The Dutch Central Bank's Solvency Rules for Securitisation
The Securitisation Rules contain the requirements that securitisation transactions (and the involved parties) must comply with if the intention is to free up capital.
To a large extent, the Securitisation Rules simply represent the codification of the DCB’s existing policy in respect of a securitisation by a regulated entity of its own assets. The Securitisation Rules set out requirements for both synthetic and traditional securitisation transactions as well as rules which are applicable only to synthetic securitisation transactions. This article only deals with the general concepts of the Securitisation Rules (which, in most cases, will be relevant to both synthetic and traditional securitisation transactions).
The Securitisation Rules also deal with capital rules applicable to third party banks (ie, banks other than the originating bank) that are involved in a securitisation transaction as liquidity provider or credit enhancement provider. This article deals only with the position of securitisation of assets by originating banks.
Like many other European central regulators’ requirements, capital relief under the Securitisation Rules depends on a “true sale” of the assets subject to the securitisation being achieved. “True sale” for these purposes means that the credit risk of the securitised pool of assets must be properly isolated from the credit risk of the bank originator. The concept of “true sale” in
the Netherlands has, from an international point of view, a particular dimension. Under Dutch law, receivables are transferred by way of assignment (cessie). To effect the assignment (ie, for legal title to the receivables to pass from the seller (the originator) to the buyer, notice has to be given to the underlying debtors. As notice to debtors is often regarded as impracticable and, from a commercial point of view, undesirable, normally an assignment of receivables in securitisation transactions will not be perfected (no “perfect sale”) unless certain notification events occur (which relate to the financial position of the originating bank). The securitisation structure will furthermore be supplemented by an undisclosed pledge of the receivables (an undisclosed pledge does not require notice to be given to debtors until it is enforced). This means that after the securitisation transaction has taken place, and no notification event has occurred, legally the receivables are still owned by the originating bank and, thus, specific measures have to be taken in order to achieve a “true sale” of the underlying assets.
The requirements for a true sale to be recognised by the Securitisation Rules are as follows:
In addition, the Securitisation Rules contain requirements that prevent the SPV being identified with the bank. These requirements mean that the bank may not have any influence over the SPV (no shareholdings or influence in the board of directors, etc) and the SPV’s name must not refer to the bank’s name.
Most, if not all of the above requirements will be recognised by securitisation practitioners familiar with the rules already promulgated by a number of other European Central Bank regulators (for example the rules of the UK Financial Services Authority). In common with those rules, the Securitisation Rules also set out the risk-weighting framework applicable to other typical transaction features such as call options, triggers and other enhancements.
An option for a bank to buy back (part of the) securitised assets will result in the risk of the securitised portfolio of assets not being fully transferred to the SPV and thus may jeopardise “true sale” treatment. Accordingly, and in particular if the securitisation contains incentives for the bank actually to exercise the option (such as, for example, a step-up interest premium to be paid by the bank if it does not exercise the option), the Securitisation Rules only allow this if the bank builds up its own funds in accordance with a specific formula during the term of the securitisation (ending on the date that the option can be exercised).
In addition, the following requirements have to be met:
If securitised assets are receivables resulting from revolving credit facilities (“revolving positions”), early amortisation of investors implies that the bank will have to finance new positions following from the revolving credit facilities. The bank’s risk increases if amortisation is triggered by economic circumstances (eg, a decline of the quality of the assets). In view of this, securitised revolving positions will in principle be treated as if these assets were not transferred to the SPV (ie, own funds have to be maintained by the bank on the basis of risk weighting the revolving positions). However, capital will be released if:
Under the former policy of the DCB, an originating bank was required to buy back a securitised position resulting from a mortgage backed loan facility from the SPV if a further advance under that credit agreement was provided to a debtor. The originating bank had, in such a situation, the right to sell to the SPV a similar position as the position it had to buy back. From a solvency point of view, this policy did not seem to make much sense and has therefore led to criticism from banks.
This policy has not been adopted in the Securitisation Rules. Originating banks can provide further advances without having to buy back the related securitised positions from the SPV, provided that the originating bank and the SPV have made arrangements regarding the management of the shared mortgage.
The Securitisation Rules require that first loss credit enhancement will result in a deduction from capital. However, a less burdensome regime applies if the credit enhancement of a bank can be properly considered a “second loss position” (ie, a third party provides a “first loss position” or this is covered off in a different manner).
Liquidity facilities provided by banks to the SPV are treated as risk-weighted assets for which own funds must be maintained. If the liquidity facility is:
Substitution of securitised assets ends the protection the bank had from the credit risk of the substituted asset. In addition, substitution can be used to provide additional credit enhancement to the SPV. For transactions designed to comply
with the Securitisation Rules, substitution provisions are therefore only allowed if the bank is not required to maintain or enhance systematically the credit quality of the pool of securitised assets. Furthermore, the asset being substituted must be bought back at market value and there must be no indication that the credit quality of the asset will decline.
A major concern of DCB, which mirrors the Basel II proposals, is that of implicit (non-contractual) support given by the bank to the SPV or to investors, typically to guard against reputational risk. Implicit support undermines the “true sale” nature of the transaction. The Securitisation Rules prohibit implicit support by an originating bank. If a bank provides implicit support in breach of this prohibition, the securitised assets will be treated as risk-weighted assets of the bank. The offending bank must also make public the consequences the implicit support has for the capital requirements of the bank.
Servicing activities by the bank are not considered to affect the risk transfer to the SPV if the liability of the bank for risks in connection with a securitisation transaction is limited to the risks in connection with the servicing agreement.
Although the Securitisation Rules are mostly a codification of existing policy, they nevertheless represent a step forward for the DCB and the Dutch market. Taking into consideration that the policy was contained in various policy rules and statements or letters from the DCB, the Securitisation Rules have made the rules more transparent. Furthermore, it is worthwhile mentioning that pursuant to the Securitisation Rules it is no longer required to obtain the DCB’s prior approval for a securitisation transaction (as was the case pursuant to the old policy).
Clearly the DCB is making preparations for the implementation of the rules that will take effect when Basel II comes into force. This clarification is a welcome development for originating banks and arrangers alike seeking to arrange and execute securitisation transactions in the Netherlands.