Structured Finance Regulation Update

This is updated with the latest regulatory output affecting structured finance investors.

This covers investor related changes to Basel II/III, the EU Capital Requirements Directive (EU CRD), US Market Risk Rule, Dodd-Frank, REG AB II, Solvency II and the AIFM Directive.
EBA May 2013 - The EBA issued a draft of its regulatory technical and implementation standards regarding risk retention for issuers of securitised debt and the due diligence requirements for institutions becoming exposed to a securitisation position. Read
RBA Apr 2013 - The Reserve Bank of Australia released new criteria for eligibility of residential mortgage backed securities (RMBS) in its repo facility.

The move sees the Bank adopt a data warehouse for issuance data and the requirement that issuers also provide cashflow waterfall models using a standard template and format. Read
Basel Jan 2013 - The Basel Committee has issued the full text of the revised Liquidity Coverage Ratio (LCR). Highlights include amendments to the definition of high-quality liquid assets (HQLA) to allow inclusion of certain RMBS assets.

In addition, the committee has agreed a revised timetable for phase-in of the standard. The changes to the definition of the LCR, include an expansion in the range of assets eligible as HQLA and some refinements to the assumed inflow and outflow rates to better reflect actual experience in times of stress. Read

IOSCO Nov 2012 - IOSCO Publishes Recommendations for Securitisation Regulation. The International Organization of Securities Organizations (IOSCO) has published a final report on Global Developments in Securitisation Regulation, which proposes a series of recommendations aimed at ensuring securitisation markets develop, but on a sound and sustainable basis. Read
FSB Oct 2012 - ASF Guide to Implementation of Due Diligence Requirements for Securitization Positions under Market Risk Rule and OCC Guidance.

A document from the ASF provides a practical overview of what investors must do to address US due diligence requirements, due to be implemented in January 2013 as per OCC guidance.

For more information on how to address these requirements from a systems perspective, please contact Principia
FSB Oct 2012 - Regulators announce they are moving forward with proposals to apply the corporate bond transparency system known as TRACE (Transaction Reporting And Compliance Engine) to the entire MBS and ABS markets. But the final timing of dissemination of the information to market participants is not clear.
FSB Aug 2012 - Another proposal under the JOBS Act eliminates advertising restrictions for private and 144A deals. The elimination of these restrictions can have a significant impact on how securities are offered and sold by permitting expanded marketing efforts to a non-core investor base of "credit investors." Today marketing of securities can only be directed and sold to qualified institutional buyers.

By removing this prohibition, participants in these types of private placements could solicit broader investor interest. Read
FSB July 2012 - The Federal Reserve Board approved a final rule to implement changes to the market risk capital rule, which requires banks to adjust their capital requirements to better account for the market risk, particularly in securitizations. This includes specific investor due diligence requirements which must be met in banks initial and ongoing assessment of asset-backed securities.

Banks will be asked to adhere to these standards of due diligence as of January 1, 2013. Read
FSB Jun 2012 - An overview of the progress made by nations towards the G20s goals and implementation requirements for strengthening financial stability. Read

Most relevant to structured finance investors are:
Scorecard summarising progress in global implementation: Read
Basel Committee on Basel III: Read
The FED Jun 2012 - The FED announced the final rule pertaining to risk-based capital market risk requirements in the US. Federal agencies must review any regulation that references the use of credit ratings, and substitute such references as deemed appropriate.

Additionally, the FRB proposed three rulemakings regarding strengthening and harmonizing the regulatory capital framework for banks including Basel III.

