Securitisation Regulation: Impact on investment funds and their managers investing in securitisations

The new EU securitisation package which was published in the Official Journal of the European Union in December 2017 will become applicable on 1 January 2019.

Regulation (EU) 2017/2402 (i) lays down a general framework for all securitisations (including initial and ongoing due diligence, risk retention and transparency requirements) and (ii) introduces a new securitisation label (with specific conditions to be fulfilled) for simple, transparent and standardised securitisation ("STS") with the creation of a specific STS framework ("Securitisation Regulation") and Regulation (EU) 2017/2401 amends the CRD IV Regulation (EU) 575/2013 mainly to introduce the specific features of STS securitisations when such securitisations meet the additional requirements laid down in the Securitisation Regulation.

The Securitisation Regulation will reshape the currently applicable securitisation provisions in sector-specific legislation such as the Alternative Investment Fund Managers Directive 2011/61/EU (“AIFMD”) and Commission Delegated Regulation (EU) 231/2013.

Alternative investment fund managers (“AIFM”) (including non-EU AIFMs and so-called below-threshold AIFMs) that manage and/or market alternative investment funds in the European Union, UCITS management companies and internally managed UCITS will be affected by the Securitisation Regulation, in particular, when investing in securitisation positions, including STS securitisations as they qualify as “institutional investors” under the Securitisation Regulation.

Institutional investors are subject to initial and ongoing due diligence requirements which also apply when they invest in securitisations where the sponsor, the original lender or the originator (as the case may be) is established in a third country.

As part of their due diligence, institutional investors, amongst others, will need to check whether EU originators, sponsors or original lenders comply with the new direct risk retention requirement as well as criteria for credit granting laid down by the Securitisation Regulation. Where neither the originator, sponsor nor original lender is established in the European Union, institutional investors have to verify whether the originator, sponsor or original lender meets the risk retention requirements and criteria for credit granting in accordance with Article 5 1. (b) and (d) of the Securitisation Regulation. The Securitisation Regulation foresees some exemptions to the risk retention requirement where the securitised exposures are exposures on or exposures fully, unconditionally and irrevocably guaranteed by certain institutions or governmental bodies such as, for example, central governments or central banks.

The Securitisation Regulation foresees the possibility for an institutional investor to instruct its delegate in charge of the investment management to fulfil the due diligence requirements that would otherwise apply to that institutional investor. According to the Securitisation Regulation, EU Member States are required to ensure that where such a delegate is appointed, any sanctions are applied to that delegate and not to the institutional investor.

The Regulations will apply to securitisation transactions the securities of which are issued on or after 1 January 2019 and to any securitisations that create new securitisation positions on or after 1 January 2019 (subject to certain transitional arrangements). Transitional provisions are detailed in Article 43 of the Securitisation Regulation.

The Securitisation Regulation may well have an impact the eligibility of certain securitisation securities for investment by UCITS and AIFs. In that context, the Securitisation Regulation introduces new provisions into the AIFMD and the UCITS Directive 2009/65/EC which provide that where AIFMs, UCITS management companies or internally managed UCITS are exposed to a securitisation that no longer meets the requirements provided for in the Securitisation Regulation, they shall, in the best interests of the investors in the relevant funds, act and take corrective action, if appropriate.