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EU Securitisation Regulation – Considerations for AIFMs, UCITS managers and institutional investors

  • United Kingdom
  • Banking and finance
  • Financial services and markets regulation

25-09-2018

Overview

The Securitisation Regulation (Regulation) comes into force on 1 January 2019, establishes a general framework for securitisation and creates a specific framework for simple, transparent and standardised securitisation. The Regulation is a cornerstone of the EU’s efforts to establish a capital markets union, by creating a single market for investment services and activities and to ensure a high degree of harmonised protection for investors in financial instruments. The Regulation aims to diversify the source of funding available, promote investment and reinforce the EU’s financial system.

To read the Regulation, click here.

Effect on Institutional Investors

Whilst certain fund managers are currently subject to rules regarding their investment in securitisations, the Regulation expands the scope to include, for example, insurance and reinsurance undertakings and institutions for occupational retirement provision. The definition of “institutional investors” in the Regulation also covers UCITS managers and alternative investment fund managers.

The Regulation bans any securitisation "where at least one of the underlying exposures is a securitisation position” (referred to as “resecuritisation”).

In addition, it outlines the due diligence and assessment requirements institutional investors are required to run prior to, or when holding, a securitisation position. Additional due diligence must be carried out on non-EU entities acting as sponsor, original lender or originator to ensure that they retain a five percent economic stake in the viability of a transaction.

In terms of grandfathering, the Regulations state that institutional investors investing in securitisation issues before 1 January 2019 will still be governed by existing risk retention obligations rather than the new obligations, which will only apply to new securitisations issued (or new issues under existing securitisation) on or after 1 January 2019.

Differences between EU and US Securitisation Regulation

Differences will continue to exist between the UK and the EU securitisation rules and the Regulations do not introduce equivalence.

By way of example, the Regulations require that in order to ensure cross-sectoral consistency and to remove misalignment between the interest of firms that repackage loans into tradable securities and originators and institutional investors that invest in those securities, the originator, the sponsor or the original lender must retain a net economic interest of not less than 5%. There are similar rules in the US, although there are material differences in their application and there is no equivalence regime. Whilst the US and EU regimes are directionally aligned, the gap is in precisely how this is achieved.

Despite the differences, it is expected that there is enough consistency between the US and EU rules that dual compliant marketing will be achievable for issuers.

Considerations for institutional investors

Whilst a number categories of institutional investors will already be complying with rules which are substantively similar to those set out in the Regulations, certain other types of institutional investors, such as pension schemes, are not currently subject to such obligations. Where institutional investors’ managers are permitted to invest in securitisations, discussions should be had around how compliance can be ensured. Alternatively, specific restrictions might be included in the documentation whereby the relevant managers are appointed. It is expected that changes to the contractual documentation, such as investment management agreements are likely to be required.

How Eversheds Sutherland can help

We have been advising a number of clients on their compliance requirements and would be very happy to assist with any queries. We can assist institutional investors with preparing a standard due diligence pack for investments in securitisations or prepare amendments to their investment management arrangements as required. Given our global reach, we are able to advise both on the EU and the US rules. Please do get in touch if you would like to discuss this.

For more information contact

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