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EUROPEAN COMMISSION
MEMO
Brussels, 10 October 2014
Liquidity
Coverage
Requirement
Frequently Asked Questions
Delegated
Act:
See also IP/14/1119
1. What is the detailed LCR Ratio?
The detailed LCR ratio is the requirement that banks should have enough high quality
liquid assets in their liquidity buffer to cover the difference between the expected cash
outflows and the expected capped cash inflows over a 30-day stressed period.
This is expressed as ratio requirement, namely:
High Quality Liquid Assets
> 100%
Cash outflows – Capped Cash inflows
The delegated act sets out rules governing what assets can be considered as high quality
liquid assets and how the expected cash outflows and inflows are to be calculated under
stressed conditions.
2. Why is the Commission adopting a delegated act on the Liquidity Coverage
Requirement (LCR)?
The crisis showed that institutions did not hold sufficient liquid means (e.g. cash or other
assets that can be quickly converted into cash with no or little loss of value). When the
crisis hit, many firms were short of liquidity. This contributed to the demise of several
financial institutions. Therefore at the request of G20 leaders, the Basel Committee on
Banking Standards introduced a new set of prudential rules for banks to address the
shortcomings revealed through the financial crisis (Basel 3). These improvements were
generally implemented into EU law through the Capital Requirements IV package
(MEMO/13/690) adopted by the co-legislators in 2014.
In line with Basel III, the Capital Requirements Regulation (EU) No 575/2013 (CRR)
provides for two new liquidity safeguards:
 The first, called the Liquidity Coverage Requirement (LCR), improves the
resilience of banks (credit institutions) to liquidity risks over a short-term period
(i.e. thirty days). The CRR requires banks to respect a general liquidity coverage
requirement from 1 January 2014 (CRR Article 412(1)). In addition Article 460 CRR
gives the power to the Commission to specify the detailed rules for the calculation
of the LCR. These are the detailed rules set out in the delegated act.
 The CRR also allows the Commission to propose legislation for a Net Stable
Funding Requirement (NSFR). This would ensure that banks have an acceptable
amount of stable funding to support their assets and activities over the medium
term (i.e. a one-year period). There is no automatic presumption that the
MEMO/14/579
Commission will come forward with such a proposal. First, the European Banking
Authority (EBA) must analyse and report on methodologies and definitions for
implementing the NSFR. On this basis, the Commission may, if appropriate, submit
a proposal to Council and Parliament by 31 December 2016.
3. Is the detailed LCR Ratio a significant prudential requirement?
Yes, the LCR is a major prudential requirement. The EBA carried out a comprehensive
impact assessment on the LCR which covered the largest banks in Europe. The total
balance sheet assets of banks included in the EBA Report amounted to 33 trillion euro
(33 000 billion euro). The total sample of banks reported an aggregated stock of liquid
assets amounting to 3 739 billion euro and net cash outflows of 3 251 billion euro. So on
average the LCR will set rules applying to about 10% of the balance sheet of banks.
4. What are High Quality Liquid Assets?
High Quality Liquid Assets are assets that can be sold on private markets with no or little
loss of value- even in stressed conditions. They are often abbreviated to HQLA and are
composed of three tiers as follows: Level 1, Level 2A and Level 2B.
4.1. Level 1 HQLA
These are the most liquid assets. They may be used without limit in the liquidity buffer
and are not subject to a discount (or haircut) to their market value. They include: cash,
deposits at the central bank, government1 or government guaranteed bonds, and covered
bonds that meet certain specific conditions. However, the last are subject to a 70% cap in
the liquidity buffer and a 7% haircut.
4.2. Level 2A HQLA
These can be used up to maximum of 40% in the liquidity buffer and are subject to a
minimum 15% haircut. They include third country government bonds and bonds issued by
public entities with a 20% risk weight, EU covered bonds with an ECAI2 2 rating, non-EU
covered bonds rated ECAI 1 and corporate bonds rated ECAI 1.
4.3. Level 2B HQLA
These can be used up to maximum of 15% in the liquidity buffer and are subject to a
minimum haircut varying between 25 and 50%. They include: high quality securitisations
for RMBS (retail mortgage backed securities), auto, SME and consumer loans; corporate
bonds rated at least ECAI 3, shares that are part of a major stock index and other high
quality covered bonds.
5. What are the expected outflows?
The expected outflows are generally calculated as a percentage outflow on balance sheet
items such as funding (e.g. deposits and wholesale funding) received by banks and offbalance sheet commitments (e.g. credit and liquidity lines) made by banks. This outflow
varies typically by counterparty. For example the outflow expected on retail deposits made
by physical persons and SMEs is lower than the outflow expected on deposits provided by
1
This includes all Member State bonds and third country bonds with an ECAI 1 rating.
An ECAI rating is a rating of a debt instrument that has been given by an External Credit Assessment
Institution (ECAI) which has been registered or certified in accordance with Regulation (EC) No 1060/2009 and
therefore the rating may be used for prudential purposes under CRD4.
2
2
corporates and especially financial institutions. Expected liquidity outflows on maturing
"repo" contracts3 are also taken into account.
6. What are the expected inflows?
The expected inflows are also generally calculated as a percentage inflow on balance sheet
items and include inflows e.g. on retail, corporate and financial loans that will be repaid
within 30 days as well as cash arising from funding returning to the bank on maturing
repo contracts.
7. Why is there a cap on expected inflows?
To reflect possible timing differences between outflows and inflows to allow for possible
loss of inflows from some counterparties, there is a cap on inflows equal to 75% of
expected outflows. However, there are a number of exceptions. For example, there is a
full exemption for banks belonging to the same group or the same institutional protection
scheme. Similarly, to reflect their low liquidity risk and importance for the real economy,
there is also an exemption for specialised credit institutions engaged in leasing and
factoring. (Note: for auto and consumer leasing a 90% cap on inflows is applied).
8. What process did the Commission follow in preparing this act?
The European Commission engaged in a thorough process to prepare the delegated act,
involving extensive stakeholder consultation and 5 expert meetings with Member State
authorities. Experts from the EBA and the ECON Committee of the European Parliament
also participated in all discussions. During this preparatory work, a limited number of
"Union and national specificities" were identified, as were a number of adjustments to the
Basel agreement that needed to be addressed before the LCR could be implemented by all
8 000 banks in the EU. The more important adjustments related to the classification of
HQLA, where ECAI 1 covered bonds could be re-classified as level 1, ECAI 2 covered bonds
could be given level 2a and the definition of level 2b securitisations was expanded beyond
RMBSs to other asset classes (auto loans and leases, SMEs and consumer loans). These
adjustments to the classification of HQLA have been extensively analysed in an impact
assessment report.
9. Why are caps
securitisations?
and
haircuts
applicable
to
these
covered
bonds
and
All level 2 assets and covered bonds in level 1 will be subject to caps and haircuts, the
lower their liquidity classification, the lower the cap and the higher the haircut. These
measures are additional safeguards, ensuring that the buffer will really be able to fulfil its
purpose in case of stressed circumstances.
A cap is the maximum amount of assets of a given level that a credit institution is allowed
to hold expressed as a percentage of the total liquidity buffer. They are designed to reduce
concentration risk, that is, the risk that the liquidity buffer may be comprised of an
excessive amount of assets of lower liquidity.
Haircuts are a reduction to the market value of a liquid asset expressed as a percentage of
the market value. They provide an additional level of conservatism which protects against
potential losses in the value of liquid assets when sold in stressed conditions.
3
A repo contract is simply an agreement between two parties to swop a security against typically cash and to
reverse the contract after a given period for a fee.
3
HQLA
Tier
Cap applicable
Haircut applicable
Covered bonds ECAI 1
1
70%
7%
Covered bonds ECAI 2
2A
40%
15%
RMBS securitisation
2B
15%
25%
Auto loan securitisations
2B
15%
25%
SME loan securitisations
2B
15%
35%
Consumer loan securitisations
2B
15%
35%
Unrated high quality covered bonds
2B
15%
30%
10. What is schedule for LCR implementation?
The detailed LCR ratio will be progressively implemented in accordance with the CRR as
follows:
 60% from 1 October 2015
 70% from 1 January 2016
 80% from 1 January 2017, and
 100% from 1 January 2018.
Therefore, 100% LCR implementation will be reached in 2018, i.e. one year earlier than
required by the Basel standard.
This progressive implementation of the LCR is meant to allow credit institutions sufficient
time to build up their liquidity buffers, whilst preventing a disruption of the flow of credit to
the real economy during the transitional period.
11. Is a bank always obliged to have a LCR ratio above 100%?
No. In a stressed situation a bank may be obliged to make use of its liquid assets with the
result that its LCR ratio (temporarily) falls below 100%. However, it should be noted that
in this situation a bank is required to immediately notify the competent authorities and
submit a plan for the timely restoration of the LCR ratio to above 100%.
12. Will it be possible to accelerate the implementation of the LCR at national
level?
Yes. In accordance with Article 412(5) CRR, Member States may maintain or introduce
binding minimum standards for liquidity coverage requirements and require LCR levels up
to 100% before the LCR is fully introduced at a rate of 100% in 2018.
13. Do the rules make allowance for the special situation of banks in cooperative
networks or institutional protection schemes (IPS)?
Yes. Although the Commission attaches great importance to the single rule book and the
application of uniform rules throughout the EU, the Commission also recognises the
diversity of the EU banks and their special needs. For this reason special consideration has
been given to banks in cooperative networks or institutional protection schemes. The
deposits of such banks with a central institution may be treated as HQLA and allowances
may also be made where the central institution is subject to specific rules on the
investment of such deposits.
4
14. Does the detailed LCR apply to investment firms?
No. Although both banks and investment firms are subject to the general liquidity
requirement under Article 412(1) CRR, only banks are directly subject to the detailed LCR
set by the delegated act.
The application of the LCR to investment firms is not required by Basel and still has to be
assessed within the EU. Under Article 508(2) CR, the EBA has to prepare a report on the
application of the LCR to investment by the end of 2015 and then the Commission has to
report on the issue to the Parliament and the Council, followed by a legislative proposal if
appropriate.
15. Does the LCR take into account the specific business models of cooperative
and other banks?
Yes. The delegated act takes into account the centralised management of liquidity in
networks of cooperative banks or banks participating in an institutional protection scheme.
Here a central institution or body often plays a key role in providing liquidity to the
members of the network. Therefore, sight deposits made by the members of the network
with the central institution and other liquidity funding made available to the members by a
central institution can qualify as liquid assets.
Furthermore, the delegated act allows credit institutions which are unable to hold interestbearing assets for reasons of religious observance to hold instead certain non-interest
bearing instruments as level 2b assets.
15.1. Why did the Commission not simply copy the Basel standard?
Recital 101 of the CRR sets out that "…. the liquidity coverage requirement should be
comparable to the liquidity coverage ratio set out in the final international framework for
liquidity risk measurement, standards and monitoring of the BCBS, taking into account
Union and national specificities."
In the Commission's view the Basel standard could not be implemented in Europe without
adaptation to EU specificities for the following reasons:
 First, the Basel agreement was designed for implementation by a small number of
internationally active institutions, whereas the EU will apply the LCR delegated act
to all 8000 EU banks. This constitutes a much larger and more diverse population
of banks.
 Second, the Basel agreement applies only at the consolidated level while the EU will
apply the LCR ratio both at an individual and at a consolidated level.
 Third, and importantly, the Basel definition of eligible assets was confined to those
assets which were deemed to be highly liquid in all BCBS jurisdictions. This fails to
give adequate recognition to certain specific assets which have demonstrated high
liquidity in the European Union (notably some covered bonds and certain assetbacked securitisations including auto-loan backed ABSs).
15.2. Did the Commission follow the recommendations of the LCR Reports
prepared by the EBA?
EBA carried out comprehensive work on the impact assessment of the LCR and performed
a detailed technical analysis on the liquidity of different classes of financial instrument.
This work constituted an extremely valuable reference point for the European Commission
in preparing its initial draft of the LCR. Many of the choices reflected in the Commission’s
proposal were considered and discussed positively in the EBA technical report.
5
Following the extensive consultation and impact assessment described above, the
European Commission concluded that there was a need to provide for greater recognition
for covered bonds and some forms of high-quality securitisations in the LCR. These
constitute the principal points of divergence with the EBA recommendation which favoured
adhering to the Basel agreement.
The decision of the European Commission to depart from the EBA recommendations (to
adhere to the Basel agreement) and technical analysis on a small number of points should
not be construed as a negative reflection on the quality or rigour of EBA's preparatory
work. Rather it reflects the fact that the European Commission is legally obliged to look
beyond the purely prudential perspective and must take a broader set of policy
considerations into account when framing legislation to apply the LCR to the European
marketplace.
16. What is the Net Stable Funding Requirement (NSFR)?
Before the financial crisis, many banks financed long-term activities through excessive
reliance on short-term funding, typically provided in wholesale markets. However, at the
onset of the crisis, this short-term funding rapidly dried up, causing serious problems and
even led to the downfall of some banks.
The NSFR is designed to avoid such problems by requiring banks to have sufficient stable
funding to support their assets and activities over a one-year horizon. This is calculated as
a ratio where
Available amount of stable funding
> 100%
Required amount of stable funding
The available amount of stable funding is generally determined by applying varying
percentages to different balance sheet liabilities. Long term funding/liabilities are assumed
to be more stable than short-term liabilities. Deposits by retail customers and SMEs are
considered more stable than, for instance, wholesale funding from other counterparties.
The required amount of stable funding is also calculated by applying varying percentages
to different balance sheet liabilities. Short-term assets and high quality liquid assets
require less stable funding than long term assets such as loans and mortgages with a
maturity stretching many years into the future.
17. What is happening with the implementation of the NSFR in the EU?
The Basel Committee is in the process of finalising the standard for the NSFR. This will be
subject to observation before applying from 1 January 2018. Within the EU, work on the
NSFR will accelerate after adoption of the LCR delegated act. Under Article 510 CRR, the
EBA has to submit by end 2015 a comprehensive report on stable sources of funding and
assess the impact on business and the risk profile of banks. Subsequently, by end 2016
the Commission shall, if appropriate, submit a legislative proposal to the Parliament and
the Council.
HIGH QUALITY SECURITISATION
18. What are the specific provisions in the Capital Requirements Regulation
(CRR) delegated act on the Liquidity Coverage Ratio (LCR)?
Recognising the good liquidity performance of certain securitisations and to ensure
consistency across financial sectors, the Commission has made some securitisation
instruments eligible as level 2b assets for credit institutions' liquidity buffers. To qualify for
these purposes, ABS instruments will have to meet certain high quality requirements
6
identical to those that will apply under the Solvency II delegated act. They will be subject,
however, to certain additional requirements specific to liquidity, such as a minimum issue
size (EUR 100 million) or a maximum weighted average life (no more than 5 years). A
minimum issue size improves market liquidity and shorter maturities means they convert
more quickly into cash.
The LCR delegated act, unlike the Solvency II delegated act, recognises as liquid assets
securitisations tradable on generally accepted repurchase markets. Repo markets are an
important source of liquidity in banking markets but in contrast are less relevant for
insurers.
Another difference is that with the exception of residential mortgage-backed securities
(RMBS), only securitisations backed by auto loans and leases and consumer credit
facilities to borrowers resident and SMEs established in the EU are eligible for the liquidity
buffer. This is because the various empirical assessments that were carried out only
analysed the liquidity of assets with an EU-based obligor.
19. What is the prudential basis for the preferential treatment of high quality
securitisations under the LCR?
Securitisation instruments fulfilling eligibility criteria will be included in level 2b of the
liquidity buffer subject to a cap of 15% and appropriate haircuts.
The liquidity of residential mortgage-backed securities (RMBSs) was assessed by the EBA
in accordance with various liquidity metrics and the results published in the EBA’s “Report
on appropriate uniform definitions of extremely high quality liquid assets and high quality
liquid assets” (20 December 2013). Based on its own empirical findings, the EBA
recommended giving RMBSs treatment of liquid assets in level 2b and subject to a 25%
haircut.
Based on the Commission’s own empirical analysis and evidence made available by market
participants, the liquidity of securitisations backed by auto loans and leases was
comparable to that of RMBSs when certain liquidity metrics were considered (in particular,
bid-offer spreads). On those grounds, the Commission considered appropriate to give auto
loan securitisations the same treatment as RMBSs.
Other market data reviewed by the Commission indicated acceptable levels of liquidity for
securitisations backed by consumer credit assets and loans to SMEs, although the
observed levels of liquidity were inferior to RMBSs and auto loan securitisations.
Accordingly, SMEs and consumer credit securitisations were given level 2b status, but
subject to a higher haircut (35%).
The inclusion of a broader pool of securitised assets will contribute to increase
diversification within the liquidity buffer of credit institutions and, thus, reduce the risk of
excessive concentration in one type of assets, in particular mortgage assets (given that in
addition to RMBSs, covered bonds also qualify as liquid assets).
Furthermore, as available market data point to a low correlation between securitisation
assets and other liquid assets such as government bonds, the inclusion of a broader range
of securitisation assets may help to weaken the bank-sovereign nexus and reduce
fragmentation in the internal market.
20. Are you not opening “Pandora's box”? Do you not acknowledge that you will
bring new risks into the financial system?
The lessons of the past have been learned. There is no intention to undo what has been
put in place by recent financial reforms in the EU. The eligibility criteria detailed in the two
delegated acts have been discussed with supervisory authorities and central banks. There
7
is broad agreement that these criteria will help to identify categories of highly transparent,
simple and safe products.
21. What are the current impediments to the development of a securitisation
market for SMEs?
Securitisation may help to alleviate the financing situation of SMEs as it may allow banks
to refinance their exposures to SMEs, freeing additional funding capacity to generate new
loans. The Commission’s initiatives will help to develop securitisation instruments backed
by SME loans/assets in the EU.
However, specific issues need to be addressed if this market segment is to develop. One
of the main hurdles is the absence of standardised and continuous credit quality
information on SMEs. As there is a lack of comparable and harmonised information for
these entities, investors have difficulties in assessing their creditworthiness.
In this context, private sector initiatives to help overcome these difficulties and to develop
EU-wide SME ABS markets are welcome.
22. How does securitisation of asset classes such as mortgages or auto loans
relate to the objective of stimulating funding of the economy?
Highly transparent, simple and safe securitisation can play an important part in
channelling additional funds to the real economy as it helps freeing room on banks’
balance sheet to generate new loans. These high quality instruments can serve as a useful
additional funding tool and, at the same time, provide a source of portfolio diversification
for a wide range of institutional investors. For instance an insurance company or a pension
fund typically does not have the expertise to grant direct loans to SMEs but could invest in
securitisation products having these loans as underlying assets. It also helps them to
increase their risk and geographical diversification, while keeping them insulated from the
originator’s credit risk. In the current environment of funding constraints and banking
deleveraging process, securitisation could contribute to bridging the gap between banks
and capital markets.
23. Is the decision to include certain high quality covered bonds and
securitisations in the liquidity buffer consistent with the ECB purchasing
programmes announced on 2 October 2014?
Yes.
The decision to include some high quality covered bonds and securitisations in the liquidity
buffer is justified by their high liquidity level but also facilitates the flow of credit to the
real economy. The Commission, thus, shares the objective of the ECB purchasing
programmes to increase lending to SMEs and businesses to promote growth and
employment. As regards the detailed eligibility criteria of the ECB's purchasing
programme, this is of course the prerogative of the ECB.
24. What is the state of play of international discussions on securitisation?
The EU does not work in isolation, given the global dimension of these markets. The
Commission plays a proactive role in promoting a differentiated approach in the current
international debate.
The Commission actively supports the developments of global standards for simplicity and
transparency by the joint BCBS-IOSCO working group4. They will provide a common basis
for international authorities to develop appropriate regulatory and prudential frameworks.
4
The Basel Committee on Banking Supervision (BCBS) and the International Organization of Securities Commissions (IOSCO) are co-leading
a cross-sectoral task force on securitisation (BCBS-IOSCO working group). Gathering experts from the main regulatory and supervisory
8
However, given the legal deadlines in the EU primary legislation for the adoption of the
delegated acts on Solvency II and the Liquidity Coverage Ratio, the Commission moved
work forward in this area to include certain elements relevant for securitisation.
The suggested approaches on securitisation in these two delegated acts have been
discussed extensively and validated in the Commission expert groups with experts from
Member States. Looking ahead, to ensure as much coherence as possible across financial
sectors and G20 jurisdictions, there may be a need to adjust these texts to reflect the
outcome of global discussions.
25. Eligibility criteria in the LCR and Solvency II delegated acts
The criteria to identify highly transparent, simple and sound securitisation instruments set
out in the Solvency II and Liquidity Coverage Ratio delegated acts are based on
recommendations from the European Insurance and Occupational Pensions Authority
(EIOPA) and a detailed analysis of the liquidity of different instruments from the European
Banking Authority (EBA).5 In December 2013, the Commission received EIOPA's technical
report on the design and calibration of the Solvency II standard formula for certain longterm investments6. This report proposed to single out high-quality securitisation and to
apply a differentiated prudential treatment to them.
In addition, the European Central Bank and the Bank of England supported this
differentiation objective in a joint statement7 released in April 2014 and in a discussion
paper published in May 20148.
The European Parliament, too, has expressed its support for the development of highquality securitisation instruments in its Resolution on long term financing.
The proposed criteria to identify high-quality securitisations do not include any risk
retention requirements (i.e. requirements that the originator, sponsor or original lender
should retain a material net economic interest in the transaction). This is because risk
retention requirements are already implemented in EU law and apply across the board, to
all types of securitisation instruments (whether high-quality or not) held by insurance
undertakings9 and credit institutions10.
Most criteria on high-quality securitisation are common to the Solvency II and LCR
delegated acts. However, as the purpose is different in each act – the Solvency II standard
formula concerns capital requirements, while the LCR delegated act prescribes rules for
the assets held by banks in their liquidity buffer – some criteria are specific to the LCR
delegated act, to ensure that high-quality securitisation instruments are also highly liquid.
authorities, this group has undertaken a wide-ranging assessment of international securitisation markets. Its main tasks are in particular to
identify factors hindering the development of sustainable securitisation markets and to develop criteria to identify and assist in the
development of simple and transparent securitisation structures.
5
This analysis examined the liquidity of some asset backed securities against a number of metrics. However, this work was
not sufficient for EBA to recommend the inclusion of ABS (apart from RMBS) as HQLA for the purposes of LCR.
