Background

It is becoming increasingly critical to revitalise the European securitisation market in order to enhance the resilience and competitiveness of the EU’s financial system. In light of this, a series of targeted improvements to the securitisation framework have been proposed, with the aim of balancing the need to foster issuance, investment and growth, with maintaining financial stability. In particular, changes in the key areas of due diligence, transparency, STS and supervision have been set out in the draft legislative proposal to amend Regulation (EU) 2017/2402 (the “Amending Regulation”). The Amending Regulation forms part of the first legislative initiative proposed under the EU’s Savings and Investments Union (SIU) strategy.

Due Diligence

The Amending Regulation recognises that the due diligence and transparency requirements of the existing securitisation framework have resulted in high operational costs for issuers and investors. As such, a series of amendments have been proposed which aim to introduce a more principles-based approach and create a better balance between the need for safeguards and the need to grow the European securitisation market. The targeted amendments include the following:

• Investors will no longer have to verify: (i) risk retention compliance; (ii) that the relevant sell-side entities are complying with the transparency requirements; (iii) that sound standards have been applied in NPE selection and pricing; and (iv) STS compliance, where the sell-side party responsible for complying with those obligations is established and supervised in the EU. Unfortunately, where investors invest in third country securitisations, they will still have to verify that the transaction complies with the EU rules. In other words, European investors will continue to have to seek the transparency information required by Article 7 of the Securitisation Regulation and ensure that it is provided in accordance with the frequency and modalities prescribed by Article 7. These prescriptive requirements hinder the ability of EU investors to invest in securitisations outside of the EU. The Commission’s Q&A states that this is necessary as the ability of national competent authorities to enforce the securitisation framework on non-EU issuers is more limited. However, it is also perhaps no surprise that these requirements have been retained, considering the EU’s stated aims of revitalising the European securitisation market (rather than facilitating access to third country markets), as well as investor protection.
• The risk assessments that investors need to carry out prior to investing in a securitisation transaction will be more principles based. The prescribed list of structural features that investors had to diligence previously will be replaced with a more straightforward requirement to assess “the structural features of the securitisation that can materially impact the performance of the securitisation position”. This allows a degree of flexibility to investors as regards how they approach their risk assessments. Indeed, the recitals to the Amending Regulation note that diligence should be proportionate to the risk profile of securitisation positions, and that senior tranches should require a less extensive due diligence review than junior or mezzanine tranches which bear higher risk and greater exposure to losses. In addition, the recitals note that investors should be allowed to conduct simplified due diligence on investments in repeat transactions, with the understanding that the risks associated with these transactions should already be well understood.
• Similarly, more discretion is provided to investors as regards the ongoing monitoring of their securitisation positions, with the deletion of a similar prescribed list of structural features that currently requires ongoing review.
• Investors in secondary market investments will now only need to document their verifications and due diligence assessment within 15 calendar days of making the relevant investment. However, the actual risk assessment will continue to need to be carried out before the investment is made. As such, our view is that this change will be of limited utility in terms of reducing the due diligence burden in the context of secondary trades.
• Investors will still be permitted to delegate investment management decisions to another institutional investor, however liability allocation will change. Whereas currently such delegation involves a transfer of responsibility such that the delegate is responsible for any breach of the due diligence requirements, going forward delegation will not transfer responsibility. Rather, the original investor will remain responsible for compliance with the due diligence requirements. Whilst this is not an unusual standard, and indeed aligns with other sectoral legislation such as AIFMD, the change in liability position is made more significant when considered in light of the proposed introduction of sanctions for investors where there has been a breach of the due diligence requirements, as outlined further below.
• Finally, due diligence requirements will be: (i) waived where a multilateral development bank guarantees the relevant securitisation position; and (ii) lightened where the first loss tranche represents at least 15% of the nominal value of the securitised exposures and is either held or guaranteed by the Union or by certain national promotional banks or institutions. The risk retention requirements are also waived in terms of (ii) above, and where the 15% first loss tranche is held or guaranteed by a narrowly defined list of public entities. These types of investments are considered low-risk, safe investments, either because the position itself is guaranteed by a credit worthy entity or a significant loss absorbing tranche is held or guaranteed by a credit worthy entity and, as such, the credit risk profile of the securitisation position has been significantly improved.    

