With the Solvency II Directive (2009/138/EC), a modernised and risk-based regulatory framework for insurance and reinsurance companies was already introduced in the EU in 2009. In October 2014, the Commission adopted a Delegated Regulation that includes dedicated implementation rules for Solvency II. This also includes risk calibrations for the calculation of capital requirements for certain categories of assets.
This legal framework already contained provisions for securitisations, differentiating between Type 1 and Type 2 securitisation products. However, the requirements for Type 1 products were not necessarily in line with the market. As a result, only a few transactions were able to comply with this type at all. In contrast, the capital requirements for type 2 products were prohibitively high.
The new Securitisation Regulation has also necessitated a number of amendments to the Delegated Act on Solvency II. First, the definitions of securitisation used in the Delegated Act on Solvency II were aligned with the definitions of the Securitisation Regulation. Second, due to the direct applicability of the provisions on risk retention and due diligence in the Securitisation Regulation, the corresponding provisions in Solvency II had to be adapted.
In addition, the capital calculations for insurance investments in securitisations were adjusted: The risk calibration now essentially distinguishes between senior STS, non-senior STS and non-STS securitisation positions. The capital requirements for securitisation positions that are not held in senior STS tranches therefore remain disproportionately high.
This is shown in the following comparison of the risk factors for an exemplary term of 5 years and the existence of an ECAI rating:
In addition, the regulation contains provisions for the risk calibration of securitisation positions without an ECAI rating as well as for re-securitisation exposures. The adaptation of the Delegated Regulation to the single supervisory framework for securitisations has not provided the hoped-for revival of insurance investments in the securitisation market. This is particularly due to the fact that the capital requirements for securitisations are disproportionately high compared with other asset classes.
A whole-loan investment in a residential mortgage portfolio, for example, leads to a risk factor of 3% with a loan-to-value ratio of 80% (source: Bank of America Global Research). An investment in a loan portfolio is thus significantly cheaper than holding a position in a corresponding RMBS securitisation. In the case of a whole loan investment, risks are not even subordinated. Adjusting the risk weights is thus an important measure for reviving the securitisation market.
Regulation (EU) 2017/1131 on Money Market Funds (MMFs) was published in June 2017. It aims to make MMFs more resilient and limit contagion channels for other financial institutions. The MMF Regulation of 2017 already contains references to STS securitisations as eligible investments. Furthermore, securitisations that meet the requirements for Level 2B securitisations under Article 13 of Delegated Regulation 2015/61 (LCR) are eligible, as are fully supported ABCP programmes that do not include re-securitisation exposures or synthetic securitisations.
At the time of the adoption of the MMF Regulation, the Securitisation Regulation had not yet been finalised. The Commission was therefore given the power to adopt additional requirements for STS investments with regard to reverse repo transactions, credit quality assessment and criteria for eligible STS ABS or ABCP investments. This has since been implemented with the MMF STS Amendments of April 2018, which link to the definitions of the Securitisation Regulation.