25 June 2018

ESMA publishes responses to its Consultation on amendments to the EMIR Clearing Obligation under the Securitisation Regulation

True Sale International

Assuming that special purpose entities can continue to be treated as non-financial counterparties, we assume that the two draft delegated regulations will have only a minor impact on securitisations. This would change drastically if securitisation special purpose vehicles had to be classified as financial counterparties in accordance with the Commission's draft for EMIR II. We therefore confine ourselves to one aspect in Article 30a which is not in line with market practice and which, if the two delegated regulations were relevant, would lead to an increase in the refinancing costs for STS securitisations, since the counterparty of the securitisation purpose company will charge for the risk of having to provide collateral and also for all the associated costs.

It is market practice to waive the exchange of collateral if and as long as the counterparty to the securitisation special purpose vehicle has a minimum rating. In practice, this generally requires an "A" rating, which corresponds to quality level 2. If the rating falls below this minimum rating, a guarantee  from a guarantor with a minimum rating of quality level 2 can also be considered as an alternative.  In addition, we would like to add that in practice it is possible for the counterparty to provide the collateral not only in cash but also in the form of securities. The latter is currently permitted under Article 4 of the Delegated Regulation (EU) 2016/2251, so that it is not clear why the collateral in securitisation transactions should be limited to cash collateral in future.

The proposed approach would entail higher costs because the financial counterparty would have higher costs due to the fact that the financial counterparty shall provide the variation margin which is not market standard in case of OTC derivatives for securitisations. To mitigate the counterparty risk it is market standard that the financial counterparty has to have an external minimum rating. If the external rating of the financial counterparty falls below the minimum rating then it is market practice to provide collaterals or that a guarantee is provided from a third counterparty that has got a minimum rating.

Full True Sale International response

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FBF

FBF agrees with the proposed approach but the requirement for securitisations should be for the counterparty to the OTC derivative to rank at least pari passu with the investors of the relevant tranche being the subject of the OTC derivative.

Furthermore it is in favour to also apply the waiver of the pari passu rank to securitisations under exceptional circumstances. For example, it is current market practice that the payment of breakage fees are subordinated in case of a default of the swap counterparty (and credit rating agencies require this).

Regarding the requirement of a credit enhancement of 2% of the most senior securitisation tranche, it is impossible to guarantee it on an ongoing basis, as there could be defaults on the underlying portfolio. A securitisation is an auto-liquidating structure, to the contrary of a covered bonds that has a cover pool that can be replenished on a regular basis. Moreover, this requirement would not be consistent with the current market practice that derivatives are pari passu with the relevant tranche hedged by the derivative. FBF suggests removing this requirement or rephrasing it in following terms: “the securitisation will provide initial credit enhancement to each securitisation tranche to which the OTC counterparty is at least pari passu (as applicable).

Full FBF response

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Finance Denmark

When amending regulation to ensure consistency of treatment between derivatives associated with covered bonds and derivatives associated with securitisations, with regard to the clearing obligation and the margin requirements on non-centrally cleared OTC derivatives Finance Denmark finds it important to extend that consistency to also include UCITS compliant covered bonds. If derivatives associated with securitisations are exempted from the clearing obligation, in order to avoid regulatory arbitrage and to secure a level playing field the same should apply for derivative associated with UCITS compliant covered bonds.

It also recommends the ESAs to observe the EU Commissions proposal for a covered bond directive, as tabled in March 2018. This directive also regulates, inter alia, the conditions for covered bond derivatives in article 11. It strongly advices the ESAs to secure that the Delegated Regulations and the coming Covered Bond directive do properly interact with each other and do not disturb well established covered bond markets. One issue to clarify could be the requirement for pari passu ranking of the derivative counterparty also in insolvency and resolution.

As a general comment Finance Denmark has noted that the ESAs propose, to avoid repetition, to delete certain conditions from the Delegated Regulations. However, this repetition may be valuable and secure transparency in the future; deletion of the conditions will only increase the risk of non-compliance of the rules. We therefore advice to keep the conditions.

Full Finance Denmark response

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Amundi

Amundi agrees that the waiver of the pari passu ranking is only relevant to covered bonds where investors have a dual recourse against the issuer and the underlying portfolio. It sees the pari passu clause as a provision aiming to reinforce investors’ protection as well as conterparties. To illustrate this point, it could in theory express the pari passu requirement from the standpoint of the investor in article 1 (1) (c) of the RTS as follows “the covered bond holders should rank pari passu with the counterparty to the OTC derivative…except where the counterparty  … is the defaulting or the affected party, or waives the pari passu”. This would imply a deletion of the words “at least”, but we do not object to the proposed wording which is clearly aligned with current market practice.

Amundi does agree that the pari passu rank should concern holders of the senior tranche of the securitisation. However, it does not like the proposed wording of the RTS which refers to “notes” in article 2 (1) (b) when it prefers the word “tranche”. It would recommend to write “the SPPE in connection with the securitisation to which the OTC derivative (singular) contract is associated is subject to a level of credit enhancement of the most senior securitisation tranche of at least 2%”. It also suggests, for the sake of consistency, to delete the mention of the “ongoing basis” since it does not appear in article 1 (1) (d) for covered bonds. It recommends a strict harmonisation, either way.

Amundi has a further comment on the relevance of this 2% overcollateralization for the senior tranche. Since our experience is that the structure of a securitisation usually exceeds this level of 2%,  it fears that suggesting such a low threshold might lower the protection of investors and contradict the quality of the STS label. As an investor, Amundi  analyses the structure of many securitisations and we tend to prefer those with a liquidity cushion or excess cash flows and with a level of subordination prudently calibrated. The reference to 2% as credit enhancement for securitisations is proposed with a view to align the level with the covered bonds overcollateralization. Amundi, though, believes that the 2 types of transactions are not identical if in some respects comparable. The level of uncertainty when considering early prepayment and management of  a macro hedging is generally higher on securitisations than on covered bonds and we submit that the 2% level might be too low from an investors’ protection point of view. It has to be assessed whether on the other hand, 2% is an absolute maximum to develop market finance through STS securitisations.

Full Amundi response

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Consultation paper

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