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  • UK Government Opens Review of Securitization Regulation

    HM Treasury has opened a Review of the U.K. Securitization Regulation with the issue of a call for evidence. The Review is required under the Regulation, and HM Treasury must report to Parliament on its findings by January 2022. Responses to the consultation may be submitted until September 2, 2021. HM Treasury also asks respondents to consider whether any changes are needed that are time-sensitive so that consideration can be given to whether a change is implemented through legislation or regulator rules. In the context of the Future Regulatory Framework Review, the responsibility for making and implementing rules will be transferred to the regulators. The FRF Review is ongoing, with a second consultation expected later this year.

    The Securitization Regulation provides the criteria for identifying which securitizations will be designated as "simple, transparent and standardized" (STS) securitizations, a system to monitor the application of those criteria as well as common requirements on risk retention, due diligence and disclosure. Related provisions under the Capital Requirements Regulation set out the regulatory treatment of exposures to securitizations that are deemed to be STS securitizations.

    The review requires HM Treasury to consider a wide range of topics, including:
    • The effects of the U.K. Securitization Regulation, including the introduction of the STS framework on the functioning of the securitization market, the contribution of securitization to the real economy (in particular on access to credit for Small and Medium-sized Enterprises (SMEs) and investments) and the interconnectedness between financial institutions and the stability of the financial sector.
    • Risk retention, such as whether the regime can be improved, which modalities are used the most, whether investors consider which modality is used when making an investment decision and if there is scope for improving the non-performing loan securitization framework.
    • The usefulness of the disclosure requirements for private securitizations (i.e., securitizations that do not require a prospectus) and whether the requirement applicable to public securitizations for disclosure of information to a securitization repository should be extended to private securitizations.
    • Whether the Environmental, Social, and Governance disclosures that are required for STS securitizations with underlying exposures of residential loans or auto loans or leases should be extended to STS securitizations with other types of underlying exposures, and the making of ESG disclosures more mainstream generally.
    • The third-party verification regime under which manufacturers of a securitization can voluntarily request a third-party entity to assess and verify the compliance of a securitization with the STS criteria. HM Treasury notes that only one third-party entity is authorized in the U.K. to verify these criteria and requests feedback to assist it in understanding why this is the case.
    • The role of Securitization Special Purpose Entities and whether they achieve the objectives of ensuring transparency of securitization activities across the market and creating an insolvency remote regime. HM Treasury is seeking feedback as to whether the role of SSPEs should be replaced by limited licensed banks, which would be subject to a customized supervisory and insolvency regime.

    HM Treasury is also seeking views on two possible changes that would require legislative change. Those are whether:
    1. Non-U.K. Alternative Investment Fund Managers that market or manage AIFs in the U.K. should be removed from the scope of the due diligence requirements under the U.K. Securitization Regulation. The government is concerned the requirement for non-U.K. AIFMs to conduct due diligence before taking a position in a securitization is disproportionate and results in an unlevel playing field because no other non-U.K. institutional investors are subject to the requirements, which may dissuade them from seeking investments in the U.K., harming the competitiveness of the U.K.'s financial market. In addition, HM Treasury considers that it would be difficult for the Financial Conduct Authority to supervise and enforce these requirements. HM Treasury is therefore proposing to amend the definition of an AIFM as it is currently stated in the U.K. Securitization Regulation.
    2. An STS equivalence regime should be introduced for recognizing non-U.K. securitizations as STS in the U.K. The U.K. Securitization Regulation provides that where originators and sponsors are established outside the U.K., the securitization cannot be designated as an STS securitization. This means that U.K. investors do not benefit from the preferential capital treatment for these securitizations.

    View the Call for Evidence: Review of the U.K. Securitization Regulation.

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