashflow modelling in a model also provided by the originator or sponsor. The transaction shall be further compliant with Article 7, dealing with data disclosure.
Articles 23 – 26 define STS compliancy of ABCP transactions, which are in many aspects similar to non-ABCP rules as briefly outlined above. Since there is no public ABCP transaction registered by ESMA yet, we leave these articles for a later discussion.
STS criteria contain one more specific requirement, not common prior 2019 – compliance notification, namely the STS Notification. As per Article 27, to obtain STS label, originators and sponsors shall notify ESMA using a specific template in which transaction in question fulfills criteria set out in Articles 20 to 22 (non-ABCP). ESMA is responsible for a maintenance of a publicly accessible list with all STS transaction, yet the responsibility of accuracy remains with the notifying entity.
Despite of many changes related to disclosure templates for the underlying exposures, the STS notification template remains unchanged – published by ESMA on November 13, 2018 and “reconfirmed” in ESMA’s Q&A Document from July 17, 2019. Using the data from this list, we can see the STS market growth over the past 8 months. Despite being slow at the beginning of this year, we could see the first STS-compliant deals in late March with notification sent to ESMA in April 2019. The first notification for public transaction was received on April 11 from Obvion. The chart below shows the distribution of notifications registered by ESMA over the first 8 months of 2019 [1].
Interestingly, when looking at the vintage years, not all of them were originated this year. From the following chart we can read that 14 out of 36 registered were originated before 2019 or are mater trusts that fall under the new Securitization Regulation as soon as they issue new bonds.
What is coming next?
The full STS framework is built upon many interlinked articles, forming a complex regulatory structure. As of early September 2019, the market still awaits endorsement of the new reporting templates as well as rules for settlement of the first Securitization Repository. Having these two pieces missing, the entire STS concept unfortunately lacks one of the key components – enhanced transparency.
In case of any questions, please contact our experts at PwC.
 Petr Surala, CFA – Mail: petr.surala@pwc.com |
 Dr. Philipp Völk – Mail: philipp.voelk@pwc.com |
[1] Applies only to public transactions where individual Notes of master trust are disregarded and only the umbrella of the master trust is counted.