6
https://eiopa.europa.eu/fileadmin/tx_dam/files/consultations/consultationpapers/EIOPA-13-163/2013-12-19_LTI_Report.pdf
7
http://www.bankofengland.co.uk/publications/Pages/news/2014/070.aspx
8
https://www.ecb.europa.eu/pub/pdf/other/ecb-boe_case_better_functioning_securitisation_marketen.pdf
9
By virtue of Article 135(2) of Directive 2009/138/EC (Solvency II).
10
By virtue of Article 405 of Regulation (EU) No 575/2013 (CRR).
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26.1. General Requirements
26.1.1. Maximum seniority
The tranche must be the most senior in the securitisation transaction, and it must remain
so at all times, even after events that may impact the relative seniority of tranches, such
as the delivery of an enforcement or acceleration notice. This criterion ensures that the
credit quality of the tranche is indeed enhanced as compared to the credit quality of the
entire pool of underlying exposures. Maximum seniority is among the more relevant
features justifying a prudential treatment that is aligned to the underlying exposures.
26.1.2. Homogeneous eligible underlying exposures
Homogeneity in the type of underlying exposures increases soundness, simplicity and
transparency (in particular, loan-level reporting is easier to produce and interpret). All
underlying exposures must belong to only one of the following types:
 Residential loans:
Securitisation positions may be backed by loans secured by a first-ranking mortgage
and/or by fully-guaranteed residential loans as referred to in Article 129(1)(e) of the
Capital Requirements Regulation. In both cases, the pool of loans must feature on average
a loan-to-value ratio lower than or equal to 80%. In the case of mortgage loans only, it is
possible to derogate from this loan-to-value requirement, provided that instead, the
national law of the Member State where the loans are originated provides for a maximum
loan-to-income ratio not higher than 45%, and each loan in the pool complies with this
limit. The relevant national law must be communicated to the Commission, and EBA
and/or EIOPA.
 Loans, leases and credit facilities to undertakings, in particular SMEs:
Securitisation positions may be backed by commercial loans, leases and credit facilities to
undertakings to finance capital expenditures or business operations other than the
acquisition or development of commercial real estate, provided that at least 80% of the
borrowers in the pool in terms of amount are small and medium-sized enterprises at the
time of issuance of the securitisation.
 Auto loans or leases:
Securitisation positions may be backed by a loans or leases for the financing of a broad
range of vehicles. Such loans or leases may include ancillary insurance and service
products or additional vehicle parts, and in the case of leases, the residual value of leased
vehicles11. All loans and leases in the pool shall be secured with a first-ranking charge or
security over the vehicle or an appropriate guarantee in favour of the securitisation special
purpose vehicle.
 Consumer loans and credit card receivables:
Securitisation positions may be backed by loans and credit facilities to individuals for
personal, family or household consumption purposes.
As a consequence of this closed list of eligible underlying exposures, commercial mortgage
backed securities (CMBS) and collateralised debt obligations (CDOs)12 are excluded. This is
11
Auto loans or lease securitisations including residual values must however comply with paragraph 0 below, which prevents the
repayment of the securitisation depending predominantly on the sale of the vehicles.
12
CDOs are also excluded by virtue of the criteria in point 0 because their underlying exposures usually include transferable debt
instruments, such as non-investment grade bonds.
10
justified given their poorer performance, as shown in EIOPA's advice and other studies of
CMBS.13
No re-securitisations, no synthetic securitisations
Re-securitisations are explicitly excluded, as they are typically complex and less
transparent structures, where the cascading of investor losses is very difficult to
understand due to re-tranching.
The same goes for synthetic securitisations, where the underlying exposures are not
transferred to the special purpose vehicle. Instead, the transfer of risk is achieved by the
use of credit derivatives or guarantees, while the exposures being securitised remain with
the originator. The transfer of the assets to be securitised ensures that securitisation
investors have recourse to those assets should the Securitisation Special Purpose Entity
(SSPE) not fulfil its payment obligations. Such recourse cannot be granted in synthetic
transactions, due to the fact that only the credit risk associated with the underlying assets,
rather than the ownership of such assets, is transferred to the SSPE. Such a structure also
adds counterparty risk on derivatives or guarantees, and hampers investors' rights to the
proceeds of the underlying exposures. In addition, most synthetic structures add to the
complexity of the securitisation in terms of risk modelling.
26.1.3. Restricted use of derivatives and transferable financial instruments
Derivatives can only be used for hedging currency and interest rate risk. This also
excludes the synthetic securitisations described in the above paragraph.
