After the 2008 financial crisis, the word « securitisation » was long associated with opaque and risky finance. Yet this financing tool remains essential for the economy, enabling banks and companies to transform illiquid assets — such as credit portfolios — into tradeable securities. To restore confidence and revive a healthy market, the European Union created a quality label: Simple, Transparent and Standardised (STS) securitisation. This framework aims to distinguish virtuous securitisation products and offer better readability to investors. Understanding the mechanism of securitisation is a first step in grasping the importance of this label.

Origins and objectives of STS securitisation

The subprime crisis highlighted the dangers of excessively complex and opaque securitisations. High-risk mortgage loans were bundled and sold to investors who struggled to assess the true quality of the underlying assets. This lack of transparency led to generalised distrust, paralysing a source of financing that is nonetheless vital for the economy.

In response, European legislators sought to rehabilitate securitisation by creating a clearly identifiable high-quality market. The aim was not to ban the technique but to regulate it rigorously. It was in this context that Regulation (EU) No. 2017/2402 was adopted, establishing a general framework for all European securitisations and, crucially, introducing the STS label. The label acts as a standard of excellence, designed to attract investors back by guaranteeing a high level of simplicity, transparency, and predictability. The implementation of these European requirements articulates with the legal framework for securitisation vehicles in France (« organismes de titrisation »), which defines the legal structures that may carry these operations.

The three pillars of STS securitisation

To earn the STS label, a securitisation transaction must rest on three inseparable foundations, defined by strict criteria. The originator and the sponsor of the transaction must ensure compliance with each criterion and notify the competent authorities. This self-labelling engages their liability and is subject to regulatory supervision.

The simplicity criterion: homogeneity and true sale

An STS securitisation must above all be easy to understand. This begins with the nature of its constituent assets. The regulation requires that the underlying exposures be homogeneous. In practice, this means that a portfolio cannot mix residential mortgage loans with trade receivables and car loans. This homogeneity enables investors to analyse more easily the risk associated with an asset class they know.

Simplicity also lies in the very structure of the transaction. One of the fundamental requirements is the achievement of a « true sale » (« cession parfaite »). This legal term implies that the securitised assets are genuinely sold by the originating institution (the « cedant ») to the securitisation vehicle (SPV). They thus leave the originator’s balance sheet, ensuring that the assets are properly ring-fenced and will not be affected by any insolvency of the originator. Finally, simplicity prohibits any active, discretionary management of the portfolio. Once constituted, the portfolio cannot be modified except in very limited circumstances, thus ensuring its predictability.

The transparency criterion: information and disclosure

For an investor, transparency means above all easy access to complete and reliable information. The STS regulation requires the originator and sponsor to provide granular data on each exposure in the portfolio. They must notably make available to potential investors historical performance data regarding defaults and losses for similar assets, over a significant period.

The transaction documentation must also include a clear and unambiguous description of the order of payment priority (the « waterfall »). This element is fundamental because it defines who is paid, in what order, and with what sums, depending on the cash flows generated by the assets. Investors must be able to model these flows without having to decipher complex clauses. In alignment with sustainable finance objectives, the regulation also encourages publication of information on the environmental performance of the assets, paving the way for « green securitisations » bearing the STS label.

The standardisation criterion: uniform practices

The third pillar aims to harmonise market practices. Standardisation concerns first the legal documentation, which must be clear and follow templates as far as possible. It also touches fundamental aspects of interest alignment. For example, risk retention requirements — obliging the originator to retain a portion of the exposure — are a standard component of any STS securitisation.

Standardisation also implies that the cash flow models provided to investors must be accessible and comprehensible. For short-term securitisations, such as asset-backed commercial paper (ABCP) programmes, specific adaptations are provided to account for their revolving nature, while ensuring that the principles of simplicity and transparency are respected. The objective is to create a common language and shared practices across Europe, reducing analysis costs for investors and facilitating comparison between different transactions.

Obligations applicable to all European securitisations

Beyond the criteria specific to the STS label, the European regulation has imposed a common set of obligations applicable to all securitisations carried out in the Union, whether labelled or not. These rules aim to moralise the entire market and prevent past excesses. One of the most fundamental concerns the risk retention obligation. The originator, sponsor, or original lender must retain a net economic interest of at least 5% in the transaction. This rule ensures alignment of interests: the creator of the transaction remains exposed to the risks and is therefore incentivised to ensure the quality of the securitised assets.

To this requirement is added a due diligence duty for institutional investors. Before investing, they must carry out their own verifications on the structure of the securitisation and the quality of the underlying assets. They can no longer rely solely on agency ratings. Transparency is also reinforced for all transactions through an obligation to report to securitisation repositories authorised by ESMA, centralising information. Finally, the regulation prohibits in principle re-securitisation (securitising already-securitised products) and requires that the securitised loans be originated according to the same selection criteria as those the institution retains on its balance sheet. These obligations redefine the roles and responsibilities of the various participants, from originator to investor.

Advantages of the STS label and future developments

Obtaining the STS label is not merely an honorary distinction. It confers concrete and significant regulatory advantages, primarily for banks and insurance companies investing in these products. The principal benefit is more favourable prudential treatment. Specifically, capital requirements for STS securitisation exposures are considerably reduced. Banks holding these securities need to set aside less capital against the risk, freeing resources to finance other projects and support the economy.

Moreover, high-quality STS securitisation positions are recognised as High Quality Liquid Assets (HQLA) and may be used by banks to meet their liquidity ratios (LCR). This eligibility makes them particularly attractive for financial institutions’ treasury management. The STS framework is evolutionary. Initially reserved for traditional securitisations, it was extended by Regulation (EU) No. 2021/557 to on-balance-sheet synthetic securitisations — a technique where only the risks are transferred, not the assets themselves. This evolution demonstrates the legislature’s will to adapt the label to cover a broader range of risk management and financing tools.

Concrete examples of STS securitisations in France

To make these concepts more concrete, let us examine two recent transactions on the French market that have obtained the STS label.

The Credit Immobilier de France (CIF) group was a pioneer, carrying out one of the very first STS securitisations in Europe as early as March 2019. The transaction, involving a portfolio of over one billion euros of residential mortgage loans, was structured through a French Fonds Commun de Titrisation (FCT — a type of securitisation fund). It demonstrated the feasibility and attractiveness of the new framework, successfully placing the issued securities with institutional investors.

More recently, at the end of 2022, BRED Banque Populaire conducted a large-scale STS securitisation of a portfolio of nearly 2.5 billion euros of residential mortgage loans. The senior notes issued by the FCT obtained the highest credit rating (AAA) from two major rating agencies and were admitted to trading on Euronext Paris. The use of a third-party verification agent confirmed the transaction’s compliance with STS criteria, providing additional assurance to investors.

The STS securitisation framework is a powerful tool for companies and financial institutions, but its implementation requires precise legal expertise to ensure compliance at every stage of the process. For an analysis of the feasibility of your financing projects or to secure your investments, contact our law firm.

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