  1. Basel III NPR

  2. Standardized Approach NPR

  3. Advanced Approaches and Market Risk NPR


Jun 2012 - IOSCO Consults on Global Developments in Securitization Regulation. IOSCO published a Consultation Report seeking comment on policy issues in response to a request from the Financial Stability Board (FSB). The FSB asked IOSCO, in coordination with the Basel Committee on Banking Supervision, to conduct a stock-taking exercise on the requirements for risk retention and measures enhancing transparency and standardization of securitization products, and to develop policy recommendations as necessary. The FSB's request followed earlier IOSCO and Joint Forum work aimed at regulatory initiatives to support recovery of securitization markets. Read

EU Feb 2012 - Consultation Report re Ongoing Disclosure for Asset-Backed Securities. Contains guidance regarding regulatory regimes for ongoing disclosure for ABS, and recommends disclosures for structured finance securities that should be made to aid investor due diligence. The comments period ends in April 2012 and final recommendations will aim to facilitate more consistent global implementation of structured finance regulation through the G20. Read
IOsco Feb 2012 - Consultation Report re Ongoing Disclosure for Asset-Backed Securities. Contains guidance regarding regulatory regimes for ongoing disclosure for ABS, and recommends disclosures for structured finance securities that should be made to aid investor due diligence. The comments period ends in April 2012 and final recommendations will aim to facilitate more consistent global implementation of structured finance regulation through the G20. Read
FSB Jan 2012 - The Australian Prudential Regulation Authority also released its final ruling for securitization, Prudential Standard APS 120 which closely matches the due diligence requirements laid out in the EU CRD and Basel Framework Enhancements. Read
Office of the comptroller of the currency Nov 2011 - The Office of the Comptroller of the Currency (OCC) proposed a rule to remove references to credit ratings and related guidance to assist national banks and federal savings associations in meeting due diligence requirements when assessing credit risk for structured finance investments.

Investors will be expected to maintain appropriate ongoing reviews of their investment portfolios to verify that they meet safety and soundness requirements, appropriate for the institution’s risk profile and for the size and complexity of the portfolios. This rule making is very similar in content to the investor due diligence requirements of Article 122a. Read
ECB Nov 2011 -  European Central Bank (ECB) published its RMBS template and RMBS taxonomy. The template, which applies to prime and non-conforming residential mortgage-backed securities transactions, as well as both stand-alone and revolving structures, consists of a number of fields that collect information about the underlying assets of European RMBS and about bond securities.

The template is intended to ensure that a set of standardized data is collected for European RMBS transactions. The RMBS taxonomy serves as a manual to the template to provide instructions and definitions regarding the submission of loan-level information. Read
EBA Sep 2011 - Following the CEBS/EBA 122a implementation guidelines released in December 2010, the European Banking Authority (EBA) received many questions from authorities and market participants about how the guidelines should be interpreted.

This Q&A document, provides answers to technical and interpretive questions around CLO structures, securitization exposures on the trading book versus the banking book, ABCP investor due diligence and the need for firm wide operational oversight of securitization exposures. Read
Reserve Bank of India Sep 2011 - The Reserve Bank of India published revisions to its 'Guidelines on Securitisation Transactions'. This includes clarification on the transfer of assets through securitization and originator risk retention. For those other than originators, assuming exposure to structured finance, i.e. investors in these securities, the same wording taken from the EBA guidelines on 122a implementation can be seen, highlighting the same core elements of investor due diligence. Read
Solvency II - EIOPA Aug 2011 - Solvency II is the proposed regime for the prudential supervision of insurance and reinsurance companies in the EU. Within this (under Article 135) are investor due diligence requirements akin to those in the EU CRD Article 122a.

The implementation guidance by CEIOPS (now EIOPA) provides details of what is meant by Article 135 and these are all taken from the implementation guidance also outlined in the CRD 122a. In short, insurance companies will be subject to the same criteria when being assessed for capital adequacy in relation to structured finance, as banks now are under the Basel III framework. For implementation guidelines. Read
AIFMD ESMA Jul 2011 - ESMA/2011/209 provides technical advice to the European Commission on implementing measures of the Alternative Investment Fund Managers Directive.

ESMA will deliver its final advice to the Commission by 16 November 2011.

For investors in structured finance securities, the advice follows the guidelines laid out for the banking industry with regards to due diligence, analytical independence and appropriate systems and controls. Article 17 covers AIFMs investments in securitisation positions, echoing the requirements of the EU CRD Article 122a. Failure to address this may result in the investment fund manager having to resign and/or the AIF to be nolonger authorised in EU. Read
AIFM Directive Jul 2011 - The European Union’s Directive on Alternative Investment Fund Managers will come into force on July 21 following its publication in the Official Journal of the European Union on July 1. Detailed regulations and subsidiary legislation to implement the AIFM Directive, so-called Level 2 measures, will be drawn up by the European Commission over the next two years on the basis of advice provided by the European Securities and Markets Authority, which is due to report back in November.

