Regulations & Current Topic

Several regulations affect the economic efficiency and structuring of Credit Risk Sharing (“CRS”) transactions. In this growing market, the applicable regulation is continuously developing. Here we highlight the most important regulations, both current and developing, how these impact CRS, and our views on these.

Regulations

Regulation has a profound impact on CRS. As a relatively young asset class, CRS is still in development and regulation continues to shape the market both directly and indirectly. There is a great variety of legal rules that affect the economic efficiency and structuring of CRS, with significant differences across jurisdictions. This is due to the nature of CRS. As such, it has multiple touch points with regulation.

Securitisation Regulation Capital Requirements Regulation Basel III rules Other regulations

Firstly, the European Securitisation Regulation (“SECR”) governs CRS directly, as a type of securitisation also known as ‘on-balance-sheet (“OBS”) securitisation’. For example, the SECR includes minimum standards and requirements for the main parties involved in a securitisation transaction, such as the originating bank and the investor. It also created a framework for Simple, Transparent and Standardised (“STS”) securitisation which allows banks to avail additional capital relief for transactions that meet additional STS criteria. Since April 2021, CRS transactions are also eligible for the STS designation. We strongly support this development, as we have been advocating for the inclusion of CRS in the STS framework since 2015.

In the UK, following the enactment of the Financial Services and Markets Act and the publication of a Securitisation Regulations policy note and final draft statutory instrument (2024), the UK envisages for most provisions of the UK SECR to be replaced with the PRA and FCA rules. Both PRA and FCA rules seems to be broadly following the EU securitisation rules, with some targeted adjustments. The STS framework for CRS is, unfortunately, not yet included in the UK SECR.

Secondly, CRS is also a way of credit risk mitigation, thereby allowing banks to achieve capital relief. Capital relief is a key rationale for banks to enter into CRS. Banking regulation, such as the Capital Requirements Regulation (“CRR”), determines the extent to which a bank can gain capital relief and under which conditions. Within the European Union, capital relief is only granted if a bank achieves “Significant Risk Transfer” (“SRT”), in other words when a bank can show that the transaction indeed achieves credit risk mitigation to a significant extent.

In addition, banking regulations stipulate the capital requirements for the underlying credit exposures. The Basel Ill framework and its finalisation, also known as 'Basel IV' or 'Basel III Endgame', is the most recent comprehensive regulation affecting capital requirements for banks' credit exposures, as well as overall capital requirements for the bank. Banking regulation and supervision also govern whether banks are allowed to use internal models for determining capital requirements for its credit exposures, and whether these are appropriately calibrated. Sophisticated and well-calibrated internal models are hugely important for investors in CRS, as these typically allow for a more accurate estimation of potential losses that a given portfolio could experience during the life of the CRS transaction. The Basel rules have not been finalised yet. For more details please see below the Current Topic: "Impact of the implementation of the Basel Ill rules on Internal Models"

Finally, the structuring of a CRS transaction and the activities of banks are impacted by many other regulations, such as accounting and tax regulation. These generally have a far broader scope, however, they may have a noticeable impact on CRS transactions, nonetheless.

Securitisation Regulation Securitisation Regulation

Capital Requirements Regulation Capital Requirements Regulation

Basel III rules Basel III rules

Other regulations Other regulations

As a pension fund asset manager, by our nature we have an investment horizon that stretches decades rather than years or months. Therefore, the long-term viability and sustainability of the CRS market is of the utmost importance to us. We strongly believe that this objective is only achievable if a balance is found between the long-term interests of banks, investors and the regulator.

Because of this conviction, we have since many years become a vocal advocate for harmonisation of practices, appropriate standards for healthy transactions and transparency. We do this through active dialogue with regulators, banks and investors, as any rule or standard will need to meet the objectives of all three. We further contribute to roundtables and consultations and publish our opinions where we believe this adds value.

We hope that by helping to shape standards in this young and promising market, we can continue to create sustainable partnerships in which risk is genuinely shared between the bank and investors.

STS Framework for CRS

In April 2021, under the EU’s Capital Markets Recovery Package (“CMRP”) the framework for STS securitisations, became applicable to CRS transactions, to make it easier for capital markets to support economic recovery from the COVID-19 pandemic. As an adamant supporter of healthy transaction structures, we strongly encouraged this development, and we are keen to continue contributing to improvement of the STS criteria for CRS transactions. We believe that key features of any healthy and sustainable investment class are that it is relatively easy to understand and manage, which is closely aligned with the objectives of STS. In our view, the CRS transactions that we have invested in prior to the implementation of the framework already broadly follow the spirit of STS.

