EU Securitisation Regulation : RTS 2024/920

The Commission Delegated Regulation (EU) 2024/920, enacted on 13 December 2023, represents a significant step forward in refining the regulatory framework established by Regulation (EU) 2017/2402. This legislation is pivotal for the European Union's financial markets, aiming to bolster the integrity and resilience of securitisation practices. By supplementing the foundational Regulation (EU) 2017/2402, which set forth a comprehensive framework for securitisation, this new regulation introduces detailed regulatory technical standards. These standards are crucial for the specification of performance-related triggers and criteria for the calibration of such triggers, thereby enhancing the robustness of the securitisation market.[1]

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Commission Delegated Regulation (EU) 2024/920 supplementing the Securitisation Regulation with regard to RTS specifying the performance-related triggers and the criteria for the calibration of those triggers

On 22 March 2024, there was published in the Official Journal of the EU (OJ) Commission Delegated Regulation (EU) 2024/920 of 13 December 2023

Global Regulation TomorrowSimon Lovegrove (UK), Michael Born (DE)

Objective and Legal Basis:

The European Commission, under the auspices of the Treaty on the Functioning of the European Union and Regulation (EU) 2017/2402, has promulgated the Commission Delegated Regulation (EU) 2024/920. This regulatory action is geared towards refining the technical standards that specify the operational triggers related to the performance of securitised assets and the criteria for their calibration. This initiative is rooted in the need to establish a more transparent, simple, and standardized framework for securitisation, contributing to the stability of the financial system within the European Economic Area (EEA).

Clarifications on Performance-related Triggers:
The regulation delineates two primary types of performance-related triggers: backward-looking and forward-looking triggers. Backward-looking triggers are concerned with the historical performance of securitised assets, focusing on the cumulative amount of defaulted exposures and cumulative losses from a specific starting point, generally the closing date of the transaction. Forward-looking triggers, on the other hand, are designed to anticipate future risks by assessing the potential deterioration in the performance of the pool of underlying exposures, including increased concentration risk or a decline in average credit quality.

Criteria for Calibration of Triggers:
Given the diversity in the types and structures of underlying portfolios in on-balance-sheet securitisations, the regulation acknowledges the impossibility of a one-size-fits-all approach to trigger calibration. It thus mandates the establishment of prudent criteria for setting performance-related trigger levels. These criteria require securitisation parties to evaluate the effectiveness of the triggers against potential back-loaded loss scenarios, ensuring that there is adequate protection against significant losses towards the end of the transaction's maturity.

Transitional Regime and Consultation Process:
To accommodate existing contracts and ensure a smooth transition to the new standards, the regulation provides for a transitional regime for outstanding Simple, Transparent, and Standardised (STS) on-balance-sheet securitisations. Moreover, the development of this regulation involved an extensive consultation process led by the European Banking Authority, including public consultations and an analysis of the potential costs and benefits associated with the proposed standards.

Commission Delegated Regulation (EU) 2024/920 on Securitisation Regulation

The Commission Delegated Regulation (EU) 2024/920 introduces essential definitions and specifications to enhance clarity within the Securitisation Regulation framework, particularly concerning the operational aspects of securitisation transactions. This document is designed to provide a comprehensive overview of the key elements defined in the regulation, aiming to facilitate a better understanding of its implications for parties involved in securitisation activities.

1. Key Definitions Under the Regulation:
   The regulation establishes critical definitions to standardize the terminology used in securitisation practices:

• Most Senior Protected Tranche: This term refers to the tranche within a securitisation structure that is least subordinated when it comes to the distribution of losses. It benefits from eligible credit protection under the agreed-upon credit protection arrangement.
• Credit Risk Bucket: Defined as a segment within the underlying portfolio, exposures are classified into these buckets based on credit risk criteria. Each bucket represents a mutually exclusive segment with a specified level of credit risk, either higher or lower than other segments.
• Back-loaded Loss Distribution Scenario: This scenario envisages a situation where two-thirds of the expected losses over the transaction's entire maturity occur in the final third of its expected life span.

2. Specification of Outstanding Amount for Backward-looking Triggers:
   
   The regulation delineates how to determine the outstanding amount of the underlying portfolio for applying backward-looking triggers, crucial for assessing the performance of securitised assets:

• Generally, the outstanding amount is determined at the transaction's closing date.

• For securitisations with a replenishment period, the lesser of the outstanding amount at the closing date or at the end of the replenishment period is used.

• For securitisations that involve a pre-defined build-up period of the portfolio, and where the credit protection agreement applies from the closing date, the outstanding amount is set as the maximum allowed under the credit protection agreement at the end of this period. After the build-up period, the outstanding amount is the amount at the end of this period.

3. Additional Backward-looking Trigger Application:
   
   The regulation specifies how to apply an additional backward-looking trigger related to the reduction of the detachment point of the most senior protected tranche:

• A threshold for the percentage reduction of the detachment point from its level at the closing date (or at the end of a pre-defined build-up period, if applicable) must be set by the parties to the credit protection agreement.

