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Following the US subprime crisis that began in 2007, the notion of securitisation has suffered from bad press that tainted its reputation. However, securitisation is still considered as an essential component to continued economic recovery and for well-functioning financial markets.
What is securitisation?
In simple terms, securitisation is a structured finance tool in which an entity pools together identifiable cash flows and transfers the interest in those cash flows to investors, either with or without the support of further collaterals, for the purpose of financing. The Securitisation Act (Chapter 484 of the Laws of Malta) (the ‘‘Act'') defines securitisation as a transaction or an arrangement whereby a securitisation vehicle, directly or indirectly (i) acquires securitisation assets from an originator by any means; or (ii) assumes any risks from an originator by any means; or (iii) grants secured loan or other secured facility or facilities to an originator and finances any or all of the above, directly or indirectly, in whole or in part, through the issue of financial instruments.
During the process of a securitisation transaction the main parties would typically include the following:
- originator;
- sponsor;
- special purpose vehicle (SPV);
- underwriter;
- credit rating agencies;
- third-party credit enhancers;
- swap counterparty;
- trustee; and
- investors.
A securitisation deal can be classified as either ‘traditional' or ‘synthetic'. Traditional securitisation is when the assets and liabilities of the SPV are removed from the originator's balance sheet. On the other hand, a synthetic securitisation includes the use of derivatives to transfer only the credit risk of the asset pool to third parties instead of the assets themselves.
Strengthening Securitisation Market and build the Capital Markets Union at EU level
Following the turbulence in the US subprime mortgage market in 2007-08 (as a result of the unexpected deterioration in the quality of some securitised assets) the confidence of investors in these financial arrangements has drastically weakened. However, in contrast to US securitisation market which recovered quickly from the subprime crisis, securitisation at EU level remains quiet, despite the fact that during the economic recession nearly all outstanding EU securitisations were redeemed appropriately as opposed to US securitisations[1]. Accordingly, the European Supervisory Authorities (ESAs) agreed to implement a number of reforms to make securitisation dealings within the EU safer and simpler, and to ensure that there are proper control mechanisms in place in order to mitigate risks and protect investors.
New Securitisation Regulations from the EU
In the context of EU's efforts to strengthen the securitisation market and to build a Capital Markets Union (CMU) by the end of 2019, on 30th September 2015 the European Commission (EC) proposed two new regulations: (i) the Securitisation Regulation; and (ii) the Securitisation Prudential Regulation. The Securitisation Regulation consolidates the patchwork of legislation governing EU securitisations, and introduces the long-awaited rules for simple, transparent and standardised (STS) securitisations. On the other hand, the Securitisation Prudential Regulation replaces the provisions of the Capital Requirements Regulation (CRR) relating to securitisation, and sets out the framework under which certain institutional investors (e.g. banks and investment firms) can benefit potentially from more favourable regulatory capital treatment for STS securitisation exposures.
After the coming into force of the Prospectus Regulation in July 2017, the new securitisation regulatory framework represents the next most significant step in the EU's CMU package of reforms. In this regard, on 30th May 2017, during Malta's EU presidency, representatives from the European Parliament (EP) confirmed their agreement on the recommendations proposed by the EC intended at facilitating the growth of a securitisation market in Europe. In this regard, on 26th October 2017 the EP voted on and approved the proposed new regulatory framework. This follows an agreement reached by the presidency and the EP on 30th May 2017. This legislative package is expected to restore market activity in EU securitisation transactions in order to generate new investment possibilities and provide an additional source of finance, particularly for SMEs and start-ups.
Growth of a Securitisation Market in Europe: STS Securisation
"Tonight's agreement with MEPs will allow us to re-launch the securitisation market, defining a model for STS securitisations", said Malta's Minister for Finance Edward Scicluna during the EU's presidency[2].
But why is the STS label so important for EU securitisation? STS securitisation has the aim of restarting the EU securitisation market and building a sustainable EU market for securitisation. For the past two years, the ESAs and other industry stakeholders have been working hard towards achieving this ambition. It is important to note that the notion of STS securitisation does not refer to the underlying quality of the securitised assets, but to the process by which the securitisation transaction is structured. In this regard, in order for a transaction to qualify as STS, first it needs to comply with the general rules of the Securitisation Regulation such as risk retention and transparency requirements. Furthermore, the idea behind the new regulation is that securitisation products that qualify as STS will be more valued by investors and will benefit from better capital treatment than non-STS ones[3]. Currently, there is still a level uncertainty with regard to the STS criteria and the requirements which will need to be fulfilled in order for a securitisation scheme to qualify as STS. The specifics of these conditions remain to be seen and undoubtedly more guidelines will be required in order to place the STS standards into practice.
Securisation Market for SMEs and start-ups
On 20th November 2017, the European Council adopted the implementing rules and technical standards developed by the EC and ESAs. This is a positive step forward towards the development of a securitisation market which will help to create new investment possibilities and provide an additional source of finance, particularly for SMEs and start-ups. Accordingly, it is anticipated that the bulk of the new Securitisation Regulations will be in place by 2019.
"These rules will help reinvigorate the securitisation market, thereby increasing the capacity for lending to households and businesses", said Toomas Tõniste, minister for finance of Estonia, which currently holds the Council presidency. "Defining a model for STS securitisations is an important step, building on recent work to regulate the industry and address risk[4]."
Malta Securitisation Market: What are the Opportunities?
The development of an efficient legislative framework for securitisation in Malta together with the National Capital Markets Strategic plan launched earlier this year has created interest for investors to use Malta as a hub for establishing structured finance vehicles in a very efficient manner. But why is it attractive to set up a securitisation structure in Malta one may quite rightly ask?
Main Advantages of setting up a securitisation structure in Malta
One of Malta's most appreciated advantages is the accessibility of the regulator, which establishes constructive working relationships with companies investing in Malta. Another important advantage is that as an EU member state, businesses in Malta can passport their services to all other member states. Moreover, Malta provides a robust legal framework for securitisation primarily through the Act which was introduced in 2006 coupled with the Securitisation Cell Companies (‘‘SCC'') Regulations (S.L. 386.16) which were ratified in 2014. The latter provides for an effective legal framework for segregation of different sets of assets within a single SPV, allowing the formation of several securitisation cells without incurring any risk of cross-contamination between the different creditors and investors of the individual cells.
Malta Unique competitive edge in the securitisation market
In conclusion, Malta has a lot of opportunities for further growth in the securitisation market. Although the robust legislative framework for securitisation in Malta is important for the growth of this market, it is the costs to setup a securitisation vehicle that give Malta its unique competitive edge. For example, when compared to other EU jurisdictions such as Luxembourg and Ireland, Malta's key cost advantages in relation to corporate, legal and accounting services make Malta a highly attractive securitisation jurisdiction especially for those securitisation arrangements below the €100 million level. Accordingly, it is expected that Malta experiences growth in the securitisation market in the years to come.
[1]http://www.europarl.europa.eu/RegData/etudes/IDAN/2015/569017/EPRS_IDA%282015%29569017_EN.pdf
[2] https://www.consilium.europa.eu/en/press/press-releases/2017/05/30/capital-markets-union-securitisation/
[3] https://www.ceps.eu/content/simple-transparent-and-standardised-sts-securitisation-it-possible
[4] http://www.consilium.europa.eu/en/press/press-releases/2017/11/20/capital-markets-union-agreement-reached-on-securitisation/
For More information on Securitisation, we welcome you to read the following publications: