UK Prudential Regulation Authority Consults on Its Approach to New EU Securitization Framework and Significant Risk Transfer

The U.K. Prudential Regulation Authority has published a Consultation Paper, setting out the PRA's proposals on its approach to supervision under the new EU securitization framework that will take effect from January 1, 2019. The incoming EU framework consists of: (i) the Securitization Regulation, which imposes general requirements for all EU securitization activity and outlines the criteria and process for designating certain securitizations as "Simple, Transparent and Standardised"; and (ii) revisions to the banking securitization capital framework within the Capital Requirements Regulation.

The PRA proposes to:

• introduce a new Supervisory Statement, "Securitisation: general requirements and capital framework." This will set out the PRA's approach and expectations relating to: (a) the provisions within the Securitization Regulation that are applicable to all securitizations; (b) firms that intend to sponsor STS Asset Backed Commercial Paper programmes; and (c) incoming securitization capital framework introduced via amendments to CRR;
• amend the existing Supervisory Statement "Securitisation," by changing its title to "Securitisation: Significant Risk Transfer" and by textual changes to reflect the PRA's approach and expectations in relation to SRT securitization, including the role of firms' senior management and prudential treatment of excess spread. The proposed amendments also cover aspects of the PRA's assessment of the commensurate transfer of risk to third parties that is required whenever a reduction in capital requirements is achieved through a securitization via SRT.
• amend the existing Supervisory Statement, "The Internal Capital Adequacy Assessment Process (ICAAP) and the Supervisory Review and Evaluation Process (SREP)" to clarify how firms should assess the appropriateness of different methods in measuring securitization risk and to specify minimum information which should be included in a firm's ICAAP document.

The new EU securitization framework will take effect from January 1, 2019. The revisions to Supervisory Statement, "The Internal Capital Adequacy Assessment Process (ICAAP) and the Supervisory Review and Evaluation Process (SREP)" and the new Supervisory Statement will also take effect from this date.

The amendments to the Supervisory Statement "Securitisation" are equally applicable to the current CRR and the amended CRR and will therefore take effect immediately after publication of a policy statement following the consultation period.

The PRA invites comments on the consultation by August 22, 2018.

View the Consultation Paper (PRA CP 12/18).