The pool of underlying exposures must not include transferable financial instruments (this
effectively means CDOs are excluded), except financial instruments issued by the
securitisation special purpose entity itself, in order to accommodate master trust
structures.
26.1.4. 'True sale' and absence of severe 'claw back' provisions
The transfer of the underlying exposures to the securitisation special purpose vehicle must
be sufficiently certain from a legal point of view:
 the transfer must be enforceable against any third party and the underlying
exposures be beyond the reach of the seller (originator, sponsor or original lender)
and its creditors, including in the event of the seller's insolvency ('true sale'
requirement);
 the transfer of the underlying exposures to the SSPE may not be subject to any
severe clawback provisions in the jurisdiction where the seller is incorporated
because such provisions induce legal insecurity on investors' rights.
26.1.5. Continuity provisions for the replacement of servicers, derivative
counterparties and liquidity providers
The underlying exposures must have their administration governed by a servicing
agreement which includes servicing continuity provisions to ensure, at a minimum, that a
default or insolvency of the servicer does not result in a termination of servicing.
Where applicable, the documentation governing the securitisation must also include
continuity provisions to ensure, at a minimum, the replacement of derivative
counterparties and liquidity providers upon their default or insolvency.
13
See page 121 of EIOPA's technical report (2013).
11
The aim of these two criteria is to mitigate credit risk with different counterparties
involved in the securitisation transaction, whose default or insolvency could jeopardise the
smooth running of the transaction.
26.1.6. Absence of credit-impaired obligors
At the time of issuance of the securitisation or when incorporated in the pool of underlying
exposures at any time after issuance, the underlying exposures must not include
exposures to credit-impaired obligors (or where applicable, credit-impaired guarantors).
The definition of credit-impaired obligors or guarantors is both backward-looking (e.g. the
obligor has declared bankruptcy, or has recently agreed with his creditors to a debt
dismissal or reschedule, or is on an official registry of persons with adverse credit history)
and forward-looking (e.g. the obligor has a credit assessment by an external credit
assessment institution or has a credit score indicating a significant risk that contractually
agreed payments will not be made compared to the average obligor for this type of loans
in the relevant jurisdiction).
This criterion effectively excludes 'sub-prime' loans from the high-quality securitisation
category.
26.1.7. Absence of loans in default
At the time of issuance of the securitisation or when incorporated in the pool of underlying
exposures at any time after issuance, the underlying exposures must not include
exposures in default, as defined in the banking prudential rules in Article 175 of Regulation
(EU) No 575/2013. This criterion ensures that the securitisation does not contain loans or
leases already in default when the securitisation transaction begins or when new
exposures are transferred to the SSPE.
26.1.8. Reliance on the future sale of assets securing the exposures
The repayment of the securitisation position must not be structured to depend
predominantly on the sale of assets securing the underlying exposures; however, this shall
not prevent such exposures from being subsequently rolled over or refinanced.
The point of this criterion is to exclude transactions where the ability of the SSPE to repay
the securitisation notes is subject to an unacceptable level risk of risk, due to overreliance
on the proceeds of the sale of assets securing the underlying exposures such as used cars
when an auto lease securitisation transaction matures. While recognising that auto lease
securitisations including residual values may be eligible as high quality (see paragraph 0),
the repayment of those securitisations should not rely predominantly on the future
realisation of those residual values.
26.1.9. Pass-through requirement for non-revolving structures
Cash proceeds from the underlying exposures should flow in a simple and transparent way
to investors. Structures where a significant amount of cash is retained within the SSPE (for
example, securitisations with bullet payments) would not comply with this pass-through
profile and, therefore, are excluded.
26.1.10. Early amortisation provisions for revolving structures
Where the securitisation has been set up with a revolving period, the transaction
documentation provides for appropriate early amortisation events, which shall include at a
minimum all of the following:
 a deterioration in the credit quality of the underlying exposures;
 a failure to generate sufficient new underlying exposures of at least similar credit
quality;
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 the occurrence of an insolvency-related event with regard to the originator or the
servicer.
High-quality securitisations should ensure that, in the presence of a revolving period
mechanism, investors are sufficiently protected from the risk that principal amounts may
not be fully repaid. Sufficient protection should be ensured by the inclusion of provisions
which trigger amortisation of all payments at the occurrence of adverse events such as
those mentioned in the criterion.
26.1.11. At least one payment at the time of issuance
At the time of issuance of the securitisation, the borrowers (or, where applicable, the
guarantors) must have made at least one payment. This is intended to exclude
securitisation backed by newly-originated loans. However, this requirement would not be
proportionate in practice for the securitisation of credit card receivables. Hence there is a
derogation for this type of securitisation.
26.1.12. Absence of self-certified loans
In the case of securitisations backed by residential loans, the pool of loans must not
include any loan that was marketed and underwritten on the premise that the loan
applicant or, where applicable intermediaries, were made aware that the information
provided might not be verified by the lender.
This requirement is essential to exclude loans where the applicant and, where applicable,
intermediaries, might be incentivised to misrepresent essential information, e.g. to
overstate their income. This criterion also helps exclude 'sub-prime' lending.
26.1.13. Assessment of retail borrowers' creditworthiness
In the case of securitisations where the underlying exposures are residential loans, auto
loans or leases, consumer loans or credit facilities, the creditworthiness of the borrowers
must be assessed thoroughly, in accordance with the Mortgage Credit Directive (Directive
2014/17/EU) or the Consumer Credit Directive (Directive 2008/48/EC) or equivalent rules
in third countries, where applicable. This requirement effectively excludes flawed
securitisation business models, relying on unsound underwriting practices.
26.1.14. Transparency and disclosure of loan-level data
Where either the originator or sponsor of a securitisation is established in the Union, they
must comply with transparency requirements set out in the Capital Requirement
Regulation. Furthermore, in accordance with Article 8b of Regulation (EU) No 1060/2009,
the European Securities and Markets Authority (ESMA) will in 2017 set up a website
centralising the publication of information regarding structured finance instruments, i.e.
securitisations. Through this website, the issuer, originator or sponsor of the securitisation
will be able to publish information on the credit quality and performance of the underlying
assets of the structured finance instrument, the structure of the securitisation transaction,
the cash flows and any collateral supporting a securitisation exposure as well as any
information that is necessary for investors to conduct comprehensive and well-informed
stress tests on the cash flows and collateral values supporting the underlying exposures.
Where neither the issuer, nor the originator, nor the sponsor of a securitisation is
established in the Union, comprehensive loan-level data in compliance with standards
generally accepted by market participants must be made available to existing and
potential investors and regulators at issuance and on a regular basis.
26.1.15. Listing requirement
Both the Solvency II and LCR delegated acts require that high-quality securitisation
positions should be listed on a regulated market/recognised exchange, or admitted to
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trading on another organised venue, with a robust market infrastructure. The drafting of
this criterion could not be strictly aligned in the two acts because of legal constraints
stemming from differences in the corresponding 'level 1' legislation14. In addition, under
the LCR delegated act, securitisation positions may be deemed highly liquid if they are
tradable on generally accepted repurchase markets. This was not included in the Solvency
II delegated act as repurchase transactions to generate liquidity are not typical for
insurers.
26.1.16. Credit quality
Both the Solvency II and LCR delegated acts require that high-quality securitisation
positions receive a minimum external credit assessment, on issuance and at any time
thereafter.
The minimum external credit assessment is one of the elements for high-quality
securitisation positions and does not constitute sole and mechanistic reliance, in
accordance with the principles of the Financial Stability Board for reducing reliance on CRA
ratings15.
In Solvency II, the position should be investment grade, i.e. be assigned to credit quality
step 3 at least.
In order to ensure that the securitisation position is highly liquid, the LCR delegated act
requires that it is assigned to credit quality step 1.
The mappings of external credit assessments onto the respective scales of credit quality
steps applicable in banking and insurance legislation is prepared by the Joint Committee of
the European Supervisory Authorities.
26.2. Requirements specific to the LCR delegated act
The LCR delegated act includes all the requirements for high quality securitisations set out
in the Solvency II Delegated Act but adds some additional requirements specifically for
liquidity purposes. It would not be justified to assume that all high quality credit
securitisations would be sufficiently liquid in a market stress scenario.
26.2.1. Minimum issue size
The larger the issue size, the deeper the secondary market. Therefore, the LCR delegated
act provides for a minimum issue of EUR 100 million.
26.2.2. Maximum weighted average time to maturity
Securitisations with a short-weighted average life and high prepayments have proven to
enjoy good liquidity during periods of stress, as they convert into cash in a short time span
(this is the case of auto loan ABSs, for example). Accordingly, the LCR delegated act will
only recognise positions in securitisations where weighted average time to maturity is less
than 5 years, assuming call or certain prepayment options are exercised.
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On the one hand, the Solvency II Directive uses the concept of a "regulated market" as defined in Article 13(22). On the other hand, the
Capital Requirements Regulation uses the concept of a "recognised exchange" as defined in Article 4(1)(72). While the latter is also based
on the concept of a "regulated market", the CRR definition also includes clearing mechanism requirements.
15
Available at: http://www.financialstabilityboard.org/publications/r_101027.pdf
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