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Temporary recognition of EU STS is being extended until the end of 2024

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Maria Green

PSL Counsel

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Salim Nathoo

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12 July 2022

There are some good news for the temporary recognition of the EU "simple, transparent and standardised" (STS) securitisations in the UK, as the draft regulations published on 5 July 2022 seek to extend this temporary recognition by another two years, while the UK is deciding on the plans for the introduction of the third country STS equivalence regime under the UK Securitisation Regulation.

Under the draft Financial Services (Miscellaneous Amendments) (EU Exit) Regulations 2022 published on 5 July 2022 (the Draft Amending Regulations), temporary recognition of the EU STS securitisations in the UK is extended by another two years, so that it expires on 1 January 2025 (instead of 1 January 2023).

It means that EU STS securitisations notified to ESMA prior to 1 January 2025 will be recognised in the UK as STS for life (provided they continue to meet EU STS requirements) and, as such, will  have the benefit of better regulatory treatment under UK CRR, UK LCR, UK Solvency II and UK EMIR regimes.

These Draft Amending Regulations, once finalised, will come into force 21 days after the day on which these are laid in Parliament. The exact timing remains unclear, but it is expected that the Draft Amending Regulations will come into effect before the end of 2022.

The explanatory memorandum and the impact assessment accompanying the Draft Amending Regulations confirm that the extension of the temporary recognition of the EU STS is intended to support robust STS securitisation markets, the choice for UK investors and to bridge the gap until a permanent framework for third country STS equivalence regime is introduced under the UK Securitisation Regulation and the EU STS framework is assessed for the purposes of such equivalence regime. The explanatory notes also state that "it will also re-affirm the UK's commitment to a stable and resilient securitisation framework which conforms to international standards, thereby furthering the encouragement of STS securitisations as an important element of well-functioning markets globally".

This is indeed a very welcome development. However, it should be noted that the extension of the temporary recognition via amendments to Article 18(3)(a) of the UK Securitisation Regulation is not fully tracked through in all other applicable provisions. In particular, corresponding changes (which are currently missing) are also needed in the investor due diligence provisions on STS assessment and in provisions dealing with UK EMIR-related exemptions for STS securitisation swaps. We are in touch with industry associations and the UK authorities in relation to these omissions and hope that the required changes will be addressed before the Draft Amending Regulations are finalised and enter into force later this year.

Allen & Overy has been and continues to be actively involved in the industry discussions and advocacy efforts, including directly engaging with relevant regulators, with regard to the UK Securitisation Regulation and the EU Securitisation Regulation regimes.

We encourage interested clients to contact us for deal-specific advice. Click here for the contact details of our global Securitisation Team.

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