One of the defining achievements of the Securitisation Regulation is the creation of a European quality label — the STS label for simple, transparent and standardised securitisations. It is, globally, a unique framework combining a set of bright-line structural requirements with supervisory oversight and a preferential regulatory treatment for qualifying deals.
Key points
- Separate STS regimes for traditional non-ABCP securitisations, ABCP transactions and programmes, and on-balance-sheet (synthetic) securitisations.
- Core pillars: simplicity (true sale), homogeneity, credit underwriting standards, transaction documentation, transparency and servicing experience.
- Compliance can be self-attested or verified by an authorised third-party verification agent.
- STS notes benefit from preferential regulatory capital treatment under Articles 260, 262 and 264 CRR — subject to additional conditions.
What STS tests
The STS regime is not a rating — it is a quality label testing whether a securitisation has been designed and documented in a way that investors and supervisors can readily understand. The criteria are grouped into four broad themes:
Simplicity (true sale)
The SSPE must acquire title to the receivables through a legally effective and insolvency-remote transfer or assignment. The originator may not retain any right to recall the receivables. This has to be represented by the originator and confirmed by a legal opinion from an external counsel. The transferred exposures must meet pre-defined, clear and documented eligibility criteria. Discretionary active portfolio management is not permitted.
Homogeneity
An STS securitisation must be backed by exposures of a single, homogeneous asset class. Securities (other than unlisted corporate bonds) are excluded. The underlying exposures must generate defined periodic cash flows. The RTS on homogeneity specifies asset-class factors; loans must generally be originated under comparable and equivalent standards and serviced under comparable procedures.
Credit standards
Minimum standards for the assessment of the obligor's creditworthiness must be met. The originator must have expertise in originating similar exposures. Exposures must be transferred without undue delay, may not be in default, and obligors must meet minimum standards. In principle, obligors must have made at least one payment at the time of transfer. The transaction may not be structured so that repayment to investors depends predominantly on the sale of collateral securing the underlying exposures.
Derivatives
Interest-rate and currency risks arising from the transaction must be appropriately mitigated and disclosed. Other than for hedging purposes, the SSPE may not enter into derivatives, and the pool may not contain derivatives. Permitted hedging derivatives must be underwritten and documented in line with common international standards. Interest references in the securitisation must be based on commonly used market rates and must not be tied to complex formulas.
Consequences of breaches
Documentation must mitigate the consequences of theoretical enforcement events. After an enforcement event, tranches may only be amortised sequentially (not pro rata), and enforcement must not trigger an automatic liquidation of the underlying exposures.
Servicing experience
The servicer must have expertise in servicing exposures similar to the securitised ones, and must have well-documented policies, procedures and controls for risk management. Where the originating bank acts as servicer, this is typically straightforward to evidence.
Transaction documentation
The Regulation requires "clear and coherent" documentation and "unambiguous terms". A detailed minimum catalogue of contractual provisions applies; the market standard for German-law securitisations largely matches the catalogue. Noteholder voting must be clearly regulated — the German Schuldverschreibungsgesetz provides a good framework.
Transparency
Before pricing, the originator and sponsor must provide potential investors with at least five years of historical static and dynamic performance data for exposures substantially similar to those being securitised, including an independent sample verification of the underlying exposures. A liability cash-flow model accurately reflecting the contractual relationships must be provided pre-pricing and updated throughout the life of the transaction.
Sustainability
For securitisations backed by residential mortgage loans or auto loans/leases, the originator is expected to disclose available information on the environmental performance of the financed assets — or, alternatively, available information on the principal adverse impacts of those assets on sustainability factors. See Sustainable Securitisation.
The regulatory capital privilege
Under Article 243(2) CRR, positions in an STS traditional securitisation are eligible for preferential treatment under Articles 260, 262 and 264 CRR — subject to additional conditions, including a 2% single-obligor concentration cap at the pool level and constraints on the risk weights of the securitised exposures under the standardised approach. The effect is a meaningful reduction in risk weight.