With regards to due diligence expect similar qualitative requirements for securitisation investment as those in Article 122a or the EU CRD. Read
FSA May 2011 - Further consultation on the implementation of CRDIII in the UK under the FSA.

One of the subtle differences between the CRD proposals and the FSA interpretation is that Article 122a is applied at the group level - not just at the bank level. This therefore includes any subsidiaries, non-EU subsidiaries and non-credit institutions.

"A credit institution must ensure that any undertaking, in relation to which the credit institution is a parent undertaking, meets the due diligence requirements of Article 122a (as set out in BIPRU 9.15). To comply with this requirement, a credit institution should be able to demonstrate that it has in place adequate group policies and procedures that its subsidiaries must follow to materially meet the requirements of BIPRU 9.15." Read
ECB Loan Level May 2011 - Following the general decision announced on 16 December 2010 to establish loan-by-loan information requirements for asset-backed securities (ABSs) in the Eurosystem collateral framework, the Governing Council of the European Central Bank (ECB) intends to introduce these requirements for commercial mortgage-backed securities (CMBSs) and small- and medium-size enterprise (SME) transactions accepted in the Eurosystem collateral framework within the next 18 months. Read
ECB Loan Level Apr 2011 - To facilitate the introduction of the ECB's loan-by-loan information requirements, market participants are being encouraged to establish a data warehouse. This warehouse will be provided by an independent, able to process, verify and transmit ABS loan-level data. The process for suitors is underway. Read
Covered Bonds Transparency Apr 2011 - The ICMA Covered Bond Investor Council launched an initiative aimed at setting transparency standards for covered bonds. Recent growth of the European covered bond market has led to a degree of fragmentation in the  level of information provided to investors on individual issues.

The proposal issued for consultation today includes a detailed list of the required data fields and their definitions, agreed by investors. The aim is that the exercise will result in the publication of  widely accepted voluntary standards of disclosure for covered bond issuers in Europe by
September of this year. Read
ECB Mar 2011 - This report by the Banking Supervision Committee (BSC) presents a snapshot of recent developments in the European securitisation markets and relates them to factors impacting on the demand for and the supply of securitised products.

The outlook provided by the report touches on the effect of regulation on originators and investors, highlighting potentially higher costs for participants in the securitisation chain in the future. Finally, the report proposes possible avenues for future work more thorough analyses of the investor base, accounting issues and covered bonds. Read
IOSCO Working Group

Mar 2011 - The Technical Committee of the International Organization of Securities Commissions (IOSCO) has published the results of a survey on the implementation of its September 2009 recommendations with respect to securitisation and credit default swap markets.

The report shows that all jurisdictions surveyed by the Task Force had at least one, if not multiple initiatives in progress to implement the recommendations on: disclosure; skin in the game; and investor suitability.

This includes the investor due diligence best practice guidelines released in its September 2009 report (see below).

Most measures are expected to be implemented in 2010 and 2011. Read the report here

ASF Jan 2011 - The ASF prepared a timetable to provide a helpful tool to aid members in tracking the rulemaking process for the various securitization related provisions of the Dodd-Frank Act.

CEBS Article 122a Jan 2011 - CEBS announces the implementation and final proposals regarding the application of the EU Capital Requirements Directive, article 122a.

Besides fostering a common understanding among EU regulators on the implementation of Article 122a, the guidelines provide clarity and transparency for market participants to assist compliance by credit institutions. In particular, CEBS provides an updated framework for competent authorities to apply an additional risk weight for infringements of the provisions of Article 122a. This relates to credit institutions' ability to perform adequate levels of due diligence when investing in structured finance assets.



