With less than three weeks to go until the scheduled end of the post-Brexit EU-UK transition period, the Joint Committee of the European Supervisory Authorities (ESAs) published a supervisory statement¹ on 7 December 2020 highlighting the impact of Brexit on the status of “simple”, “transparent” and “standard” (STS) securitisation transactions. The supervisory statement was published on the European Securities and Markets Authority (ESMA) website and while short in length it is strict in supervisory tone by reconfirming that:

1. In order for a securitisation issuance to be eligible to qualify as an STS, the EU’s Securitisation Regulation requires that an originator, sponsor and securitisation special purpose entity (SSPE) must be established in the EU. Any securitisation that involves a non-EU originator, sponsor or SSPE will not be able to qualify as STS. There is no third-country equivalence regime applicable to non-EU parties. This is a significant consideration for UK originators in the context of Brexit; 
2. Those securitisation issuances that are currently labelled as STS where one or all of the transaction parties named in point 1 are established in the UK² following the end of the transition period i.e., from January 1, 2021, will no longer benefit from their STS status. This applies to both asset-backed commercial paper (ABCP) STS securitisations and term STS securitisation issuances. Importantly, as discussed below, the supervisory statement does not address the location of cashflow generating assets and if the transaction is structured appropriately, non-EU cashflow generating assets may still be able to qualify as STS;
3. ESMA is working with the relevant national competent authorities (NCAs) of the EU-27 Member States to ensure that the ESMA’s STS Securitisation Register³ is brought up to date on 1 January 2021 thereby introducing a hard deadline as opposed to any gradual phasing out of STS labels; and
4. The loss of STS status of a securitisation issuance will end the preferential capital treatment afforded to investors under the EU’s Securitisation Regulation. Investors are advised to “…assess the impact of this change of status on their balance sheet and investments ahead of December 31, 2020.”

The EU’s Securitisation Regulation does not define what is meant by “established in the Union” but it does define and distinguish what constitutes “established in a third country”. The UK has been formally, since leaving the EU on 1 February 2020, become what the EU terms a “third country”. The EU-UK transition period, which ends on 31 December 2020 (unless extended), continued to treat the UK as if it were an EU Member State for such period. The application of EU law in the UK continues for such period along with the STS status for securitisation issuances with transaction parties established in the UK, but only for the length of that period.

The UK has, as part of its post-transition period preparation, begun to on-shore EU legislation into its own legislative and regulatory regime (referred to as “retained EU law”), which will only be capable of amendment by UK legislation as opposed to subsequent EU legislation. The UK’s Securitisation (Amendment) (EU Exit) Regulations 2019 (UK Securitisation Regulations 2019), amend the EU’s Securitisation Regulation, as it will apply in the UK, following the expiry of the EU-UK transition period. The UK Securitisation Regulations 2019 also make a number of additions that go beyond replacing EU references with UK ones that are beyond the scope of this current Client Alert.

While the UK Securitisation Regulations 2019 contemplates a period in which EU STS could benefit from being treated in the UK as STS under the UK regime, the ESA’s supervisory statement could put this into doubt. At present no reciprocal measure exists for UK STS under the UK regime to be recognized as STS in the EU regime and this could cause UK STS issuances to lose appeal for EU market participants. Either way, Brexit is contributing to an uneven playing field for securitisations. 

What firms may wish to consider

Importantly, firms will want to note that the last paragraph of Article 18 of the EU Securitisation Regulation states (emphasis in bold and clarification in square brackets) that: “The originator, sponsor and SSPE involved in a securitisation [issuance] considered STS shall be established in the Union.” Consequently, certain transaction structures exist and carry a STS label, where an originator and SSPE are in the EU, but the cashflow generating assets were first sold to the EU originator by an entity in a third-country – which the EU Securitisation Regulation refers to as an “original lender” – who may sell those assets to an originator in the EU so as to satisfy the Article 18 requirements and the further STS criteria. 

Nevertheless, some of these structures might, in light of the ESA’s supervisory statement, merit stakeholders revisiting arrangements to ensure that they have suitable controls to conform to all STS requirements. This may also extend to reviewing the suitability of arrangements in place that aim to ensure the EU-domiciled originator’s accountability for exposures originated outside of the EU as well as to consider what preparatory measures to take if competent authorities review the issuance in light of the ESA’s supervisory statement.

Notwithstanding the above and despite the ESA’s supervisory statement, a lot of the impact will be transaction specific and merit not only issuers but also investors (including liability driven investors) continuing (and possibly stepping up existing efforts) to: 

1. review the impact of Brexit and any mitigating arrangements already accounted for in transaction structures, parties’ preparations as well as disclosure and consent obligations vis-à-vis third-parties or regulatory and supervisory authorities; 
2. consider whether any use of any EU-domiciled entities could be used to step-in and “cure” situations where one or all of the originator, sponsor and SSPEs are located in the UK and what amendments, consents and disclosures may be required; 
3. assess whether the change in STS status may impact the acceptance or the valuation of STS issuance for collateral asset purposes, including when mobilized with central banks in various programs. It should be noted that: Securitisations listed on an UK trading venue will not meet the Eurosytem’s (and thus the ECB’s) eligibility criteria which require the obligors of the underlying assets to be in the EEA, any property collateralizing those underlying assets to be located in the EEA and certain transaction parties to be established in the EEA as part of the eligibility criteria; and 
4. engage with investors to carry out restructuring of securitisation issuances that could lose STS status from 1 January 2021. 

Outlook

While the ESA’s supervisory statement does not close the door on the ability to structure STS-eligible securitisations that have non-EU cashflow generating exposures, considering that of course today also non EU-originated cashflows and receivables form part of STS-compliant transactions, it marks a clear next step by the EU supervisory policymakers and should also be read in conjunction with other Brexit-preparation notices of the EU and UK authorities.⁴ As both the EU and UK move forward with their own securitisation regulatory regimes, market participants (both sell and buy-side) will need to be aware of conceptual differences between rules as well as the supervisory expectations from competent authorities in what will be parallel regimes. 

If you would like to discuss structuring options or documentation priorities that stem from these changes please contact the key contacts.

1. Available here.↩
2. N.B. the ESA’s supervisory statement is limited to the UK i.e., it does not address situations concerning the position relating to the UK’s overseas territories (Gibraltar), Crown Dependencies (Isle of Man and the Channel Islands).↩
3. Please see ESMA’s current landing page, which is available here. and setting out links to files reporting securitisation issuances that meet STS requirements and those where STS notifications have been cancelled as well as a file setting out securitisations which no longer meet STS requirements. ↩
4. Please see coverage from our Financial Regulatory Hub Europe on EU-27 supervisory principles on relocations and Brexit preparation. ↩