Transparency

In the context of the transparency requirements, the Amending Regulation proposes to insert new definitions for public and private securitisations. A public securitisation will be one that meets any of the following criteria:

• a prospectus has to be drawn up for that securitisation pursuant to Article 3 of Regulation (EU) 2017/1129 of the European Parliament and of the Council;
• the securitisation is marketed with notes constituting securitisation positions admitted to trading on a Union trading venue as defined in Article 4(1), point (24) of Directive 2014/65/EU of the European Parliament and of the Council; 
• the securitisation is marketed to investors and the terms and conditions are not negotiable among the parties.

A private securitisation will be one that does not meet any of the aforementioned criteria.

The intention behind widening the concept of a public securitisation is to ensure that securitisation transactions that are “public in substance” are required to provide investors with the information needed to form a proper risk assessment, and to monitor systemic risks in the financial system. However, the definition appears to have conflated a listing on a European market with an intention to create a public market and, as such, will capture segments of the market that have traditionally, and more correctly, been classified as private transactions. This could have a number of unintended, negative consequences, for example:

• a significant number of securitisation transactions will be incorrectly reclassified as “public” transactions, placing an unnecessary operational burden and cost on originators and issuers to comply with the public transaction reporting requirements;
• the reclassification will result in a very limited number of private deals benefitting from the envisaged simplified reporting template for private securitisations (as to which see further below);
• the reclassification and consequent increased reporting burden will act as a serious disincentive to issuance, having a dampening effect on the growth of the EU securitisation market;
• the reclassification and resultant need to report on a public basis to securitisation repositories, without the confidentiality restrictions that private transactions will benefit from, will also act as a disincentive to issuance, having a dampening effect on the growth of the EU securitisation market; and
• originators, sponsors and issuers will be incentivised to seek listings on third country trading venues, to fall outside of the limb (b) definition of a public transaction. This will introduce a new barrier to the integration of the EU capital markets by driving listings to third country trading venues, and reduce transparency and investor protection in circumstances where the listing rules of third country trading venues are not equivalent to European standards.

The Amending Regulation also proposes to amend the transparency requirements as follows:  

• the reporting templates for public securitisations will be streamlined, reducing the number of reporting fields and therefore the operational burden and cost of compliance;
• reporting templates will no longer require loan level information where the underlying exposures are highly granular and short term (e.g. credit cards). This change has been made in recognition of the disproportionate cost / benefit of providing loan level information for short term assets;
• a dedicated and simplified reporting template for private securitisations will be developed. The template will be based on existing reporting templates in use in the market, and tailored for the use of supervisors; and
• private securitisations will have to be reported to securitisation repositories to facilitate supervision over the private market. There will be confidentiality restrictions in place in terms of access to private information by investors and potential investors.

STS Requirements

The Joint Committee Report on the implementation and functioning of the EU Securitisation Regulation on 31 March 2025 (the “Article 44 Report”) found that the STS framework is generally working well. However, the Amending Regulation does make some targeted changes in the area in order to improve clarity and consistency and to make some technical adjustments. These include the following:

• the homogeneity requirements will be modified to specify that a securitisation where at least 70% (down from 100%) of the underlying pool of exposures consist of SME loans will be homogenous. The purpose of the amendment is to facilitate the securitisation of SME loans in STS securitisations;
• unfunded credit protection provided by insurance and reinsurance companies will become eligible for the STS label provided that certain requirements relating to diversification, solvency, risk measurement and minimum size are met. This will enable insurance and reinsurance companies to participate more meaningfully in the on-balance sheet STS securitisation market; and
• in terms of technical adjustments:
  • removing assets from securitisation pools due to: (i) the imposition of sanctions; (ii) fraudulent practices; or (iii) a change in law which affects the enforceability of the underlying exposures, will no longer be considered active portfolio management on a discretionary basis;
  • it will be clarified that, in instances where junior tranches can absorb a portion of the underlying exposure losses, their loss bearing capacities should be taken into consideration when applying the standardisation criteria;   
  • it will be specified that credit protection premiums will be structured as contingent on the size of the outstanding tranche (rather than contingent on the outstanding nominal amount of the performing securitised exposures) and credit risk of the protected tranche; and
  • in the context of committed excess spread which acts as credit enhancement for investors, the changes will make it clear that there is a cap, equivalent to one year’s expected loss, on the total amount of synthetic excess spread that an originator can commit per year.

Supervision

Finally, the Amending Regulation propose certain changes to the supervisory framework:

• The securitisation sub-committee that exists within the framework of the Joint Committee of the European Supervisory Authorities will now be led by the EBA, with cooperation from ESMA and EIOPA. The role of the sub-committee will be strengthened and the stewardship of the EBA will provide a more prominent role for the EBA in implementing and policing the securitisation framework.
• Where a securitisation transaction involves sell-side parties which fall under the remit of competent authorities from more than one Member State, the competent authorities will appoint a lead supervisor to coordinate actions and avoid divergences in the application of the Securitisation Regulation. Disagreements between competent authorities as regards a breach of the Securitisation Regulation can be escalated and ultimately resolved by a decision of the EBA.
• The relevant banking supervisors (either banking national competent authorities or the SSM) will take over STS supervision for bank originated securitisations.
• Third Party Verifiers of STS compliance will now need to be supervised as well as authorised by their respective national competent authority.
• As mentioned above, private securitisations will now be required to report to securitisation repositories in order to facilitate supervision of the private market.
• Finally, it will be possible for competent authorities to sanction investors for non-compliance with the due diligence requirements. Such sanctions include fines of up to 10% of global turnover. Concerns have already been expressed as regards this change, noting that consequences for non-compliance with the due diligence requirements are already provided for under other sectoral pieces of legislation, and imposing a duplicative sanctions regime could have a chilling effect on issuance.

Prudential Regulation

As well as the above, a separate legislative proposal has been published in relation to the prudential framework for securitisation transactions which aims ensure greater risk sensitivity for the capital treatment of securitisation for banks. There will also be amendments to the Liquidity Coverage Delegated Regulation (draft amendments already published) and the Solvency II Delegated Regulation (draft amendments to come later in the Summer). The intention is to make targeted changes to: (i) address inconsistencies in the existing requirements that securitisations need to comply with in order to be eligible for inclusion in banks’ liquidity buffers; (ii) adjust the insurance prudential framework to better account for the actual risks of securitisation; and (iii) remove unnecessary prudential costs for insurers when investing in securitisations.

Next Steps

Whilst the Commission’s efforts to bolster the EU securitisation market are to be welcomed, it’s currently unclear whether the proposed changes will meet that aim. In particular, careful consideration will need to be given to how the proposed definition of a public securitisation will impact the securitisation market. The scope of this definition has the potential to impose the burden of the public transaction reporting requirements on a significant number of private transactions, and to incentivise transaction parties to seek listings outside of the European market. In addition, the imposition of the requirement to report private transactions to securitisation repositories, and the imposition of a duplicative sanctions’ regime in terms of the due diligence requirements, have already caused concern to originators, issuers and investors. It will be important to ensure that these factors don’t have a dampening impact on issuance and undermine the effort to achieve an integrated, competitive and revitalised securitisation market in Europe.

The draft Amending Regulation and the prudential legislative proposal have been submitted to the European Parliament and the Council for consideration. Further changes are still possible before the final texts are agreed.