Dec 2010 - The Federal Reserve, the Office of the Comptroller of the Currency (OCC), and the Federal Deposit Insurance Corporation (FDIC) seek comment regarding proposed rulemaking that revises the market risk capital rules for US banking organizations.

They also seek comment on a notice of proposed rulemaking that amends Basel II to make it consistent with provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act. This includes the application of minimum risk-based capital standards in line with EU revisions to the Basel II Securitization Framework. Read

BoE Dec 2010 - The ECB's ABS loan-level initiative establishes specific loan-by-loan information requirements for asset-backed securities (ABSs) accepted as collateral in Eurosystem credit operations. This will be introduced over the next 18 months. Any investor wishing to post collateral with the ECB for funding will need to be able to provide the relevant loan level information using the template established by the ECB with industry bodies. Initially this will apply to RMBS but the ECB plans to expand this to apply to other asset classes gradually. Read
BoE Dec 2010 - Bank of England's final details of eligibility requirements for RMBS and covered bonds for funding through the Discount Window Facility. Includes the implementation timetable. These criteria build on the high level proposals published in July 2010. Publication of all transaction documents will become an eligibility requirement from July 2011 and a 12 month implementation period has been set for other requirements. It also details new haircuts that will severely affect the cost of future ongoing funding, greater guidance on what criteria are considered important for loan level disclosure, and final rules regarding the provision of cashflow waterfall models. Read
EC Nov 2010 - EC Public Consultation on Credit Rating Agencies: Highlights and requests comment on the key areas that must be improved to reduce investors' reliance on external credit ratings. Read
Financial Stability Board Oct 2010 - Financial Stability Board report, "Principles for Reducing Reliance on CRA Ratings." The goal of the principles is to reduce mechanistic reliance on ratings and to incentivize improvements in independent credit risk assessment and due diligence capacity. Banks, market participants and institutional investors should be expected to make their own credit assessments and not rely solely or mechanistically on CRA ratings. Read
EC Jul 2010 - In the asset management sector the recent overhaul of the UCITS directive has strengthened due diligence and internal management obligations for UCITS managers.

This includes an obligation to ensure a high level of due diligence in the selection and ongoing monitoring of investments and prove adequate knowledge and understanding of their assets. UCITs managers should be able to formulate forecasts and perform analysis concerning the investment's contribution to a UCITS portfolio before carrying out the investment. These requirements aim to limit automatic reactions of UCITS managers to external rating changes and thereby limit the risk of overreliance on ratings. The obligation for banks to undertake their own due diligence regarding the underlying assets of securitization exposures was introduced in Article 122a of the Capital Requirement Directive - another example of how this is being enforced.

Obligations for risk management: Article 51 and Due Diligence Requirements: Articles 38-44. Read
BoE Jul 2010 - Bank of England released results of its market consultation regarding proposals to expand eligible collateral in the Bank’s Discount Window Facility and increase information transparency for Asset-Backed Securities. The Bank is proposing to extend the eligible collateral investors can exchange for gilts, allowing the inclusion of whole portfolios of loans. It also proposes disclosure of granular information such as loan-level data and standardized summary tables in investor reports; as well as key legal documents, summaries of structural features and deal cashflow waterfall models for each transaction posted to gain use of the facility.
CEBS Jul 2010 - Committee of European Banking Supervisors ("CEBS"). Published its "Consultation paper on guidelines to Article 122a of the Capital Requirements Directive" The amendments to CRD II have to be transposed into Member States' national law by 31 October 2010 and applied from 31 December 2010. Read

ECB Jun 2010 - Keynote speech by José Manuel González-Páramo, Member of the Executive Board of the ECB, at Association for Financial Markets in Europe/ESF and IMN Global ABS 2010 Conference in London. A presentation discussing the restart of the ABS markets, the return of investor confidence and understanding and the role of the ECB in securitization’s recovery. Read
SEC Apr 2010 - US SEC Reg AB Proposed Rules: Increased Investor Protections in Asset-Backed Securities
The drive behind the proposed SEC rules is to “give investors the tools they need to accurately assess risk and better align the interests of the issuer with those of the investor.” This includes originator risk retention, new shelf registration procedures, asset level disclosure and ongoing reporting for ABS and MBS and the provision of a waterfall computer program by issuers upon registration of a deal. Read

