Guidance

The Securitisation (Amendment) (EU Exit) Regulations 2019: explanatory information

Updated 20 December 2018

1. Context

The European Union (Withdrawal) Act 2018 (EUWA) repeals the European Communities Act 1972 on the day the UK leaves the EU and converts into UK domestic law the existing body of directly applicable EU law. The purpose of the EUWA is to provide a functioning statute book on the day we leave the EU.

The EUWA also gives Ministers powers to make Statutory Instruments (SIs) to prevent, remedy or mitigate any failure of EU law to operate effectively, or any other deficiency in retained EU law. We refer to these contingency preparations for financial services legislation as ‘onshoring’.

HM Treasury is using these powers to ensure that the UK continues to have a functioning financial services regulatory regime in any scenario.

This SI is part of the wider work the government is undertaking to prepare for the UK’s withdrawal from the EU. It is not intended to make policy changes, other than to reflect the UK’s new position outside the EU, and to smooth the transition. The changes made in this SI would not take effect on 29 March 2019 if, as expected, we enter an implementation period.

2. Notice

The draft SI is intended to provide Parliament and stakeholders with further details on our approach to onshoring financial services legislation. The draft instrument is still in development. The drafting approach, and other technical aspects of the proposal, may change before the final instrument is laid before Parliament.

3. Policy background and purpose of the SI

3.1 What does the underlying EU regulation and UK law do?

Securitisation is the process of pooling various financial assets to form a financial instrument that can be marketed to investors. This packaging allows banks to transfer the risks of some loans to other banks or long-term investors such as insurance companies and asset managers. A securitisation will typically involve three parties – a sponsor, an originator, and a Securitisation Special Purpose Entity (SSPE). Securitisation played a significant role in the global financial crisis, which created an impetus for reforms that would introduce stricter standards and make securitisations simpler and more transparent.

The Securitisation Regulation came into force in the EU in January 2018 and will take effect from January 2019. A key purpose of the Securitisation Regulation was to consolidate a patchwork of legislation governing European securitisations, repealing and replacing existing securitisation legislation.

As well as this, the Regulation also sets out eligibility criteria for issuing ‘simple, transparent and standardised (STS)’ securitisations – a new classification of European securitisations that can in some cases benefit from preferential capital treatment. The aim of the introduction of STS securitisations was to revitalise the European securitisations market, which has remained relatively subdued following the financial crisis, and to incentivise the creation of safer financial instruments.

3.2 Deficiencies this SI remedies

This SI identifies and amends deficiencies within the EU text to ensure that the Securitisation Regulation can remain operative in a UK-only context post-exit. Details of specific changes are:

STS recognition

STS securitisation recognition was a significant aspect of the Securitisation Regulation. A securitisation can be classified as STS if it meets standards derived from the international Basel framework. EU securitisations with this classification are desirable for firms as they may qualify for lower capital requirements relative to non-STS securitisations. The European Securities and Markets Authority (ESMA) will maintain a public list of all EU securitisations recognised as STS.

STS securitisations are only acknowledged where all securitising parties are located in the EU (the Regulation does not contain any equivalence position for third countries). When the UK leaves the EU, and if this deficiency were not fixed, the scope of the current Regulation would no longer allow UK parties to be deemed STS. Further, if the scope of the regime was restricted to the UK only then it would cease to capture existing parties, while also putting the status of any existing STS securitisations into question.

Therefore, to promote continuity in the market for securitisation in the UK and to clarify the scope for STS recognition after exit day, this SI both allows for the possibility of cross-border securitisations post-exit and seeks to avoid a cliff-edge impact where EU STS securitisations cease to be recognised from Day One of exit. This would be achieved in two steps:

1. Securitisations recognised as STS in the EU before exit, and added during a subsequent two-year transition period, will continue to be recognised as STS in the UK.

2. In the longer term, specifically for asset-backed commercial paper (ABCP) cross-border securitisations, these will be eligible for STS recognition in the UK where the sponsor is located in the UK, even where the SSPE and/or originator are located outside the UK. For non-ABCP cross-border securitisations, these would still be eligible for UK STS recognition where the sponsor and originator are located in the UK. This will allow a higher number of potential securitisations to be eligible for STS recognition.

The definition of ‘sponsor’

Under the Securitisation Regulation, non-STS securitisations may have the sponsor located anywhere in the world. However, if the sponsor delegates day-to-day portfolio management of a securitisation, the delegated firm is defined with respect to one of three EU Directives – UCITS (a Directive relating to Undertakings for Collective Investment in Transferable Securities), the Alternative Investment Fund Managers Directive (AIFMD), or the Markets in Financial Instruments Directive (MiFID). The intention of the Securitisation Regulation is not to limit the location of the delegated firm to the EU, and this has been acknowledged by the European Commission as an unintended consequence of the cross-references to these Directives. Therefore, this SI restates the definition of ‘sponsor’ to clarify the geographical scope of the definition and corrects the relevant directive cross-references. After exit under the UK Securitisation Regulation the delegated firm may be located anywhere in the world, rather than just within the UK.

Registration of a securitisation repository

Under the Securitisation Regulation, originators, sponsors, and SSPEs must report information relating to their public securitisations to repositories located in the EU and authorised and registered with the ESMA. As ESMA will no longer have jurisdiction in the UK post-exit, this responsibility will be transferred to the Financial Conduct Authority (FCA).

Exposures to National Promotional Banks

The Securitisation Regulation exempts exposures to National Promotional Banks located in the EU. These are entities that carry out financial, development and promotional activities with a mandate given to them by a national or regional government. In a no deal scenario, UK entities would not be in scope of this exemption in the EU. This SI ensures that under the UK Securitisation Regulation the exemption will be restricted to National Promotional Banks in the UK (e.g. the British Business Bank).

Transfer of functions

Under the UK Securitisation Regulation, the responsibility for maintaining a domestic list of securitisations that qualify as STS will be transferred from ESMA to the FCA. Similarly, responsibility for making Binding Technical Standards under the Securitisation Regulation SI will be transferred to the FCA and the Prudential Regulation Authority (PRA) as appropriate.

3.3 Relevant Rulebook and Binding Technical Standard changes

The FCA and the PRA will be updating their Handbook/Rulebook and relevant Binding Technical Standards to reflect the changes introduced through this SI, and to address any deficiencies due to the UK leaving the EU. Details of the FCA’s approach can be found here, and the PRA’s here. The FCA and the PRA have confirmed their intention to consult on these changes in the winter.

3.4 Stakeholders

This SI affects banks and investment firms that engage in the trade of securitisations. There are many firms that work in this industry within the UK, ranging from large banks to smaller investment firms. HM Treasury is engaging with industry bodies where possible to ensure awareness of these changes, with the aim to provide sufficient time for industry to assess and prepare for the impact of this SI. As already noted, the intention of this SI is not to make policy changes, other than to reflect the UK’s new position outside the EU, and to smooth the transition to this position.

The SI will not include provisions that may be necessary to ensure Gibraltarian financial services firms’ continued access to UK markets in line with the [UK Government’s Statement] (https://www.gov.uk/government/news/uk-government-statement-following-the-jmcgen-wednesday-8-march-2018) in March 2018, and other provisions dealing with Gibraltar more generally. Where necessary, provisions covering Gibraltar will be included in future SIs.

4. Next steps

HM Treasury plans to lay this instrument before Parliament before exit.

5. Further information

Read HM Treasury’s approach to financial services legislation under the European Union (Withdrawal) Act 2018.

6. Enquiries

If you have queries regarding this instrument, email FSlegislationEUWA@hmtreasury.gov.uk.