To qualify for the STS designation, CRS transactions need to adhere to a variety of criteria, which fall under one of the three main pillars of the label. For ‘Simple’, this includes, among others, a homogeneity requirement for the underlying asset pool: only one type of exposure, for example corporate loans, is allowed. Under ‘Transparent’, the risk sharing bank has to provide data on historical default and loss performance and independent verification of the eligibility for (a sample of) the underlying exposures is required. An example of the requirements under ‘Standardised’ is a minimum risk retention by risk sharing bank (please find more information and our view on risk alignment here). Finally, several specific criteria for CRS transactions are included, such as which credit events should be included at a minimum.

The current STS standards allow for cash proceeds of STS compliant OBS securitisations to be held on deposit by the risk sharing bank, albeit under conditions. We believe strongly that these cash proceeds should always be collateralised in order to mitigate bank counterparty credit risk. More details on collateralisation of investment notional can be found here.

The first year of STS for Credit Risk Sharing has shown that the framework adds positive momentum to the development of this market. The framework has led established issuers to adapt their transactions to meet the STS criteria and has stimulated new issuers to enter the market. Up to Q4 2023, we have invested € 2.1billion in 13 STS-qualifying transactions, with a total underlying loan notional of € 39 billion with banks across the European continent. Indeed, virtually all CRS transactions we see being issued by EU banks since the implementation of the STS framework aim to achieve the STS certification. The first year of the STS framework for CRS has been promising and we expect this trend to continue. Please see our blog “STS for Credit Risk Sharing is proving a success”.

EU Securitisation Reform: a positive step forward but missing the right balance

On the 17th of June, the European Commission (EC) published its proposals for targeted adjustments to the EU Securitisation Regulation (SECR) and to the Capital Requirements Regulation (CRR)^[1]. The EC aims to unlock the potential benefits of securitisation for the European economy by addressing existing regulatory challenges as part of the Savings and Investment Union (SIU) strategy. The proposals accomplish these goals in certain areas; however, from an institutional investor perspective – they do not strike the necessary balance, and as a such, they fall short of an essential element for achieving the SIU objectives.

Objectives of the EC Proposals
The current regulatory set-up for EU securitisation is overly conservative and complex. As such, it is keeping the European economy from applying the full benefits that securitisation can offer. The EC’s long-awaited review strives to make the EU Securitisation Framework less burdensome and more principles-based, in order to facilitate securitisation activity in Europe. This is a priority for the SIU^[2] as the current economic and geopolitical environment requires vast amounts of investment and securitisation can be a crucial tool for increasing the amount of financing available to the real economy.

Proposed Changes and Their Impact
The proposed measures bring several positive changes, which are expected to ease the regulatory process for European issuers of, and investors in, securitisation. These include a reduction of fields in the reporting templates, simplification of the due diligence requirements for EU transactions, (overall) lower capital risk-weights and new, principles-based, SRT tests. However, ‘all that glitters is not gold’ and some aspects of these proposals may jeopardise the EC’s core objectives and the success of the review.

One significant issue is the continued requirement for EU investors to ensure that securitisations issued by non-EU issuers adhere to the SECR, including the detailed disclosure requirements (in the form of templates^[3]). This creates a serious competitive disadvantage for EU investors and may, in practice, render third-country securitisations non-investible. Given that EU investors are expected by their own clients and regulators to build a diversified and well-balanced portfolio, this requirement comes as a surprise; even more so because the Commission has recognised this problem in the past and pledged to resolve it. A highly effective solution has already been suggested in the Report of the Joint Committees of ESAs^[4], which proposes to strike the link between due diligence and disclosures requirements in the SECR.

Another alarming proposal is the amendment to Article 32, which introduces administrative sanctions under the SECR for failure to meet the due diligence requirements. This additional measure is entirely unnecessary as EU institutional investors are already regulated and supervised by their national regulators, who have all the tools to impose relevant sanctions. If adopted in its current form, Article 32 will discourage investors, especially first-time investors, from investing the EU securitisation market.

In a nutshell, the EC’s proposals contain many good amendments, which could potentially open up the market. On the other hand, the EC seems to be compensating for the flexibility it has provided by imposing restrictions on non-EU securitisations and by adding sanctions for investors. This approach does not strike the right balance and is not playing in favour of meeting the objectives of the review of the EU Securitisation Framework.

Next Steps
The EU legislative procedure requires the EC’s proposals to be accepted by the European Parliament and the Council. This process is not expected to start before the summer break and is likely to take several months, during which the co-legislators can propose their amendments. The final shape of the SECR and CRR is therefore still to be determined. Balancing the needs of regulators, issuers, and investors will be crucial for the success of this initiative.

^[1] Commission proposes measures to revive the EU securitisation framework - European Commission
^[2] Savings and investments union - European Commission
^[3] pggm-paper-esma-templates-not-fit-for-risk-sharing-transactions-november-2019.pdf
^[4] JC 2025 14 Joint Committee report on the functioning of the securitisation regulation