• The trigger occurs when the decrease in the detachment point exceeds this predetermined threshold at any point after the closing date of the transaction.

Forward-Looking Triggers in Securitisation Regulation

The implementation of forward-looking triggers, as detailed in the Commission Delegated Regulation (EU) 2024/920, is a critical aspect of the Securitisation Regulation framework. This regulation supplements the foundational Regulation (EU) 2017/2402, setting forth a structured approach to managing the credit risk within securitisation transactions. This guide aims to elucidate the provisions related to forward-looking triggers, ensuring a clear understanding of their application and significance in enhancing the stability and integrity of the financial market.

Determining the Forward-Looking Trigger:

Forward-looking triggers are designed to proactively manage potential risks within a securitisation transaction. Their application is based on the effective number of exposures within the pool at the closing date, as defined under Regulation (EU) No 575/2013:

• For pools with fewer than 100 exposures, a threshold for the number of the largest exposures to individual obligors is established.

• For pools with 100 or more exposures, a threshold is set based on the change in the ratio of the outstanding amount of higher credit risk buckets relative to the total outstanding amount of all securitised exposures.

2. Criteria for Trigger Activation:
   
   The activation of a forward-looking trigger occurs under the following circumstances:

• When the number of the largest securitised exposures towards individual obligors drops below the predetermined threshold for pools with fewer than 100 exposures.

• When the threshold for the change in the ratio of higher credit risk buckets is breached for pools with 100 or more exposures.

3. Steps for Determining the Largest Exposures:
   
   For pools with fewer than 100 exposures, the process to identify the largest exposures involves:

• Consolidating multiple exposures to the same obligor into a single exposure.

• Sorting these consolidated exposures by their outstanding amount in descending order.

• Adding the outstanding amounts, starting with the largest exposure, until reaching a predefined limit related to the tranche hierarchy.

4. Criteria for Credit Risk Bucket Assignment:
   
   The criteria for assigning exposures to credit risk buckets are explicitly defined in the transaction documentation. This involves:

• Utilizing the grading system outlined in Regulation (EU) No 575/2013 for different types of exposures, such as corporate, specialized lending, institutions, and retail exposures, based on the Internal Ratings-Based (IRB) Approach.

• Assigning exposures to higher credit risk buckets based on their default status, impairment, or other indicators of elevated credit risk as agreed in the credit protection agreement.

5. Assignment of Exposures to Higher Credit Risk Buckets:
   
   Exposures designated as having a higher credit risk include those in default, those associated with credit-impaired debtors, and any other exposures identified as high risk per the credit protection agreement. It is crucial to exclude exposures that have triggered a credit event and for which credit protection payments have been made.

Securitisation Regulation: Setting Triggers and Preserving STS Status

The Commission Delegated Regulation (EU) 2024/920 marks a significant advancement in the securitisation regulation framework, aiming to fortify the robustness and transparency of securitisation transactions within the European Union. This article sheds light on the refined criteria for establishing performance-related triggers under Regulation (EU) 2017/2402 and outlines provisions for maintaining the Simple, Transparent, and Standardised (STS) designation for certain securitisations.

Establishing Criteria for Performance-related Triggers

The regulation mandates that parties involved in a credit protection agreement define the thresholds for performance-related triggers. These thresholds must satisfy several crucial criteria to ensure the triggers' effectiveness and relevance throughout the securitisation transaction's life:

• The triggers should activate before the amortisation of tranches providing credit protection reaches a level where significant losses towards the end of the transaction's maturity cannot be absorbed.

• For backward-looking triggers, it is imperative to validate their efficacy through testing in scenarios where losses are concentrated towards the transaction's latter stages.

• In cases where the originator leverages Part Three, Title II, Chapter 5 of Regulation (EU) No 575/2013 for determining the own funds requirements related to securitisation exposure, both the calculation of lifetime expected losses and the assumptions for a back-loaded loss distribution scenario must align with the criteria for assessing significant and commensurate risk transfer as outlined in Article 245 of the same regulation.

Provisions for STS Securitisations with Non-Sequential Priority of Payments

The regulation provides specific guidance for STS on-balance-sheet securitisations that feature non-sequential priority of payments and incorporate performance-related triggers as per the stipulated articles. For these transactions, if they were notified to the European Securities and Markets Authority before 11 April 2024, originators and Special Purpose Entities (SPEs) may continue to use the STS designation without adhering to the new requirements set forth in Articles 1 to 5 of this regulation. However, continued compliance with Article 18 of Regulation (EU) 2017/2402 is required.

Entry into Force and Applicability

The regulation becomes effective on the twentieth day following its publication in the Official Journal of the European Union. It is binding in its entirety and directly enforceable across all Member States, signifying a unified approach towards enhancing the stability and transparency of the securitisation market in the EU.