ECB Apr 2010 - ECB proposals and market feedback on the provision of ABS Loan level information in the Eurosystem collateral framework. Regards the establishment of loan-by-loan information requirements for asset-backed securities, in the Eurosystem collateral framework. The 16 national central banks of the euro area are working on the requirements. Preparatory work was due to be completed in September 2010. It will address the loan-level information requirements, as well as the technical implementation. Read
FSA Apr 2010 - FSA BIPRU 9, Prudential sourcebook for Banks includes guidelines for implementation of the CRD II as it applies to securitization in the UK. This includes detailed advice on the type and amount of due diligence investors must perform as of December 31st 2010. See BIPRU 9.3.1A, BIPRU 9.15.12 and BIPRU 9.15.13 in the following: Read 
FASB Jan 2010 - FASB Statement 166 and 167 FASB, June 2009
The federal banking and thrift regulatory agencies announced the final risk-based capital rules related to FASB 166 and 167. These new accounting standards make substantive changes to how banking organizations account for securitized assets that had been previously excluded from these organizations' balance sheets. Read

FSA Dec 2009 - FSA Strengthening Capital Standards 3
The FSA announced its proposals to adopt the changes made to the EC Capital Requirements Directive (CRD). The FSA does not intend to provide guidance in advance of CEBS completing its consultation process. It’s adoption currently proposed a cut and paste approach, implementing article 122a under the CRD as it currently stands. A final review before passing into law will take place in October 2010. Read

FSB Sep 2009 - The Financial Stability Board Report to G20 Leaders
This report to the G20 leaders covers the achievements and mandates being adopted by members of G20. It highlights the drive to re-launch securitization on a sound basis globally and specifically mandates that regulators and supervisors implement Basel II and adopt the IOSCO proposals to strengthen securitization practices throughout 2010/11. Read

IOSCO Sep 2009 - IOSCO issues final regulatory recommendations on securitisation and CDS market. From an investor due diligence perspective the report covers investor suitability requirements as well as the definition of a ‘sophisticated’ investor in ABS markets. It suggests how to strengthen these requirements, as appropriate, in the context of the relevant asset class; and
encourages the use and implementation of tools by investors to assist in understanding complex financial products. Read

BIS Jul 2009 - Basel II Securitization Framework Enhancements.
Page 5 of the updated Basel II Framework covers the operational criteria for credit analysis in section 2.1 entitled, Information on the underlying collateral supporting securitisation exposures. Paragraphs 565(ii) through 565(iv) apply in both the SA and the IRB Approach and are equally applicable to the banking book and trading book. A bank needs to meet these requirements in order to use any of the approaches specified in the securitisation framework. The additions incorporate operational requirements for traditional and synthetic securitisations that a bank must meet to recognise risk transference of exposures. If a bank does not perform the level of due diligence specified, it will have to deduct the securitisation exposure. Read

EC Jul 2009 - EU Capital Requirements Directive II (CRD II)
The revisions to the CRD II incorporate the enhancements to the Basel II securitization framework and apply them to financial institutions across Europe. These state that prior to investing and on an ongoing basis, credit institutions must be able to demonstrate at all times to the competent authorities that they have a comprehensive and thorough understanding of each of their individual securitization positions and have implemented formal policies and procedures for analyzing and recording the risk characteristics of deals and underlying collateral.

IOSCOJul 2009 - IOSCO announces Good Practices in Relation to Investment Managers´ Due Diligence When Investing in Structured Finance Instruments. The International Organization of Securities Commissions published its final report on investment manager due diligence practices. The report contains guidelines aimed at assisting both investment management industry participants and regulatory bodies, in assessing the quality of their due diligence procedures regarding investments in structured finance instruments (SFI). The practices are broken down into the three stages: 1) analyzing the underlying assets of the SFI; 2) analyzing the structure of the SFI; and 3) understanding how the SFI fits into the Collective Investment Scheme model. Read

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