Response to consultation on RTS on methods of prudential consolidation
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An SSPE is structured with the sole purpose to isolate the securitised obligations from the originator. The holders of the beneficial interests (in the SSPE) have the right to pledge or exchange those interests without restriction. In addition, the new regulation for simple, transparent and standardised (STS) securitisations defines the special status of securitisation special purpose entities, distinguishing them from financial institutions (Article 2 (2) of the STS Regulation).
The activities of SSPEs and SPV-Secs are limited to purchasing receivables and refinancing the purchase price by issuing asset-backed securities or other financial instruments. Their legal status prevents them from engaging in other activities. This ensures that the purchased receivables and related collateral are always available as collateral cover to creditors.
A potentially required consolidation of the SSPEs under IFRS 10, should not lead to a required consolidation for prudential purposes. Therefore, we think that these entities should be deconsolidated for prudential purposes.
In the case of ABCP programmes, IFRS 10 may require the sponsor to consolidate as from an accounting perspective the sponsor may exerts significant influence over the ABCP programme. In addition, as stated in Article 25 (2) of the new STS Regulation, the sponsor is obliged to act as the liquidity facility provider.
If the regulation is amended to require that the special-purpose entity should be consolidated for prudential purposes, the application of the Internal Assessment Approach at group level would no longer be possible. As a consequence it would require sponsors to apply regulatory capital to all the receivables purchased by the SPV. This is not possible form an operational point of view as the sponsor bank does not usually have access to the specific information which is necessary to calculate the required risk weights of the purchased receivables.
In addition, deconsolidation is a pre-requisite for equity relief, following effective risk transfer from the institution (in its capacity as originator) to the securitisation SSPE. In the absence of prudential deconsolidation, the institution would be forced to maintain capital for the receivables transferred to the securitisation SSPE with legal effect, thus preventing any capital relief for the institution.
Therefore, in order to allow business and households to continue obtaining funding through ABCP programmes in Europe, we call upon the EBA to oppose the prudential consolidation of SSPEs and SPVs-Sec."
For instance, in the leasing business, joint arrangements are funded by the parent institutions on a mix of equity and credit financing on a non-recourse basis. The liability is therefore not limited to the share of the capital they hold.
In line with IFRS 11 the approach for joint arrangements should be also within the scope of prudential consolidation, but the equity method should be used independently of whether a joint arrangement is classified as a joint operation (if structured through a separate vehicle) or as a joint venture.
In addition, the requirement of proportional consolidation should be removed in cases where financial institutions are managed with one or more undertakings not included and the liability of the parent undertaking is limited to the share of the capital they hold (according Article 18 (4)).
Question 2: Do you consider SSPEs financial institutions? When SSPEs are consolidated for accounting purposes, do you also consolidate them for prudential purposes? Please differentiate in your answer between the situation when SRT is met and when it is not met (the institution originates the securitisation); and when the institution acts as an investor on the securitisation vehicle (whether this is a SSPEs or a special purpose entity used to set up securitisations) or sponsors the securitisation transaction.
We consider that securitisation special purpose entities (SSPEs") and single purpose vehicles ("SPV-Sec") should not be classified as "financial institutions" as defined by Article 4 (1) (26) of the CRR, nor as "ancillary services undertakings" as defined by article 4 (1) (18) of the CRR.An SSPE is structured with the sole purpose to isolate the securitised obligations from the originator. The holders of the beneficial interests (in the SSPE) have the right to pledge or exchange those interests without restriction. In addition, the new regulation for simple, transparent and standardised (STS) securitisations defines the special status of securitisation special purpose entities, distinguishing them from financial institutions (Article 2 (2) of the STS Regulation).
The activities of SSPEs and SPV-Secs are limited to purchasing receivables and refinancing the purchase price by issuing asset-backed securities or other financial instruments. Their legal status prevents them from engaging in other activities. This ensures that the purchased receivables and related collateral are always available as collateral cover to creditors.
A potentially required consolidation of the SSPEs under IFRS 10, should not lead to a required consolidation for prudential purposes. Therefore, we think that these entities should be deconsolidated for prudential purposes.
In the case of ABCP programmes, IFRS 10 may require the sponsor to consolidate as from an accounting perspective the sponsor may exerts significant influence over the ABCP programme. In addition, as stated in Article 25 (2) of the new STS Regulation, the sponsor is obliged to act as the liquidity facility provider.
If the regulation is amended to require that the special-purpose entity should be consolidated for prudential purposes, the application of the Internal Assessment Approach at group level would no longer be possible. As a consequence it would require sponsors to apply regulatory capital to all the receivables purchased by the SPV. This is not possible form an operational point of view as the sponsor bank does not usually have access to the specific information which is necessary to calculate the required risk weights of the purchased receivables.
In addition, deconsolidation is a pre-requisite for equity relief, following effective risk transfer from the institution (in its capacity as originator) to the securitisation SSPE. In the absence of prudential deconsolidation, the institution would be forced to maintain capital for the receivables transferred to the securitisation SSPE with legal effect, thus preventing any capital relief for the institution.
Therefore, in order to allow business and households to continue obtaining funding through ABCP programmes in Europe, we call upon the EBA to oppose the prudential consolidation of SSPEs and SPVs-Sec."
Question 7: Do you have any comment on the application of proportional consolidation according to Article 18(4) of Regulation (EU) No 575/2013?
The conditions are too narrow, so the application of the proportional consolidation is restricted to a few exceptions. Hence, due to the partial fulfilment of the required conditions and for simplification purposes, institutions should consider the potential risk to which they are exposed towards those undertakings only as counterparty risks.For instance, in the leasing business, joint arrangements are funded by the parent institutions on a mix of equity and credit financing on a non-recourse basis. The liability is therefore not limited to the share of the capital they hold.
In line with IFRS 11 the approach for joint arrangements should be also within the scope of prudential consolidation, but the equity method should be used independently of whether a joint arrangement is classified as a joint operation (if structured through a separate vehicle) or as a joint venture.
In addition, the requirement of proportional consolidation should be removed in cases where financial institutions are managed with one or more undertakings not included and the liability of the parent undertaking is limited to the share of the capital they hold (according Article 18 (4)).