European Parliament approves new rules for NPE securitizations and synthetic securitizations – finance and banks

European Parliament approves new rules for NPE securitizations and synthetic securitizations - finance and banks

Introduction of a definition of NPE securitisation as a
securitisation backed by a pool of NPEs, the nominal value of which
makes up not less than 90% of the entire pool’s nominal value
at the time of securitisation and at any later time where assets
are added to or removed from the underlying pool;

Possibility for the servicer to act as the risk retainer in NPE
securitisations. This change recognises the fact that the servicer
has a more substantive interest in the workout of the assets and
value recovery than the originator or the original lender;

Possibility to calculate the size of the retention not by
reference to the nominal value of the securitised NPEs but by
reference to their “net value” (i.e., nominal value or
outstanding value less than the nonrefundable purchase price
discount agreed at the time of securitisation); and

Amendments to the verification of the credit-granting standards
provide that where the originator is an entity that purchases a
third party’s exposures on its own account and then securitises
them, the credit-granting standards applicable at the time of
securitisation of the exposures are of minor importance. Instead,
the application of sound standards in the selection and pricing of
the exposures is a more important factor with respect to
investments in NPE securitisations. This amendment takes into
account that, in most cases, the portfolio of NPEs has changed
hands and that the original lender/originator is no longer involved
in the transaction. The amendment is limited in scope as it applies
only to securitisations of third party-originated assets, while
assets originated by the originator itself will, of course, not
benefit from the amendment.
The amendments to the Securitisation Regulation will correct
some unintended consequences of the original legislation and will
facilitate the implementation of NPE securitisations by introducing
the following changes to the existing framework:  STS Synthetic Securitisations

Looking Ahead: Once adopted, the amendments to
the Securitisation Regulation and the CRR will facilitate the use
of securitisations in the EU’s economic recovery in an effort
to maintain or even improve the lending capacity of lending
institutions and to face the effects of the expected increase in
NPEs caused by the COVID-19 pandemic. The Action: The European Parliament recently
adopted the long-awaited amendments to Regulation (EU) 2017/2402
(the “Securitisation Regulation”) and corresponding
changes to Regulation (EU) 2013/575 (the “CRR”) in order
to inter alia (i) remove some regulatory obstacles to the
securitisations of NPEs and (ii) extend the framework for simple,
transparent and standardised (“STS”) securitisations to
balance-sheet synthetic securitisations. The amendments to the
Securitisation Regulation and the CRR are not yet in force and
still need to be approved by the Member States and published in the
Official Journal of the European Union. Given the severity
of the subject matter, a quick implementation can be expected.

NPE Securitisations  The Situation: The extraordinary circumstances
of the COVID-19 pandemic and its unprecedented effects on the
European economy triggered a call for immediate action by the
European Parliament to give lending institutions the ability to
channel sufficient funds to businesses to help them absorb the
economic shock caused by the COVID-19 pandemic. At the same time,
the pandemic has increased the need for lending institutions to
manage and deal with their non-performing exposures
(“NPEs”).

Simplicity: additional representations and
warranties, borrower creditworthiness and originator
expertise;

Transparency: specific data on historical
defaults;

Standardisation: specific risk retention
requirements, documentation and servicer expertise; and

Other specific requirements: credit events,
credit protection payments and verification agents.
While the definition of “excess spread” for
traditional securitisations can be found in Regulation (EU)
625/2014, so far no official definition of “synthetic excess
spread” exists. The new legislation will introduce the
definition of “synthetic excess spread” to mean the
amount that is contractually designated by the originator to absorb
losses of the securitised exposures that might occur before the
maturity date of the transaction. The STS criteria are based on the existing STS criteria, with
the following adaptions to take into account the particular nature
of Synthetic Securitisations:

The Securitisation Regulation will also extend the STS to
Synthetic Securitisations subject to compliance with a specific set
of STS criteria. Currently, securitisations using credit derivatives or
guarantees and where the securitised exposures remain on the
balance-sheet of the originator (the “Synthetic
Securitisations”) are beyond the scope of the STS
framework.

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