In the wake of the 2008 financial crisis, the word "securitisation" has long been associated with opaque and risky finance. Yet this financing tool remains essential to the economy, enabling banks and companies to transform illiquid assets such as loan portfolios into negotiable securities. To restore confidence and revive a healthy market, the European Union has created a quality label: Simple, Transparent and Standardised securitisation (STS). The aim of this framework is to distinguish virtuous securitisation products and make them easier for investors to understand. Understanding the securitisation mechanism is a first step towards understanding the importance of this label.
Origin and objectives of STS securitisation
The crisis in subprimes highlighted the dangers of excessively complex and opaque securitisations. Subprime mortgages were bundled together and sold to investors who had difficulty assessing the true quality of the underlying assets. This lack of transparency led to widespread mistrust, paralysing a source of financing that was vital to the economy.
In response, European legislators sought to rehabilitate securitisation by creating a high-quality, clearly identifiable market. The aim was not to ban the technique, but to provide a rigorous framework for it. It was against this backdrop that Regulation (EU) 2017/2402 was adopted, establishing a general framework for all European securitisations and, above all, introducing the STS label. The latter 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 is linked to the legal framework for securitisation undertakings in Francewhich defines the legal structures that can carry out these operations.
The three pillars of STS securitisation
To earn the STS label, a securitisation transaction must be based on three inseparable foundations, defined by strict criteria. The originator and sponsor of the transaction must ensure compliance with each criterion and notify the competent authorities. This self-certification engages their responsibility and is subject to the supervision of the regulators.
The simplicity criterion: homogeneity and perfect assignment
First and foremost, an STS securitisation must be easy to understand. This starts with the nature of the assets that make up the securitisation. The regulation requires that the underlying exposures be homogeneous. In practical terms, this means that a portfolio cannot mix residential property loans with commercial receivables and car loans. This homogeneity makes it easier for investors to analyse the risk associated with an asset class with which they are familiar.
Simplicity also lies in the structure of the transaction itself. One of the fundamental requirements is the achievement of a "perfect transfer" (true sale). This legal term implies that the securitised assets are actually sold by the originator (the transferor) to the securitisation vehicle (SPV). This ensures that the assets are properly isolated and will not be affected by any bankruptcy of the originator. Finally, simplicity prohibits any active, discretionary management of the portfolio. Once the portfolio has been set up, it cannot be modified, except under very limited conditions, thus ensuring its predictability.
The transparency criterion: information and disclosure
For investors, transparency means above all easy access to complete and reliable information. Regulation STS requires the originator and sponsor to provide granular data on each exposure in the portfolio. In particular, they must make available to potential investors historical default and loss performance data for similar assets over a significant period.
The transaction documentation must also include a clear and unambiguous description of the order of priority of payments (the "payment cascade"). This is fundamental because it defines who is paid, in what order and with what amounts, based on the cash flows generated by the assets. Investors need to be able to model these flows without having to decipher complex clauses. To align with sustainable finance objectives, the regulation also encourages the publication of information on the environmental performance of assets, paving the way for STS-labelled "green securitisations".
The standardisation criterion: uniform practices
The third pillar aims to harmonise market practices. Standardisation primarily concerns legal documentation, which must be clear and follow models wherever possible. It also affects fundamental aspects of the alignment of interests. For example, risk retention requirements, which oblige 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 are accessible and understandable. For short-term securitisations, such as asset-backed commercial paper (ABCP) programmes, specific adaptations are planned to take account of their revolving nature, while ensuring that the principles of simplicity and transparency are respected. The aim is to create a common language and shared practices across Europe, reducing analysis costs for investors and making it easier to compare different transactions.
Obligations applicable to all European securitisations
In addition to the criteria specific to the STS label, the European regulation has imposed a set of common obligations that apply to all securitisations carried out in the European Union, whether they are labelled or not. These rules are designed to clean up the entire market and avoid the abuses of the past. One of the most fundamental concerns the obligation to retain risk. The initiator, sponsor or initial lender must retain a net economic interest of at least 5 % in the transaction. This rule ensures an alignment of interests: the originator of the transaction remains exposed to the risks and therefore has an incentive to ensure the quality of the securitised assets.
In addition to this requirement, institutional investors have a duty of care. Before investing, they must carry out their own checks on the structure of the securitisation and the quality of the underlying assets. They can no longer rely solely on agency ratings. Transparency has also been increased for all transactions by requiring them to be reported to the securitisation trade repositories (securitisation repositories) approved by ESMA, centralising the information. Finally, the regulation prohibits re-securitisation as a matter of principle (securitising products that have already been securitised) and requires that securitised loans have been granted according to the same selection criteria as those that the institution keeps on its balance sheet. These obligations redefine the roles and responsibilities of the various playersfrom the initiator to the investor.
The benefits of the STS label and future prospects
Obtaining the STS label is more than just an honour. It confers concrete and significant regulatory advantages, mainly for banks and insurance companies investing in these products. The main benefit is more favourable prudential treatment. In concrete terms, capital requirements for exposures to STS securitisations are considerably reduced. Banks holding these securities need to set aside less capital against the risk, freeing up resources to finance other projects and support the economy.
In addition, high-quality STS securitisation positions are recognised as high-quality liquid assets (HQLA) and can be used by banks to meet their liquidity ratios (LCR). This eligibility makes them particularly attractive for the cash management of financial institutions. The STS framework is evolving. Initially reserved for traditional securitisations, it was extended by Regulation (EU) 2021/557 to on-balance sheet synthetic securitisations, a technique where only the risks are transferred, and not the assets themselves. This development demonstrates the legislator's desire to adapt the label to cover a wider range of risk management and financing tools.
Concrete examples of STS securitisations in France
To make these concepts more concrete, let's take a look at two recent deals on the French market that have been awarded the STS label.
The Crédit Immobilier de France (CIF) group has pioneered one of the very first STS securitisations in Europe, starting in March 2019. The transaction, involving a portfolio of over €1 billion in residential property loans, was structured via a French Fonds Commun de Titrisation (FCT). It demonstrated the feasibility and attractiveness of the new framework, successfully placing the securities issued with institutional investors.
More recently, at the end of 2022, BRED Banque Populaire carried out a large-scale STS securitisation transaction on a portfolio of almost €2.5 billion of residential property loans. The senior bonds 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.
Sources
- Regulation (EU) 2017/2402 of the European Parliament and of the Council of 12 December 2017 creating a general framework for securitisation and a specific framework for simple, transparent and standardised securitisations.
- Regulation (EU) 2017/2401 of the European Parliament and of the Council of 12 December 2017 amending Regulation (EU) No 575/2013 on prudential requirements for credit institutions and investment firms.
- Regulation (EU) 2021/557 of the European Parliament and of the Council of 31 March 2021 amending Regulation (EU) 2017/2402 as regards the STS framework for synthetic securitisations.
- French Monetary and Financial Code, in particular articles L. 214-166-1 et seq. relating to financing institutions.
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